Indag Rubber Ltd Bloomberg Code: IDR IN

Transcription

1 Industrials-Transportation Equipment-Commercial Vehicles Bloomberg Code: IDR IN India Research - Stock Broking Set to Ride on Commercial Vehicle Growth with Strong Cash Flows and Balance Sheet Recovery in Commercial vehicle growth: Demand from commercial vehicles is one of the major growth triggers for retreading industry. Retreading industry picks up with lag effect. With improving economic activity, good growth is witnessed in commercial vehicle segment which is expected to sustain in the coming quarters and in the coming years. Domestic CV sales grown by 15.% in FY15 and by 11.2% in FY16. The company is focusing more on end retreader and fleet owners. New capacities coming on stream: Over the years, the company added the capacities with better utilization levels. Currently, it is adding 62 MTPA (Metric Tonne Per Annum) (brownfield expansion), addition of around 5% to the current capacity of 138 MTPA, with capex of Rs. 7 Mn which is expected to complete by mid-216. This capacity augments well for the company s growth in the long term. Increase in Radialisation in CV segment: Current radialisation in India is expected to be in the range of 28%-3% and expected to increase to 45-5% in the next three years. Radialization will get more tyres for retreading, as casing gets less affected and can be retreaded multiple times. This is going to narrow the gap in retreading time. Healthy balance sheet: With zero debt, IDR has strong balance sheet with surplus free cash and investments over the years accumulated to Rs. 87 Mn, majority deposited in mutual funds. Lower capex over the years, high return on Assets and efficient working capital management led to better operating and free cash flow. Valuation and Outlook IDR is the leading thread manufacturing company in the domestic market with strong distribution network (25 depots). Though the growth is expected to be weak because of excise duty effect, but because of growth in free cash flow on the back of lower capex, better working capital cycle and expected recovery in returns on equity and assets by FY18E, we initiate coverage on Indag Rubber and assign P/B multiple of 2.9x, discount of 5% to last two years average, to FY18E Book value and give BUY rating with a target price of Rs.22, with an upside potential of 19%. Key Risks 1) End of excise duty benefit. 2) Dumping of Chinese tyres at very low prices. Recommendation (Rs.) Jun 3, 216 BUY CMP (as on Jun 29, 216) 184 Target Price 22 Upside (%) 19 Stock Information Mkt Cap (Rs.mn/US$ mn) 4847 / wk High/Low (Rs.) 237 / 146 3M Avg. daily volume (mn) Beta (x) 1.1 Sensex/Nifty / 8238 O/S Shares(mn) 26.3 Face Value (Rs.) 2. Shareholding Pattern (%) Promoters 74.8 FIIs.5 DIIs.2 Others 24.5 Stock Performance (%) 1M 3M 6M 12M Absolute 6 18 (7) 2 Relative to Sensex (1) 9 (12) 22 Source: Bloomberg Relative Performance* Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Indag Rubber Source: Bloomberg; *Index 1 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 Sensex May-16 Exhibit 1: Valuation Summary YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Net Sales EBITDA EBITDA Margin (%) Net Profit EPS (Rs.) RoE (%) PE (x) ; *Represents multiples for FY14, FY15 & FY16 are based on historic market price For private circulation only. For important information about Karvy s rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>, Thomson Publishers & Reuters Analyst Contact Ashok Ramineni ashok.ramineni@karvy.com 1

