Blood in the streets (Hopefully, Not Yours) – Chapter 5 & “Baby needs new shoes & other people’s money” – Chapter 6 from Joel Greenblatts’ all time classic “You can be a stock market genius” is worth a study before you read this further.

Companies end up in bankruptcy court for all sorts of reasons. A lousy business is only one of them. Some others include mismanagement, overexpansion, government regulation, product liability, and changing industry conditions. Many times, especially in the last decade, profitable, attractive businesses are forced into bankruptcy because of excessive leverage taken on as a result of a merger or leveraged buyout. In some of these cases, a business was too cyclical to make regular debt payments. In others, over-optimistic projections and too much debt combined to bankrupt an otherwise good company. It is these attractive but over-leveraged situations that create the most interesting investment opportunities.

Can you believe that a Tata group company had filed an application with BIFR since it had become sick company?

Yes, the name of the company is TRF Ltd.

The company manufactures bulk material handling and processing equipment, bulk material handling systems, coke oven equipment, coal dust injection systems for blast furnaces, coal beneficiation systems, and port and yard equipment etc. It has also specialized in the manufacture of advanced systems for conveying, stacking, blending, reclaiming and processing of bulk raw materials.

It services core industries like power, mining, coal, fertilizers, cement, ports, etc

Are there headwinds in these sectors? With a slew of projects coming in via the huge infrastructure push by the government, and the Capex cycle looking to turn up, one of the biggest beneficiaries will be companies handling bulk material handling equipment providers.

Also it has a host of subsidiaries in the auto ancillary space which are comparable to good Indian corporates, serving clients across the world.

Let’s look at what this company has in store for us as potential investors?


The parent company has 2 parts of its business. It has a products business and the projects business which is essentially the EPC for installing and erecting the bulk material handing equipments.

A bit of numbers, but they explain the entire story for us.

 Rs crs 2013 2014 2015 2016 2017 H1 2018*
Projects Revenue 513 526 441 431 383 134
Projects EBITDA -95 -55 -90 -20 -48 -52
Projects EBITDA (%) -19% -10% -20% -5% -13% -39%
Products Revenue 300 281 263 267 276 103
Products EBITDA 53 42 34 35 42 2
Products EBITDA (%) 18% 15% 13% 13% 15% 2%
Inter-Segment Revenue (168) (111) (157) (145) (139) (54)
Standalone Revenue 645 696 547 553 520 183

*Haven’t taken the full year numbers since, there is up fronting of costs as explained below.

The products business is a profitable one with average EBITDA margins of 15% and constitutes~ 50% of the revenues of the company.

The projects business is a drag on the financials of the company which has been making losses at EBITDA levels for the last few years. They key reasons for the lackluster performance of the company has been as follows

  • Lack of project executions skills
  • Inordinate delay in execution of projects, which has led to huge money being blocked in retention
  • Inaccurate assessment of cost & time for projects and skewed execution of contracts in favor of buyers.

Balance Sheet

12-Mar 13-Mar 14-Mar 15-Mar 16-Mar 17-Mar
Equity Share Capital 11 11 11 11 11 11
Reserves 165.72 88.83 62.04 -22.78 -28.34 -54.95
Borrowings 324.7 389.52 369.46 372.88 417.37 381.01
Other Liabilities 421.23 578.52 555.92 685.83 669.19 648.14
Total 922.65 1,067.87 998.42 1,046.93 1,069.22 985.2
Net Block 44.99 42.95 43.04 37.91 34.32 31.11
Investments 109.48 109.11 185.06 185.06 185.11 185.2
Other Assets 767.57 913.63 770.28 823.96 849.79 768.89
Total 922.65 1,067.87 998.42 1,046.93 1,069.22 985.2
Working Capital 346.34 335.11 214.36 138.13 180.6 120.75
Debtors 457.19 523.76 486.62 512.15 538.9 448.18
Inventory 83.77 159.95 88.07 139.36 135.99 128.33
Debtor Days 207.99 295.65 255.12 341.56 363.95 323.4
Inventory Turnover 9.58 4.04 7.91 3.93 3.97 3.94

The balance sheet gives some very good insights.

  • Debtors are around INR 530 crs out of which INR 80 crs is deemed as doubtful and has been provided for.
  • Retention money is around INR 250 crs which will be paid on completion of projects. Last FY, the company managed to recover around 70 crs our retention money by completing the outstanding projects
  • Total term debt at standalone levels is INR 381 crs which can very well be paid off as and when receivables are en cashed
  • The average collection period is around 1 year where remedial action can be seen

 Now what has become interesting in this company?

The appointment of N Chandrasekaran as the CEO of Tata Sons Ltd has the set in motion a series of events which should impact the fortunes of Tata group companies including TRF.

  • The businesses need to be either shut down or sold off or revived to make it best in class in its category
  • No wonder Tata Steel has now decided to revive the business of TRF which can be seen from the high profile appointment of 3 senior executives to the board of TRF Ltd.
  • Sandip Biswas (Group Executive VP – Tata Steel), Dibyendu Bose (Group Director-Investments, Tata Steel) & Rajesh Jha (VP – Engineering & Projects, Tata Steel)
  • These appointments clearly show the intent of Tata Steel to revive the fortunes of TRF both from business/financial perspective and also the intent of the 3 senior executives to take up a challenging role.

