TRF

With the revival in capex activity in sectors such as steel, port, power and other infrastructure segments, the fortunes of engineering equipment maker TRF stand renewed. Investors with a two-three year perspective can consider investing in the stock of TRF.



Demand for its bulk handling equipment and systems of this Tata group company has picked up. It has also de-risked its business model by diversifying into the automotive space through the inorganic route. Business from group and associate companies is also likely to buttress TRF's growth.

At the current market price of Rs 790, the stock trades at 13 times its expected consolidated per share earnings for FY-11. We expect higher traction in the company's automotive business after a year or two, as recently acquired subsidiaries make the transition to the profit zone.

Business

TRF provides turnkey bulk handling services and makes bulk handling equipment and systems. These are typically required in mining sites, ports and process industries such as steel, iron, power utilities. The company has traditionally derived a good proportion of its revenue from the power and port sectors. These two sectors hold ample opportunities over the next three-five years given the ongoing and envisaged capacity additions in the private and public sector enterprises in these spaces.

In the power sector, for instance, over 41,000 MW of capacity under construction in the Eleventh Plan could translate into over Rs 10,000 crore (about 6 per cent of capex stated to go for bulk equipment) business opportunity for this sector.

Similarly, the estimated investment in ports translates into about Rs 6,000-7,000 crore opportunity for port equipment. Larger established players such as TRF, Elecon Engineering, TIL and FL Smidth can be expected to be among the major beneficiaries of this opportunity. TRF is already undertaking coal-handling plants for a number of NTPC projects and is also eyeing the ultra mega power project segment.

TRF also receives a small portion of its business from group/associate companies. Orders from Tata Steel, Tata Projects and, more recently, Tata Motors, besides potential projects from companies such as Tata Power also provide comfort on the revenue front.

While the contribution from related parties remains insignificant at present, it could increase with growth in the automotive subsidiaries' business.

Diversification

In an effort to avoid being hit by the slowdown in capex activity, TRF has expanded its presence in the automotive segment as well. The company's Singapore-based subsidiary, York Transport Equipment, supplies trailer undergears, typically axles and suspension, and has presence in over 25 countries. It has recently added a unit in China and plans one in India as well. Dutch Lanka Trailer Manufacturers (DLT) and Adithya Automotive Applications (joint venture) are other investments that TRF made during FY-10 to augment its automotive business.

While the former is a trailer manufacturing company with presence in Oman, Sri Lanka and India, the joint venture recently commenced operations involving fabrication and machining works for tipper, load bodies and refrigerated bodies.

The above businesses appear well-integrated to offer automotive applications to what may well become their largest customer — Tata Motors. TRF's subsidiaries DLT and York alone accounted for close to 25 per cent of the revenues in the June quarter and could cross 30 per cent by FY-11.

Financials

However, high contribution to topline may not help contain the slide in profit margins in the near term. Operating profit margins slid to 7 per cent in the June quarter. It may take a while before the company moves into the 10 per cent-plus margin range that it managed historically.

While the subsidiaries have started making profits (from June 2010) at the operating level, they may continue to weigh on net profits on a consolidated basis. To this extent, return on equity may be marginally impacted for a year or so. Nevertheless, its return on equity at over 26 per cent (as of March 2010, post-acquisitions) remains superior to peers.

TRF's consolidated sales for FY-10 was Rs 866 crore while net profits stood at Rs 47 crore. Orders at over Rs 2,000 crore are at a healthy 2.3 times FY-10 sales. Unlike its peers which had a tepid June quarter, the company along with subsidiaries expanded revenues by 77 per cent while profits grew 24 per cent. Higher raw material costs, especially steel, could hurt profitability.

While steel prices have cooled off 15-20 per cent from the April 2010 highs, price hikes expected by September could once again hurt margins. That the company purchases steel from Tata Steel, which holds 32.5 per cent in TRF, provides comfort on the cost front to some extent.

via BL