Gandhi Special Tubes has a history of rewarding shareholders with healthy dividends and buybacks: ICICI-Direct

Encouraging growth prospects lie ahead…

About the stock: Gandhi Special Tubes (GST) manufactures small diameter welded and seamless steel tubes that primarily find application in farm equipment (tractor), construction equipment and commercial vehicle (CV) space among others.

 Given the specialised nature of product profile, GST realises high EBITDA margins (~40%) with resultant high capital efficiency (RoIC at ~50%)

 Unlevered b/s with surplus cash of ~Rs 100 crore (~15% of MCap)
FY21 Results: GST reported a robust operational performance in FY21.

 Net sales for the year were at Rs 114 crore, up 40% YoY
 EBITDA in FY21 was at | 45 crore with attendant margins at 39.4%
 Consequent PAT in FY21 was at Rs 36 crore, up 70% YoY

What should investors do? GST’s stock price has grown at ~8% CAGR over the past five years (from ~Rs 315 in July 2016 to ~Rs 475 levels as of July 2021).

 We upgrade GST from REDUCE to BUY

Target Price and Valuation: We value GST at Rs 550 i.e. 15x P/E on FY23E EPS

Key triggers for future price performance:

 With a cyclical recovery under way in its key user segments (construction equipment, commercial vehicles) and steady prospects in the tractor space, we expect GST to report sales CAGR of 15% over FY21-23E

 EBITDA margins are slated to remain elevated at ~38% with RoCE inching up to 30% in the aforesaid timeframe (FY21-23E)

 With low capex spends, GST has a history of rewarding shareholders with healthy dividends and buybacks. We expect the trend to continue with recent dividend declaration of Rs 9/share for FY21 & buyback announcement amounting to Rs 42 crore at Rs 550/share for 6% equity capital (yet to open)

Alternate Stock Idea: In mid,-small cap coverage we also like Phillips Carbon Black.

 The company is domestic leader in the carbon black space (key RM for tyres) with healthy margin profile (~20%) as well as capital efficiency (~20%)
 BUY with a target price of Rs 260