2 Company Financial Snapshot (Y/E Mar) Profit & Loss (Rs. Mn) FY16 FY17E FY18E Net sales Optg. Exp (Adj for OI) EBITDA Depreciation Interest Other Income PBT Tax Adj. PAT Profit & Loss Ratios EBITDA margin (%) Net margin (%) P/E (x) EV/EBITDA (x) Dividend yield (%) Balance sheet (Rs. Mn) FY16 FY17E FY18E Total Assets Net Fixed assets Current assets Other assets Total Liabilities Networth Debt Current Liabilities Other liabilities Balance Sheet Ratios RoE (%) RoCE (%) Net Debt/Equity (x) (.) (.) (.) Equity/Total Assets P/BV (x) Exhibit 2: Shareholding Pattern (%) Company Background (IDR) was incorporated in July 1978 as a joint venture between Khemka group and M/S Bandag Incorporated, USA, one of the biggest players in the US retreading industry. The company manufactures precured tread rubber, un-vulcanized rubber strip gum, universal spray cement and tyre envelopes for the tyre retreading industry. Manufacturing plant is at Nalagarh (Himachal Pradesh) with a capacity of 13,8 MT for tread rubber. The company had one other plant at Bhiwadi (Rajasthan), which is not working right now. Close to 9% of the company s revenue is generated from the sale of precured tread. The brand name INDAG is used to supply tread rubber in India. ZOMA is the brand name for exports. In 215, it launched a new brand Maxmile. Along with the main product Precured Tread Rubber, it also manufactures Un-vulcanized Rubber strip gum (with capacity of 18 MT), Envelope and Universal Spray Cement (with capacity of 18 KL). Cash Flow (Rs. Mn) Exhibit 3: Revenue Segmentation (%) FY16 FY17E FY18E PBT Depreciation Interest (net) (19) (33) (57) Tax (135) (96) (119) Changes in WC (27) 11 (41) Others CF from Operations Capex (74) (2) (15) Others Inc/dec in investments (181) (2) (18) CF from Investing (228) (184) (135) Dividends (75) (76) (76) Interest Paid (2) (3) (3) CF from Financing (77) (79) (79) Change in Cash (7) (13) 19 DIIs.2% Others 24.5% Bonding repair & extrusion gums (including envelopes) 8.4% FIIs.5% Promoters 74.8% Precured tread rubber 86.2% Other materials 5.4% Source: BSE, Karvy Research 2

3 Recovery in Commercial vehicle growth: Exhibit 4: Commercial Vehicles (Units) Source: Company presentation, Karvy Research New capacities coming on stream: Exhibit 5: Capacities over the years FY14 FY15 FY16 Commercial Vehicle (units) Due to significant operational savings and durability, retreading in domestic market has gained greater acceptance in the commercial vehicle segment, especially truck/bus and Light Commercial Vehicle (LCV) tyres. Retreading cost for commercial vehicles costs 3-5% of the original new commercial tyre. Management is focusing more on end retreaders and fleet owners for better growth. From the last 18 months, the CV segment witnessed recovery in the demand and growth. The commercial vehicle segment has reported good growth in Q1CY16 and this growth is likely to continue in the coming quarters on the back of improving economic activity. Retreading industry picks up with lag effect. With Domestic CV sales grown by 15.% in FY15, the growth in retreading industry is good in FY16. CV sales expected to grow at double digit growth in FY16 also, as IIP has grown by 4.8% in FY16. This is expected to create sufficient demand for retreading industry in the coming years. The other segments like OTR (off-the-road) also are the growth drivers where the demand for retreading is increasing. Commercial vehicle sales grew at 11.5% in FY16, led by the 3.% growth in the Medium and Heavy Commercial Vehicles (M&HCV). SIAM estimates the M&HCV industry to grow at 12-15% in the current year Capacities (MT) Source: Company presentation, Karvy Research Over the years, the company has added the capacities with better utilization levels. Currently, it is adding 62 MTPA. It s a brownfield expansion with capex of Rs. 7 Mn which is expected to complete by mid-216. This capacity addition of around 5% to the current capacity of 138 MTPA, augment well for the company s growth in the long term. Over the years, the capex for these capacity addition is small compared to the operating cash flow. Most of the capex is for growth capex. Post this capex, there are no major capex plans for the company. Increase in Radialisation in CV segment: Exhibit 6: Radialisation penetration FY1 FY11 FY12 FY13 FY14 FY15 Radialisation penetration (%) in Truck & Bus Current radialisation in India is expected to be in the range of 28%-3% and is expected to increase to 45-5% in the next three years. Radial tyres penetration in FY13 in India is at 22% where as in developed regions like North America, Western Europe and South America, the penetration is at 96%, 1% and 65% respectively. Radialisation in Truck and Bus segment is expected to grow at 56% and 66% in FY17E and FY18E respectively. Radialization will get more tyres for retreading, as casing will get less affected. This is going to narrow the gap in retreading time. Source: Company presentation, Karvy Research 3