Post Appointment actions

  • The first half numbers of FY 18 seem to be sand bagged. I.e. typical when new management comes in. Front load the costs, expenses, provisions so that they can being the New Year i.e. FY 19 on a clean slate. H1 FY 18 has already shown a highest ever loss of INR 50 crs
  • Rationalization of subsidiaries (the story of subsidiaries comes next). Remaining stake in Aditya Automotive has been sold off recently in the 3rd Qtr for around INR 30 crs which will directly impact the bottom-line.
  • Trade receivables are down by INR 50 crs (No commentary has been provided in the half yearly results though)
  • Focus on internal group projects to strengthen the balance sheet, experience & expertise & capability building for the company
  • Tata Steel’s proposed Kalinganagar expansion project should provide significant orders and revenue visibility for next 2 years for the projects business.
  • The company is also focusing more on the products sales along with servicing rather than the projects business since margins are better for products at around 15%

Expectations on future numbers

It is very difficult to estimate as of now the future numbers since this company is on revival mode. But it would not be over optimistic to see the peak revenue numbers achieved in the last few years i.e INR 1300 crs in 2012 (INR 800 crs products and INR 500 crs projects). We still project lower numbers by 2021

 Rs crs 2018 2019 2020 2021
Projects Revenue*** 250 275 300 350
Projects EBITDA -75 9 15 17
Projects EBITDA (%) -30% 3% 5% 5%
Products Revenue 250 350 450 550
Products EBITDA 20 52 67 83
Products EBITDA (%) 8% 15% 15% 15%
Inter-Segment Revenue (100) (100) (120) (150)
Standalone Revenue 400 625 750 900
Standalone EBITDA -55 61 82 100

*** 75% of the business expected from Tata group companies. Net project revenue excluding the inter-segment sales goes up from INR 150 crs in 2018 to INR 200 crs in 2021.

(Estimated growth rates – 20% CAGR over 2018 to 2021)

With the completion of existing projects and recovery of o/s retention & receivables, the entity should become debt free at term debt level and will only have working capital debt in the next 2-3 years.


TRF Ltd has a whole host of subsidiaries which contribute significantly to the overall topline of TRF Ltd.

  • York Transport Equipment (Axles, suspensions, couplers, gears)
  • Dutch Lanka Trailers (Port & Road trailers)
  • Hewitt Robins International (screeners, feeders, crushers)
  • Adithya Automotives Applications (body applications – Now divested)
 Rs Crs 2013 2014 2015 2016 2017        2018* 2019 2020 2021
Subsidiaries Revenue 469 478 578 569 490 582 650 780 936
Subsidiaries EBITDA 10 15 26 13 14 40 52 78 112
Subsidiaries EBITDA (%) 2% 3% 4% 2% 3% 7% 8% 10% 12%

*Exactly double of reported H1 numbers and 20% growth going forward

The company has been increasingly focusing on the products business which has started showing improvements in the current financial year.

Balance Sheet

Narration Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
 Borrowings               198               255               229               203               180
 Other Liabilities               134               111               141                 63                 72
 Debtors                 98               117               124                 99               103
 Inventory               122               109               127               105                 95
 Sales               469               478               578               569               490
 Debtor Days                 76                 89                 79                 64                 77
 Inventory Turnover                    4                    4                    5                    5                    5

The debtors and inventory profile of the subsidiaries is better than the parent. The subsidiary business is much better managed, primarily since it is classic OEM auto component supplier.

What would be the estimated value of the company along with its subsidiaries?

Standalone Projects

The standalone projects business is the main cause of concern. The group will endeavor to do projects internally only till the time expertise is built or might transfer it to the group company Tata Projects Ltd (INR 8000 crs revenue), which is the main EPC company in near future.

Very conservatively, we can see that once the debt is entirely paid off from the stuck receivables in the next 2 -3 years’ time, which is the stated intention of the management and limited business to be done, the estimates for FY 21 are as follows.

FY 21 – Market Cap (EV/EBITDA 8x) = 140 crs

Subsidiaries (Products)

For the subsidiary, valuations, I would like to look at Automotive Axles and GNA Axles which are in the direct line of business as York Transport is. Further, York constitutes around 2/3rds of the subsidiary revenues.

The EV/EBITDA is in the range of 13-19. For conservative purposes, if we take an EV/EBITDA of 10 for TRF subsidiaries

S.No Revenues (Rs crs) EBIT(Rs crs) M Cap(Rs crs) Debt EV/EBITDA
GNA Axles (FY 17) 513 83 (15%) 930 117 13
Automotive Axles (FY 17) 1146 112 (10%) 2160 0 19
TRF Subsidiaries (FY 18 est) 582 40 (7%) 120** 180 10
TRF subsidiaries (FY 21 est) 936 112 (12%) 1120 100 10

**Implied market cap is INR 120 crs currently.

FY 21 – Market Cap (based on EV/EBITDA 10x) = 1120 crs

Standalone Products

For standalone products, valuations will be similar to the numbers as carried out for subsidiary valuations.

S.No Revenues (Rs crs) EBIT(Rs crs) M Cap(Rs crs) Debt EV/EBITDA
TRF standalone products (FY 21 Est) 550 83(15%) 830** 0 10

**Implied market cap

FY 21- Market Cap (based on EV/EBIDTA 10x) = 830 crs

Sum of parts valuation for FY 21 = 2000 crs

At current market cap of INR 220 crs, the company is significantly undervalued. The market has also not factored in the true value of the subsidiaries due to the layering nature of the holdings which makes it difficult to analyze the numbers threadbare.

If and when the projects business is turned around by the new management, and little more traction is given to the products businesses, there is huge scope for re-rating in the next 2-3 years.


Tata Steel holds only 34% equity in the company. With the focus on turning it around, the market cap is bound to rise multifold, why has Tata Steel not pumped in equity into the company to raise its stake?

As the market re-rates the stock, the cost of increasing the shareholding will definitely rise.

Source : LINK


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