Buy Gandhi Special Tubes; target of Rs 450: ICICI Direct

ICICI Direct's research report on Gandhi Special Tubes

Gandhi Special Tubes (GST) reported a healthy performance in Q2FY19 with net sales for the quarter coming in at Rs 33.6 crore, up 12.9% YoY. Corresponding EBITDA in Q2FY19 was at Rs 12.9 crore with subsequent EBITDA margins at 38.3%, flat YoY PAT in Q2FY19 was at Rs 10.0 crore, up 15.1% YoY Topline growth of 12.9% can be considered a temporary blip vs. ~30% in last three quarters (Q3FY18, Q4FY18 & Q1FY19). The management attributed it to fewer working days in the quarter with trend normalising, going forward, from Q3FY19 onwards GST holds >20% of MCap in cash on its books. With no substantial capex plans in place amid ~70% capacity utilisation levels, GST intends to share the surplus cash with shareholders through greater dividends and buybacks, going forward.

Outlook

With healthy tractor as well as capital equipment sales domestically, GST is on a healthy growth trajectory with bright prospects, going forward. It has a cash surplus balance sheet (>Rs 100 crore, ~20% of MCap) and has been generous in sharing the same with shareholders with dividend payout in excess of 35% and share buyback in the past at Rs 500/share. We believe the management will continue to do so, going forward, and offer attractive dividend yield of ~2.5%. Going forward, we expect sales & PAT to grow at a CAGR of 16.5% and 19.4%, respectively, in FY18-20E. We value the company at Rs 450 i.e. 13x P/E on FY20E EPS of Rs 34.6 and maintain our BUY rating on the stock. We also derive comfort from healthy return ratios (RoCE>25%, RoIC>50%) and CFO yield of ~8%.

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