The stock of Tube Investments of India (Tube Investments), a part of the Muruguppa Group, has gained 10 per cent since our buy call in January. The company’s prospects look promising and investors can still buy the stock at the current market price of ₹402.

A sum-of-the-parts valuation, taking into account the company’s core business and its financial services business, suggests further upside in the stock. The target price comes to about ₹460.

Core business Tube Investments’ engineering products (tubes and strips) and value-added metal products (chains, car doorframes, auto components, railway wagons and coaches) find usage in sectors such as automobile, general engineering and infrastructure. These two divisions, along with cycles, contribute over 40 per cent to the company’s revenue and over a fifth to the operating profit.

The company has been ramping up production at its large diameter tubes facility at Thirutanni in Tamil Nadu, which was set up last year. Production from the plant totalled 4,000 tonnes in the September 2015 quarter, double that in the June quarter. High-value products, such as hydraulic cylinders and propeller shafts manufactured at the plant will cater to the infrastructure sector. Demand for these products is currently being met mostly through costlier imports.

The plant is close to breaking even at the operating level and should add to the margins of the engineering products division.

Tube Investments has also seen a pick-up in demand from the Integral Coach Factory for coaches made by it. Besides, the well-performing cycles division is expected to benefit from initiatives, such as introduction of new high-end cycle models and premium retail stores.

That apart, the improving performance of Shanthi Gears, a subsidiary (70 per cent stake) of Tube Investments, too should help. The company makes industrial gears and gear boxes for the infrastructure sector.

Operating profit from this business more than doubled in the half-year ended September 2015 compared with the same period last year. This was in contrast with the 50 per cent decline in profit in 2014-15. Efforts at acquiring new customers and focussing more on the better margin orders seem to have helped.

Hope for turnaround The automobile sector, mainly two-wheelers and cars, forms a major customer base for the company. The ongoing slowdown in two-wheeler sales, particularly motorcycles, has been a sore point. This has hurt the demand for Tube Investment’s products, such as tubes, strips and chains. But given the company’s market leadership for most of its products, it is well placed to reap gains as and when demand picks up.

Investors can also draw comfort from Tube Investment’s financial services business, which has consistently provided support to the company’s overall earnings. Tube Investments holds about 46 per cent stake in Cholamandalam Investment and Finance Company (CIFCL) and 74 per cent stake in Cholamandalam MS General Insurance. The financial services business contributes over 50 per cent to Tube Investments’ consolidated revenues and over 70 per cent to the operating profit.

In the latest September quarter, hurt by the auto slowdown, revenue from the standalone operations declined 4 per cent year-on-year to ₹967 crore and net profit remained flat at ₹25 crore. But revenue and profit from consolidated operations (which includes the financial services business) grew 2 per cent to ₹2,539 crore and 7 per cent to ₹107 crore, respectively.

A pick-up in economic growth should provide a further boost to the financial services business. For the half-year ended September 2015, CIFCL posted net profit of ₹233 crore, up 20 per cent from the year-ago period.

Cholamandalam MS General Insurance however, reported 15 per cent decline in profit to ₹58 crore during this period. This was due to higher cost of acquisition and more claims than expected due to the monsoon.

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