Gandhi Special Tubes

Background

Gandhi Special Tubes was set up in technical collaboration with BENTELER of Germany for manufacturing small diameter welded and cold drawn seamless steel tubes. The plant situated at Halol, Gujarat, started commercial production in April 1988.

Gandhi Special Tubes Ltd. have also started manufacturing of Cold Formed Tube Nuts for Fuel Injection Tube Assemblies as well as Hydraulic Tube Assemblies. This is a pioneering effort in India as hitherto tube nuts were being manufactured by machining.

Gandhi Special Tubes (GSTL) product focus is in import substitution. With the focus on Quality (ISO/TS 16949 : 2002 as well as ISO 9001: 2000) they have been successful in winning over most OEMs hitherto importing, and enjoy a large market share in their niche product segments.


Main Products/Segments

Welded Steel Tubes [32.60%] – (3.1-12.7 mm OD) – These tubes find applications mainly in refrigeration and automobile industry.

Seamless Steel Tubes [55.33%] – (3-75 mm OD)- These tubes find applications in high pressure fuel injection tubings and hydraulic tubings -mostly in diesel engines.

Cold Formed Nuts/Scrap [9.84%] – These nuts find applications as Coupling Nuts for fuel injection tubes and Coupling Nuts for hydraulic fittings.

Wind Power [2.23%] – 5 plants based in Gujarat & Maharashtra totaling 5.35 MW


Main Markets/Customers

Seamless Steel Tubes – Customers include automobile OEMS like Telco, Tisco, Ashok Leyland, M&M, Simpson, Kirloskar Oil Engines, Mannesman Rexroth, HMT, L&T, etc. and ancillaries like Imperial Auto.

Welded Steel Tubes – Refrigeration Industry customers include Godrej, Voltas, Electroloux, Carrier, etc. Major automobile/engine manufacturers like Telco, Ashok Leyland, M&M, Simpson, Kirloskar Oil Engines , Maruti Udyog, etc or their ancillaries.

Cold Formed Nuts – Automobile OEMS for seamless steel tubes as above

Wind Power – Captive consumption (Gujarat plants) & supply to State grid (Maharashtra plants)


Bullish Viewpoints

  • Good track record – GSTL has a good track record over the last 10 years. Operating profits (~7 Cr in FY2000) and Net Profits (~3.5 Cr in FY2000) have clocked a CAGR of over 20% to reach over 41 Cr and 25 Cr respectively.
  • High profitability with consistently expanding Margins – Net margins have moved up from over 13% in FY2000 to over 30% in FY10. Operating Margins have moved up from ~27% in FY2000 to over 50% in FY10. This trend has accelerated in the last 5 years, as the company has perhaps consolidated its position as the leading supplier of seamless & welded tubes and cold formed nuts to the automobile OEMS, refrigeration and general engineering industries. Return on Capital employed has been high, in the 30-35% range.
  • Good Free Cash Flows, Completely Debt free – GSTL has the unique record of remaining largely debt free and funding all its capital expenditure requirements out of internal accruals, without resorting to long term debt or equity dilution. Having completed major expansions in FY07 and FY08, capex in last 2 years has been minimal. Free Cash flows as a percentage of Sales has climbed to over 25% in FY10. This would seem sustainable for the next 2-3 years as Sales growth has not kept pace.
  • Great Dividend track record – Dividend Payout has consistently been increasing from ~18% of earnings in FY06 to 29% in FY10. 5 yr DPS CAGR is 25% while it has accelerated in the last 3 years to clock a DPS CAGR of over 41%
  • High Dividend yield – at CMP of Rs 115, the stock provides a dividend yield of over 4% which provides good comfort. However it should be noted there was a special silver jubilee dividend declared in FY10, so sustainable yield is more like 2%

Bearish Viewpoints

  • Sales growth track record has been faltering – If you ignore a stupendous FY10 performance (on the back of a poor FY09), GSTL Sales growth record has been far from impressive. GSTL has only tripled its Sales in last 10 yrs from 25 Cr in FY2000 to over 75 Cr in FY2010 recording a 10 yr Sales CAGR is ~13%; 5yr Sales CAGR is poorer at 8.6%. While the company has been served well by margin expansions over the last few years, Sales growth lagging substantially behind earnings growth is not a very welcome sign.
  • Gross Block additions higher than Sales growth – Gross Block has moved from Rs 55 Cr in FY06 to Rs 87 Cr in FY10 and Sales from Rs 64 Cr to Rs 84 Cr in the same period. Sales to Capex ratio in last 5 years is < 1.Asset Turnover has been below 1 for last 2 years, improving from 0.66 in FY09 to 0.74 in FY10
  • Recent Financial performance – Going by 9m FY11 performance, GSTL has recorded an 18% increase in Sales coupled with a modest 2% rise in Earnings. This is on the back of higher raw material and other expenditure costs. Full year FY11 picture is unlikely to be much different.
  • Higher Working capital requirements – Debtor days has climbed to 71 days (41days) and Inventory days have risen to 171 days (131 days) – significantly up from levels prevalent 2 years back.
  • High Management Compensation – For a company of its size (<100 Crs) GSTL Senior Management is taking in over 15% of the Net Profits of the company. (3.77 Cr, 25Cr in FY10, 2.49 Cr, 15 Cr in FY09). No doubt, the Management has driven the high performance and great margins for the company, but this level of compensation seems high especially on peer comparison with companies of similar sizes that have registered much better growths.
  • Raw material volatility – While raw materials constitute ~30% of Sales, it must be noted that over 50% of the raw material is imported (FY10) and exposes the company to forex volatility risks on top of raw material risks. Exports are minimal.

Barriers to entry

  • Technology Intensive – Small dia seamless and welded tube manufacturing is a technology intensive process refined through decades of experience, going down to the quality of raw material – specialty steels, used. In FY10, over 52% of raw material was imported by GSTL.
  • Product Line extensions – Manufacturing Cold Formed Nuts with superior reliability and tensile strength as opposed to machined nuts (a first in India) used in fuel injection and hydraulic tubings also helps GSTL in its quest for niche domination

Interesting Viewpoints

  • Zero debt and no equity dilution – GSTL has increased its Net Worth almost 5 times over the last 10 years. Reserves & Surplus have gone up over 6 times. Gross Block has gone up from some 30 Cr in FY2000 to ~87 Cr in FY2010. It has funded all capital expenditures out of internal accruals (over 50 Crs). Not once has it resorted to long term debt or equity dilution.
  • Consistent Margins expansion – GSTL boasts of an envious record in margin expansions especially over the last few years. Operating margins have shot upto over 50%. Is this an oligopoly kind of situation developing?

Disclosure(s)

Donald Francis: No Holdings in the Company;


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