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Good Luck Steel Tubes - To Buy or Sell

We present below our view point for Good Luck Steel Tubes with an aim to arrive at a conclusion that whether one should buy or sell the stock.

Good Luck Steel Tubes Ltd  with code (GLSTL), a domestic manufacturer of steel tubes, forgings and structured products, is reaping the benefits of moving up the value chain and expanding its reach to newer industries like auto, railways and power (thermal and solar) among others.

Given its improving product portfolio and customer base, the company has set out on a phased expansion in all the three business segments and is positioning itself for the pick-up in demand resulting a revival in the economy. It has already doubled its capacity in the auto tubes segment and the next phase of expansion is coming up in the metal structure division (transmission towers, boiler support and solar support structures) with a cumulative investment of close to Rs125 crore. The expansion of its forging unit is scheduled for commissioning in the first half of 2016.

After a muted financial performance over the recent years (OPM of 6.5-7.5% and negative earnings growth during FY2012-14), GLSTL is expected to register revenues and earnings CAGR of 15% and 39% respectively over FY2014-17. Further, its OPM is expected to expand by 150-200 BPS (by FY2017) due to focus on high-margin products. At the current market price, the stock is trading at an attractive multiple of 3.2x its FY2017E EBITDA. We expect a 20-25% upside from the current levels, valuing the stock at 4.5x its FY2017E EBITDA (broadly in line with three years’ average EV/EBITDA of 4.8x).

Key risk: Delay in pick-up in industrial cycle could put severe pressure on the balance sheet as the debt/equity ratio would balloon to 1.8:1 on the back of its expansion plans. Also, the margins are susceptible to volatility in line with sharp movements in raw material prices and consequently would affect its financial performance.

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