Tube Investments looks to reduce dependence on automobile industry

Deriving almost three-quarters of its revenues as a B2B supplier to the unstable automobile business, it sought a strategy to de-risk itself
Some three years ago, the senior management of Tube Investments of India (TII), flagship of the Rs 38,000-crore Murugappa Group, created a three-pronged strategy for growth. Deriving almost three-quarters of its revenues as a B2B supplier to the unstable automobile business, it sought a strategy to de-risk itself. Termed TI1+T12+TI3, the strategic concept broke down the growth elements into organic growth (TI1), a VC-style approach to medium-term growth (TI2) and inorganic growth of acquiring companies and turning them around (T3).

Last year’s Rs 800-crore acquisition of fraud-and-debt-hit CG Power & Industrial Solutions Ltd (CG Power) — the largest by the Rs 4,340-crore company in its history — was a key element of the T3 strategy.

At one level, this acquisition appears to be an uncharacteristically brave decision by the ultra-conservative TII, which started in 1959 after the merger of TI Cycles of India and Tube Products of India. CG Power has been plunged in controversy since 2019 when the company reported massive fraud. A board-led investigation found that some employees had pledged the company’s assets without permission, understated advances to related and unrelated parties by Rs 4,796 crore and understated liabilities by Rs 2,661 crore. The chairman, Gautam Thapar, was sacked as a result.

By the time TII came into the picture, the Mumbai-headquartered CG Power’s revenues had dropped from Rs 5,620 crore in 2018-19 to Rs 3,169 crore in 2019-20; losses had piled up to Rs 1,799 crore; and it owed banks Rs 2,161 crore. In the settlement that followed, a consortium of 14 banks with debt of Rs 2,161 crore agreed to take a haircut of Rs 1,100 crore and restructure the rest. The company avoided the new insolvency process because the time involved would have forced its dissolution.

Despite being in dire straits, the 82-year-old CG Power has a strong market presence. It is among the world’s top 10 transformer manufacturers. In India, it is a leader in motors, and number two in switchgears. It competes with Bharat Heavy Electricals, ABB, Siemens and Schneider in the automobile and railway businesses.

It is, in short, an asset worth owning. TII has set a modest target of around Rs 5,000 crore of revenue and Rs 500 crore profit before tax in four or five years, by which time it is expected to become debt-free.

More importantly, the acquisition is expected to boost TII’s growth. “TII can grow at 6-8 per cent a year over a cycle, but the company set a higher threshold of around 17 per cent. The only way to achieve this is through inorganic and organic growth,” said S Vellayan, TII managing director who recently took over as the chairman of CG Power.

CG Power is also expected to help TII reduce its dependence on the automobile industry, which accounts for 65-70 per cent of its revenue.

TII operates three business divisions: engineering, bicycles and metal-formed products. It has largely sought to “harvest adjacencies,” Vellayan explained, which means leveraging its manufacturing capabilities and other synergies. In 2018, for instance, the company signed a strategic tie-up with the Sakthi Group, a Chennai-based group that makes TMT bars and reinforcement steel. In the same year, it forayed into truck body building and identified vision products (optic lens) a growth opportunity for the auto industry.

Through CG Power, TII will enter three new businesses — including motors for industrial purposes, railways and power. With an old Murugappa hand, N Srinivasan, as managing director, the company has set about investing in R&D, since all three businesses are technology-intensive, attracting partners and focusing on people, suppliers and customers.

“We will go and talk to them and tell them sorry, whatever happened has happened and that now in the foreseeable future, they should see this as a steady company. Our intent is that CG Power should be with us for at least another four generations. We are not worried about this quarter or the next; we are looking at long-term,” Vellayan said.

“It gives us a fairly rare opportunity to acquire a market leader, that is number one and number three in the various segments that it is in, with secular growth at fairly reasonable valuations. We believe that there is a fair amount of value creation opportunity through improving profitability and increasing the growth trajectory of the company,” said Vellayan.

The question is: To what extent will the continuing investigations by the Serious Fraud Investigation Office into the pre-acquisition irregularities — some of which involved executive directors — hamper the turnaround plans.

“Obviously, in this case there is no counterparty giving us kind of reps and warranties to give us 100 per cent comfort. But what gives us a fair amount of comfort is that as far as we can tell, there does not appear to be any intent to go after the company or its assets from an investigation perspective,” Vellayan said during an investors call.

Analysts think TII has made a prudent decision in buying CG Power, despite its problems. “We believe that CG Power is a decent asset and with the backing of the Murugappa Group, it could be a potential turnaround candidate as a good asset meets a good promoter,” said a B&K Securities research report.

Rating agency Crisil added that the acquisition of CG Power is expected to significantly add scale to TII’s business profile, apart from yielding synergies such as common vendors and complementary product categories, and strengthen TII’s overall business risk profile by providing further diversity to revenues and reducing dependence on the cyclical automotive sector.

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