Tube Investments of India Ltd: Michael on Cycle

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Greeks worshiped the geometry like God. They were of the view that these intelligent designs were a proof of the some super Creator. They were very near to the truth. There lies a system, a thought, intelligent design behind our universe…and if we have open minds we can see that even pattern of petals of flowers are following a system, our DNA is following some pattern, so as tree branches, Galaxies etc…it is called Golden Mean; the Fibonacci series where every successive number is a sum total of preceding two numbers (1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 . . .). Remarkably whole nature is built on the basis of this series. Its nature’s way of perfect design. Anything built on the basis of this ratio look perfect…Gize pyramids are also based on this ratio, Leonardo Da Vinci used this ratio extensively in his artwork; he conducted an entire exploration of the human body and the ratios of the lengths of various body parts.

So it is also called Divine Proportion. It is the division of a given unit of length into two parts such that the ratio of the shorter to the longer equals the ratio of the longer part to the whole or, when a line is divided such that the ratio of the longer part of the line to the whole is exactly the same ratio as the shorter part of the line is to the longer part. This ratio is golden mean or phi, which is approximately 1.61803. The higher you go in the Fibonacci sequence, the more closely the ratio between two successive numbers in the sequence approximates phi.

Shapes proportioned according to the golden ratio have long been considered aesthetically pleasing throughout many cultures, and is still used frequently in art and design, suggesting a natural balance between symmetry and asymmetry.

The master creator has left his watermark everywhere. He might have used this ratio for some purpose which we don’t understand but we KNOW HE has used it. This golden mean is a bit complex but once we understand it, it opens a new world to us. Same is theory of relativity, multi universe, time travel etc.

If we sit among the Gurus discussing it, we may find our head twisting as these are most difficult things for human mind. But when we Understand or Follow it, our Vision changes and we begin to see and comprehend a Life which was always HIDDEN from us.

We feel alike when we sit among another set of Gurus like CA’s, Finance professionals, Taxation experts etc. They use very complex phrases like “Excise duty is payable on manufacturing, but payment event is triggered on removal of goods from the factory gate. CST input can’t be set off against VAT liability but against CST liability.” Common man shivers on the name of Tax laws. Big words, tough ones. These are too complex. Our tax laws have become much complex and lengthy but I do not feel that tax administers have done it. Actually they are forced to insert/remove new tax rules due to some smart people exploiting the weakness of their rules. So they change their rules accordingly but all of it has rendered our tax laws into a big tree with thousands of interconnected branches and we are supposed to read one rule with reference to 10-20 other rules.

Being a CA myself, I have been the privilege of being in many so discussions. We think by understanding complex tax law we are doing something but at the end these taxes are just a mean to collect the money from the earners to distribute them to laggards to fulfill the political wishlists. You can go on feeding a poor man with free food for eternity but he will remain depend upon you. You are not doing any good. This is what our government is doing all the time. Very less money is really invested for growth. No denying to the fact that govt needs money for security and justice. So these tax laws are complex so that no one can evade it. There is no big deal in absorbing this mess.

And what our administers say about this mess? They say that tax income is needed for the security/growth of the country, helping the poor etc. but is it so? Whether they are successful in fulfilling the PURPOSE? A big NO! Poor pay the same amount of tax on Tea as is paid by a rich man. Our Government is still unable to devise a system to keep poor out of the sales tax. They say that they use the tax income to help the poor, but everybody knows the efficiency of distribution system of government where 50-60 rupees out of 100 are wasted or stolen. But yet so many talks, use of big words like “GST will end the cascading effect of taxes” when they are a failure in serving the purpose of collecting high amount of taxes.

Taxes on Indian liquor are around 100% which makes liquor very costly for a poor man. And so poor man buys substandard low quality liquor and many times he dies because of this. State says our constitution asks them to prohibit the use of liquor. But what about our Army? Army gets the liquor without taxes and at even lower prices. Why? They say they work in difficult conditions and also need to fight the depression of tough life. But whether our poor laborer lives an easy life? No, they live even harder life devoid of basic facilities. But on the contrary, every state earns around 20% of their tax income from liquor!!

Government talks about lowering oil imports, pollution. The way we are living, there are high chances pollution will kill everything. In order to promote consumption to bring growth, everybody focused on cheaper loans for cars etc. And then new roads, steel etc for these cars, trucks all of which contribute their share in pollution.

But in another feat of splendor, they kept their eyes off from the easiest remedy; instead they levied high taxes on it. I am talking about poor Bicycle which is taxed anywhere around 15-20%. It should have got subsidies but it is taxed!! So ridiculous. I mean what our planners really understand. Government should never enter any business; especially in competition with private sector. Just look at Air India, HMT, BSNL. These crowns were crushed by private elephants. But at least they can act rationally while levying taxes.

They should have promoted Cycle sharing systems, separate bicycle lanes, reward schemes for using bicycles, subsidies on bicycles with no tax. Bicycle are a panacea to reduce the dependence on costly oil, accidents, pollution, provides health benefits. But still india is way behind in using bicycles. Our share in global exports and production is also very low. China leads the way in it with 67% against 10% of india. India produce around 15 million bicycles but it exports just 5-6% out of it.

