GANDHI SPECIAL TUBES - AVAILABLE AT DISCOUNT

Company Background



GANDHI GROUP is manufacturing automobile components since over 3 decades. The products are marketed all over India and are also exported all over the world including Germany, UK, South East Asian countries etc. GANDHI SPECIAL TUBES LTD. formerly known as GANDHI SPECIAL 07 TUBES LTD. was a project set up by GANDHI GROUP in technical collaboration with BENTELER of GERMANY. BENTELER is one of the leading enterprises in manufacturing of steel. Besides steel they manufacture welded and seamless steel tubes and are also producing pressed, drawn, stamped parts and tubular components.The project was for manufacturing small diameter welded and cold drawn seamless steel tubes. M/S 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. The plant situated at Gujarat, started commercial production in April 1988.



GANDHI SPECIAL TUBES LTD. have also subsequently started producing tubular components like condenser coils and wire on tube condensors at Halol plant mentioned above and have recently set up a unit at Pune to manufacture tubular components.



M/S 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.



Products



Small Diameter Welded Steel Tubes



The size range of small diameter welded steel tubes manufactured is 3.1 to 12.7mm Outside dimension and 0.5 to 1.5 mm wall thickness. Plain, inside and outside copper plated and outside zinc plated tubes are manufactured. These tubes find applications mainly in refrigeration and the automobile industry. The list of customers include major refrigerator manufacturers like Godrej, Voltas, Electrolux, Daewoo, Carrie etc and major automobile / engine manufacturers like Telco, Ashok Leyland, M&M, Simpson, Kirloskar Oil Engines, Maruti Udyog Ltd etc or their ancillaries.



Cold Drawn Seamless Steel Tubes



The size range of cold drawn seamless steel tubes manufactured is 3 to 75 mm Outside dimension and 0.5 to 7.5 mm wall thickness. GSTL is a pioneer in introducing cold drawn seamless steel tubes normalized / annealed in bright annealing furnace in India. This ensures soft and scale free tubes. These tubes find applications in high-pressure fuel injection tubing and hydraulic tubing. Most of the customers in India who were earlier importing these tubes are now buying these tubes from GSTL. The list of customers include Telco, Ashok Leyland, M&M, Simpson, Kirloskar Oil Engines, Mannesman Rexroth, Vickers, Wipro, SMS (I) Ltd, L&T, Tisco etc.



Tubular Components



Facilities at Pune plant for manufacturing tubular components include CNC and manual bending, hydraulic head forming, welding / brazing, flushing, pressure testing etc. Components manufactured are condensers, compressor parts, fuel injection tube assemblies, hydraulic tubes etc.



Cold Formed Nuts



In order to provide a complete product with end fittings, GSTL also started the manufacture of cold-formed nuts. These nuts have the following distinct advantages over machined nuts: High degree of reliability ensuring zero failures on account of cracked nuts, tensile strength, yield strength and shear strength increase due to cold working. Also, the unbroken flow lines follow the part contour, which increase the strength of the part and improved surface finish, which not only gives it a better look but also improves the life of the product and helps sealing where ferrules are used.



Investment Rationale



Gandhi Special Tubes is a niche player in small diameter seamless and welded tubes segment which caters to the automobile and general engineering industry. It has virtually no competitors in the small diameter seamless tubes segment but faces some competition in the small diameter welded segment from players like STI Sanoh India Ltd and Bundy Tubing. Also threat from new entrants is low as gestation period for new companies is long about 3-5 yrs. The technology required for its product is highly specialized and as a result the small diameter seamless tubes are high-margin value added products. The seamless tubes find application in diesel based automobiles and hydraulic equipments and the welded tubes are used in refrigerators and automobiles.