4 Cost effective: Jun 3, 216 The cost of manufacturing of retreading is also low as it just uses 25% of natural rubber. In new tyres, 8% of natural rubber is used. It also needs just one third of oil to produce a retread as compared to manufacture a new tyre. Commercial vehicle manufacturers who go for retreading could save around 5-7% of the new tyre cost with life nearly same as new tyre. Good Operating cash and free cash flow: Exhibit 7: Operating Cash flow & Free Cash flow (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Cash flow from Operations Capex Free cash flow 218 IDR maintains better working capital cycle which resulted in good operating cash flow. In FY16, the working capital days are at 7 days. Most of the natural rubber and other petrochemical products are sourced from domestic market. The operating cash in the last three years has grown at a CAGR of 1.4% where as in the same period the revenue has grown at a CAGR of 2.5%. The free cash flow over the years has also improved well due to lower maintenance capex and growth capex. This resulted in accumulation of cash and investments on the books which stand at Rs. 87 Mn in FY16. Implementation of GST: Retreading is dominated by most of the unorganized players and is slowly transitioning from unorganized to the organized market. There is lot of difference in pricing between organized and unorganized players. One of the main reasons is because of different taxes. Once GST is implemented, that would result in removal of various taxes from suppliers to consumers and creates a level playing for all the players in the industry. Currently, the ratio between organized and unorganized players is 5:5. Strong balance sheet: With wide distribution network, low cost per kilometer for end users, IDR has market share of 2-25% in organized cold process tread manufacturing market size in FY14. The total Indian tread manufacturing size is Rs. 329 Mn in FY14, of this organized cold retreading process is around 33%. With zero Debt, IDR has strong balance sheet with surplus free cash and investments over the years accumulated to Rs. 87 Mn, majority deposited in mutual funds. The capex for the new capacities is very low as compared to capex required to new tyre plant (either Brownfield or Greenfield Plant). In the next two years, because of the lower capex, free cash flow is expected to grow and expected to increase the cash and investments on the books further. 4

5 Exhibit 8: Business Assumptions Y/E Mar (Rs. Mn) FY15 FY16 FY17E FY18E Comments Revenue Revenue Growth (%) (1.1) 12. EBITDA EBITDA Margins (%) PAT (normalized) Fully Diluted EPS (Rs.) Fully Diluted EPS Growth (%) 18.3 (1.9) (24.1) 24. Net CFO Capex (28) (74) (2) (15) Net Debt (537) (34) (327) (346) Growth is post the excise duty deduction. The excise duty is around 12.5%. Due to excise duty effect, the EBITDA margins are expected to decrease. Only maintainence capex is assumed in FY17E and FY18E. Free Cash Flow Lower capex led to same levels of free cash flow. 5