India exports bicycles mainly to Africa and other less developed nations. Their exports to western countries are negligible as we can’t meet their demand for high end products. Exports are growing at 10% but imports of high end bikes from countries like china are growing at 25%!! Although now we are waking up to it and companies like Hero and Tube are investing big into R&D. India mainly use steel for their cycles but global demand is for alloy, carbon or titanium based components which are not produced in india. India also lacks the technology to manufacture high technical cycle products like gears, disc brakes etc. which are currently imported. Here again, our great government planner play their innovative part by  imposing import duties of around 20% which further raise the final prices and hit the export competitiveness. We are urgently required to sort out these issues just like we did in pharma and auto parts.

Copenhagen, the capital of Denmark, is regarded as bike city of the world. Maximum people use bicycles for their household and office work. Most of the people owns a bicycle but not a car. Around 70% of their parliament members use bicycles. No wonder, Denmark is world’s cleanest and most peaceful country.

As a counter measure to deal with rising emission levels and congestion on roads, presently, 800 cities in 56 countries have well established public bicycle sharing systems. The system consists of bike hubs situation in an area from where anyone can rent a bike for short distance commuting. The cycle can be picked up from one hub and left at another on reaching the destination. The cycles are made available at cheap rents. Advanced electronic assisted tools help preventing theft or misuse.

It cuts traffic trouble and struggle for parking space. A space required to park a car can accommodate 15-20 cycles. Neighboring China is the world's largest shared-bike market with a fleet of 858,000. France started Velib’ in 2007, now the world’s second-largest operation.

But we are way behind the globe in using bicycles in spite of the fact that we are a poor country and bicycle suits us the most. Like just 50% of rural households have a bicycle in india as compared to 100% of china. Cheapest bicycle cost around 15% of annual per capita income as compared to 2.5% of china (our planner please open your eyes). So our planners needs to seriously eliminate the taxes on bicycles costing less than 5000 to help the poor along with providing direct subsidy to consumers on every purchase of bicycle.

So no doubt we need to do much in this direction. And I think that this is just on the anvil. Although the demand for high end sports bikes are growing fast in india for last few years but this is nowhere near the potential. Just as New Delhi Govt has imposed even-odd rule for vehicles on the roads on alternate days, I think measures for bicycle will be announced soon. It will take time to build separate cycle lanes in the city, but at least cycles can be made compulsory in colleges and universities. Government employees should be encouraged to use bicycles.

Efforts should be made to make people aware about the benefits of cycles and change in the image of bicycles as poor man’s gadget.

Although Hero cycles is the largest in india with around 40% shares but Tube with brands BSA and Hercules is second at around 25-30% share.

Tube got around 1300 cr from cycle business in 2014-15 with around 60 cr as operating profit before interest and taxes which is good keeping in view the competition with low demand, setting up of retail points (around 940), new models…the benefits of these will be realized in the future. As against this much older Atlas cycle with around 600 cr is grappled with losses for past many years. So Tube’s performance is encouraging relatively as sector is yet to see its good time. It is best placed along with Hero to reap the benefits of most probable surge in demand of bicycles in india. I have been to many cycle stores with some selling only high end costly bikes starting from 20000 and they are getting good respond. The only thing which I see lacking is proper brand promotion.

Cycle manufacturers need to link bikes with fitness and machismo; they need to endorse someone like Salman khan or John Abrahm and create a new product line. Tube and Hero has the financial muscle to do this.

Tube’s metal and engineering products divisions are fairly big in size with turnover of around 2700 cr. I will write more on these two on some other time.

Its most prized assets are cholamandalam investment and finance company ltd (CIFC, listed) and Cholamandalam MS general insurance company ltd (not listed). It is having 50.4% holding of CIFC. Current market value of CIFC is around 10000 cr, so its 50% share is valued at 5000 cr which with 30% holding company discount is valued at 3500 cr. Its insurance business is not listed but it earned around 150 cr net profit last year, I am giving it 30 PE ratio which is not high as compared to the current deal in the sector as growth prospects are very high in general insurance in india. So its value will be 4500 cr. Its share is 74% which valued it around 3200 cr. Since it is not listed I am not discounting it. These two are valued at 6700 cr itself. Current market value of Tube is 7800 cr which makes its standalone business with turnover of 4000 cr valued at just 1000 cr.

It also holds 70% in listed shanti gears whose market value is at 900 cr. It is also having a 50:50 JV with Tsubamex of japan for making dies and tools for which india depends on imports. It has invested around 20 cr in the JV which may bring good revenues in the future.

I want to devote some more time on detailing its other businesses but only for time and length of the article. I will post another post on it. Its cmp is 420 but do not make big of it as it is a Murugappa group company; Eid parry and Coromandal international. Good buy at CMP and at every fall.

Let’s wait for our respected PM to say “Michael on cycle” and this cycle will turn into a rocket.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares of Tube Investments of India ltd)