The Specialized and high quality nature of its products is evident from the fact that it developed a very special component for Volvo. The product was approved and now it manufactures this component for all Volvo’s component manufactures who export from India. One of the most important engines driving the growth of the Indian manufacturing sector is the domestic automobile industry, which has grown at a CAGR of 13% over the past 5 years. Further, multinational automobile companies like JCB India and Volvo are expanding automobile/excavator manufacturing capacities in India. Many new players are entering the Indian market and India is emerging as an automobile and automobile component manufacturing hub due to the availability of cheap labor, skilled Engineers and high-quality products. Even domestic auto component companies are investing about Rs. 30,000 crore to cash in on the automobile boom. It is expected that the automobile capacity in the country will double from 2.2 million units per annum to 4.4 million by 2010. This kind of growth in OEM auto manufacturers (one of GSTL’s major clients), gives GSTL the potential to ride on the progress of the auto industry in India.



GSTL is the exclusive supplier of seamless tubes to JCB India. JCB recently announced the opening of its second plant in Pune, Maharashtra, with an investment of $25 Million. Total investment of $75 Million has been made in Pune Plants, where world-class heavy-line machines will be manufactured for India and Pan Asia. Going ahead, it is expected that JCB will open a third plant in India in order to keep up with the robust demand and to capitalize on the growing market.



Further, GM is coming up with a special small car plant in India. The Volkswagen group is also coming to India with plans to manufacture 1,20,000 cars per year near Pune.



Being the only manufacturer of seamless welded tubes in India and a very cost-efficient import substitute, GSTL is witnessing a rise in demand for the same. Seamless welded tubes find applications in high-pressure diesel fuel injection, hydraulics and general engineering. Diesel engines are primarily found in commercial vehicles. With the Supreme Court’s ban on overloading of trucks above permissible limits, rising off-take of the small commercial vehicles and increased demand for construction related vehicles; commercial vehicles sales are slated to grow at a CAGR of 10-11% till 2010-2011. Further, the Indian commercial vehicle space is also seeing substantial interest from foreign investors.



Recently, Volvo acquired a 50% economic interest in Eicher Motors’ commercial vehicles business for $350 million while Daimler Trucks announced a strategic alliance with the Hero Group. In October, Ashok Leyland had announced an alliance with Nissan to produce LCVs. This results in increased demand for diesel engines that in turn results in augmented demand for GSTL’s specialized small diameter seamless tubes.



GSTL’s clients include reputed international and domestic automobile and general engineering companies. Over the years, GSTL has built a direct relationship with its clients and has received the necessary approvals for its various products. The list of a few clients is provided below.



1. Tata Engineering & Locomotive Co, Ltd.



2. Tata Iron & Steel Co. Ltd.



3. Ashok Leyland Ltd.



4. Maruti Udyog Ltd.



5. Mahindra & Mahindra Ltd.



6. Bajaj Auto Ltd.



7. Escorts group companies



8. L & T Case Equipment Ltd



9. Larsen & Toubro Ltd.



10. SMS India Ltd.



11. Steel Authority of India Ltd.



12. Bharat Heavy Electricals Ltd.



13. Bharat Earth Movers Ltd.



14. Bosch Rexroth India Ltd.



15. Vickers System International Ltd.



16. Lincoln Helios India Ltd.



17. Godrej Appliances Ltd.



18. Electrolux India Ltd.



19. Voltas Ltd.



20. Daewoo India Ltd.



21. Kirloskar Copeland Ltd.



22. Carrier Refrigeration Ltd.



23. Imperial Auto Industries Ltd.



24. Injecto Ltd.



25. Matchwell Engineering Pvt.Ltd.



26. Sebros Enterprises



GSTL is entirely a debt free company and has been able to fund its expansion of about 45 cr entirely from internal accruals.



Risk and Concerns



Ø The margins could come under pressure due to increase in input costs and other expenses.



Ø Competition from low cost manufacturing countries such as China.



Ø Adverse fluctuation in foreign exchange rates.



Valuation



At current market price of Rs 84, it is trading at 6.5 times FY08 EPS and 1.6 times book value with a dividend yield of about 2.9%. Also the company has high profit margins and return on invested capital The value of a debt free company has to be substantially more than the amount of debt it can comfortably service. It's a principle which was laid out by Ben Graham in Security Analysis and is known as the Debt-capacity bargain. On that basis it can be valued at Rs 130 assuming cost of capital to be 10%.



Value =earning per share /cost of capital



= 12.9/10%



= 130



Hence the business is available at 35% discount to intrinsic value.




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