Stock Analysis: Gandhi Special Tubes (GandhiTube)

Gandhi Special Tubes manufactures and sells automobile components, primarily in India. It offers a range of small and big diameter seamless and welded tubes along with tubular components, such as condensers, compressor parts, fuel injection tube assemblies, and hydraulic tubes. It was incorporated in 1985 and set up its first plant at Halol, Gujarat in technical collaboration with German manufacturer Benteler. Benteler have supplied most of the critical machines and were involved in installation and commissioning of the plant and training personnel in India as well as Germany.

GSTL produces special tubes of small diameter ranging from 3mm to 75mm. These special tubes are used across automobile, refrigeration and engineering industries. GSTL have also started manufacturing cold formed tube nuts for Fuel Injection Tube Assemblies as well as Hydraulic Tube Assemblies. This is a pioneering effort in India as previously tube nuts were being manufactured by machining. GSTL currently derives 80% of its revenues from the automobile sector and the rest from refrigeration and engineering.Apart from its manufacturing business the company also has five windmills with a total installed capacity of 5.35 MW, providing part of the company’s energy supply. The three windmills located in Gujarat are for captive consumption whereas the two in Maharashtra are for commercial purposes. Gandhi Special Tubes Limited also exports its products to customers in Germany, the United Kingdom, and the south east Asian countries.

Company is debt free and has invested surplus cash in capacity expansion & wind mills for captive power consumption. It has a marquee list of clients which include L&T, Maruti Udyog, Ashok Leyland, M&M, BEML, Voltas, Electrolux and Kirloskar among many others.

Financials:

CMP: Rs. 123.55

Market Cap: 181.62 Cr

Face Value: Rs. 5

Promoter’s Shareholding: 73%

Book Value: Rs. 69

P/E: 6.95

P/B: 1.77

One of Walter Schloss criteria -> Promoter’s Shareholding > 50% is satisfied.

Looking at the basic financial ratios –

Variable                       Current            Industry Median

Net Profit Margin           33.56                1.84

Operating Profit Margin 41.34                5.93

Asset Turnover             0.74                  1.52

Return on Assets          24.95                3.15

Return on Equity           24.95                7.94

Debt to Equity               0.00                  0.96

Return on CE                 35.90                9.73

Interest Coverage         728.80              1.70

Just on basis of ratios, we can derive that –

Superior ROCE, Superior RoE, No debt, Terrific interest coverage coupled with reasonable P/E and P/B make it an attractive stock to be in.

Let’s look at the history of management’s performance, rather than a single snapshot (just to ensure we are not under the influence of some accounting shenanigans or one time fad market).

Variable                       FY06    FY07    FY08    FY09    FY10

Net Profit Margin           29.75    21.41    24.74    28.36    33.56

Operating Profit Margin 35.69    35.53    37.80    38.84    41.34

Return on Assets           32.14    21.64    25.56    18.73    24.95

Return on Equity            32.88    21.96    25.76    18.79    24.95

Capital Employed           50.22    59.46    73.72    85.07    101.51

Return on CE                 36.92    32.64    36.54    27.35    35.90

Free Cash Flow to Sales  –           3.09      3.15      31.31    27.44

Dividend Payout             18.22    22.84    19.48    23.10    29.02

Based on the above table, we can derive that

– GSTL has consistently maintained high NPMs and OPMs over the past 5 years (signifying moat)

– GSTL has had superior return ratios all throughout for the past 5 years (in fact, I checked the results from FY2002 and the results don’t differ much)

– The cream, would be a very good dividend payout, consistently increasing year on year. Current dividend yield is 4%.

– Margin of safety: It has cash of almost Rs. 24 per share. That’s almost 20% of the current share price.

Apart from all these ratios and parameters, on an absolute basis –

1) The Book value for GSTL has increased at a CAGR of 20% over the past 5 years. (adjusting for stock split 1:2 in 2008 )

2) The Net Sales have had a CAGR of 11% and PAT has had a CAGR of 20% over the past 5 years.

All the above factors indicate that the business has a moat, a capable management which can deliver results on a consistent basis (atleast, for the past 8 years that I have read the results) and has paid dividends consistently which gives us a margin of safety.

Negatives:

1) The cost of Raw materials is more than 30% of the total cost incurred. Any increase in the prices of raw materials (steel, for example) would put pressure on margins.

2) The cost of power also eats into profit. However, the captive power consumption should reduce power costs to a large extent in the coming quarters.

3) Sales have been stagnant for the past 2 years.

4) Illiquid stock. Garnering even 400 shares would be slightly challenging.

5) Foray into commercial power generation from Maharashtra windmills is still something I am getting my head around with. Is this diworsefication or a temporary arrangement before they consumer the entire power captively?

Triggers:

1) The consumer story is in a stage of rapid growth in India. GSTL is well placed to supply tubes to various consumer durable companies.

2) With the foray into the Engineering segment, sales might increase in the near future.

Recommendation:

GSTL is a virtual monopoly in this industry segment, consistently generating high ROCE and Free cash flow. Its dividend yield of 4% along with the safety of Rs. 24/share cash makes it an attractive stock. I would term GSTL to be a value buy at these levels (and probably accumulate more on declines). The stock is undervalued to say the least and will give good returns if it keeps up with the performance of previous years.

Disclosure: I have initiated a small position in the stock.

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  1. #1 by Abhishek on July 26, 2011 - 7:17 PM

    Dear Kiran,

    Great Blog… already bookmarked for daily read… tons of wealth in terms of knowldege.

    Grateful if you could tell me how you get the Industry related figures such as industry avg., ind. median etc.

    Thanks
    Abhi

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