Buy TRF Ltd.
CMP Rs. 570.00
Target Price: Rs.750
Overview
This stock was first recommended almost a year back (VOL 1 No 12) at the then price of Rs 721 and was projected to be priced at Rs 1050 in a years’ time frame. The stock is currently trading at Rs 518 Ex – Bonus (1:1) slightly above our projected price. As the future outlook for the company is robust, we have taken the liberty to repeat our recommendation. Now for a brief re-cap: The demand for Material Handling Equipment – an integral part of any Plant, Warehouse, or Distribution System, is dependent on the state of a nation’s economy. There has been an increasing tendency towards integration of Material Handling Equipment with other company systems; this has led to an increase in its market growth. TRF supplies all kinds of machines to enable movement of goods to areas where they can be consumed, like conveyor belts and tipplers to industries like cement, steel, power and mining. TRF – a producer of Bulk Material Handling Systems is regarded as one of the most comprehensive source of engineering equipment, systems and services.
With capacities being expanded in all its user industries, TRF is looking forward to an unprecedented growth in the future and has set a vision to be a Rs 25000 Mn company by 2013.
Investment Rationale
We are faced with an existing deficit in the Energy Sector. Power is an important component to sustain future growth across the various sectors in the economy. Thus, it is obvious for the power sector to be in focus, as it is the keystone of impending growth. This when translated into orders for Bulk Material Handling Systems results in a doubling of the amount spent over the last five years. Equipment sold to the Power sector accounts for almost half of TRFs standalone turnover. The Steel industry is also coming in the limelight on account of its intensifying consolidation, softening raw material costs and marginal increase in finished goods prices from the recent lows. With the entry of new foreign players, the domestic players are now strengthening their presence, increasing their capacities and working towards integration. The newly formed ore rich states like Chhatisgarh and Jharkhand are seeing host of proposals for setting up new Steel Plants. Wagon tipplers, vibrating screens, coal washeries – to improve the purity of coal and conveyor belts are among a host of TRF products that are necessary for the smooth functioning of a steel plant.
The Indian Mineral Reserves – are yet to be exploited. With the nationalized mining companies having huge capex plans and also with the opening of the sector for private players for captive consumption, the demand for Handling Equipment will see a new high. TRF is also in the business of making equipments that are used while setting up the entire sequence from excavating to loading. The Port & Yard Equipment division of the company – manufactures gantry cranes and loaders / unloaders, holds great promise of growth in the coming years, as the traffic handling capacity of ports is expected to more than double in the next five years.
TRF had recently acquired 51% stake (with a call and put option to acquire the balance 49% by April 2010) in York Transport Equipment, a Singapore based company engaged in manufacture of trailers / axles under gear systems. This unit had faced a tough time last year due to increased steel prices and adverse foreign exchange movement. The government’s focus on good and improved road conditions mean a huge demand for quality axles and in turn for trailers. Thus to capitalize on this demand growth and leverage on York’s technology, TRF will be setting up a multi-axle plant in India.
Investment Concerns
Steep increase in raw material prices could be a cause of concern for the company. Delay in execution of orders could affect profitability
Valuation
At the current price of Rs. 518 TRF’s projected FY10 EPS of Rs. 56.7 is discounted 9x. Long term investors can add this to their portfolio.
Report card
| Attribute | Value | Date |
|---|---|---|
| PE ratio | 6.86 | 17/10/09 |
| EPS (Rs) | 82.75 | Mar, 09 |
| Sales (Rs crore) | 109.74 | Jun, 09 |
| Face Value (Rs) | 10 | |
| Net profit margin (%) | 8.63 | Mar, 09 |
| Last bonus | 1:1 | 16/06/09 |
| Last dividend (%) | 120 | 20/05/09 |
| Return on average equity | 34.45 | Mar, 09 |
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