6 Exhibit 9: Revenue growth FY13 FY14 FY15 FY16 FY17E FY18E Net Revenue (Rs. Mn) Revenue Growth (%) In the last 5 years, the revenue has grown at a CAGR of 11.% with major revenue from retreading segment. Between 21 and 214, the Indian Tread manufacturing industry market size has grown at 4.2%. With growth in investments on books, the other income has also grown at a good rate. In FY16, the other income is at Rs. 5.8 Mn with most of income is from Dividends from Mutual funds and from Equities invested. Currently, the company has total cash and investments at Rs. 87 Mn. Exhibit 1: Profit margins FY13 FY14 FY15 FY16 FY17E FY18E Gross Profit Margin (%) EBITDA Margin (%) PAT Margin (%) The EBITDA margins are at around 19.8% in FY16 and has improved by 171 bps on the back of improvement in gross profit margins due to lower natural rubber prices, crude oil derivative prices and better utilization rates. In the last 3 years, the gross profit margins have improved significantly. Currently, the gross profit margins are around 4.4% in FY16. In FY15 and FY14, the gross profit margins were at 35.2% and 33.6% respectively. In FY16, the operating profit margins are at 19.8% and net profit margins are at 12.4%. The operating profit and net profit margins improved by 171 bps as compared to FY15 but net profit margins decreased by 89 bps on the back of increase in effective tax rate which is at 28.% in FY16. The major expenses on the books are the raw material costs and the employee expenses. Of the total raw material costs, Rubber accounts for 5.%, Carbon black 3.% and other chemicals 2.%. Most of the natural rubber required is sourced from the domestic market. These operating profit margins are likely to decrease in FY17E and FY18E on the back of excise duty. Exhibit 11: Cash flow (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Cash flow from Operations Capex Free cash flow IDR maintains better working capital cycle which resulted in good operating cash flow. In FY16, the working capital days are at 7 days. The free cash flow over the years has also improved well due to lower maintenance capex and growth capex. This resulted in accumulation of cash and investments on the books. By end of FY16, Rs. 537 Mn are in Non-current investments, Rs. 297 Mn are in current investments and Rs.23 Mn are in Cash and bank balances. Exhibit 12: RoE(%) and RoCE(%) FY14 FY15 FY16 FY17E FY18E RoE (%) RoCE (%) In FY16, the RoE and RoCE stand at 22.4% and 33.4% respectively, which have slipped from 28.2% and 36.3% in FY15 because of weak growth in bottom line and lower growth in EBIT. By the end of FY17E and FY18E, the RoE is expected to be at 14.7% and 16.3% respectively. 6

7 Exhibit 13: Dividend Payout(%) Over the years, the company has maintained healthy dividend pay out ratio of around 2%. The left over money is invested in quoted equity investments and majority part of the amount in mutual funds. FY11 FY12 FY13 FY14 FY15 FY16 Dividend Payout (%) Exhibit 14: Company Snapshot (Ratings) Low High Quality of Earnings 33 Domestic Sales 33 Exports 33 Net Debt/Equity 33 Working Capital Requirement 33 Quality of Management 33 Depth of Management 33 Promoter 33 Corporate Governance 33 7

8 Valuation & Outlook IDR is the leading thread manufacturing company in the domestic market with strong distribution network (25 depots). Though the growth is expected to be weak because of excise duty effect, but because of growth in free cash flow on the back of lower capex, better working capital cycle and expected recovery in returns on equity and assets by FY18E, we initiate coverage on Indag Rubber and assign P/B multiple of 2.9x, discount of 5% to last two years average, to FY18E Book value and give BUY rating with a target price of Rs.22, with an upside potential of 19%. Exhibit 15: P/B graph FY12 FY13 FY14 FY15 FY16 P/B graph Source: BSE, Karvy Research Key Risks yend of excise duty benefit: Excise duty benefit which the company used to enjoy has ended on Jan 16, 216. The company is taking necessary steps to recover from this. ydumping of Chinese tyres at very low prices: In the last few years, heavy dumping of tyres from Chinese markets is putting high pressure on the new tyres manufacturers and also treading industry. 8

9 Financials Exhibit 16: Income Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Revenues Growth (%) (1.) (1.1) 12. Operating Expenses EBITDA Growth (%) (27.2) 22.1 Depreciation & Amortization EBIT Other income Interest Expenses PBT Tax Adjusted PAT Growth (%) (1.9) (24.1) 24. Exhibit 17: Balance Sheet YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Cash & Cash Equivalents Trade receivables Inventory Loans & Advances Non current Investments Investments Net Block CWIP Other current assets Total Assets Current Liabilities Debt LT provisions and Deferred Tax Liabilities Total Liabilities Shareholders Equity Reserves & Surplus Total Networth Total Networth & Liabilities

10 Exhibit 18: Cash Flow Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E PBT Depreciation Net Interest flow (8) (13) (19) (33) (57) Tax Paid (75) (88) (135) (96) (119) Inc/dec in Net WC (55) (13) (27) 11 (41) Cash flow from operating activities Inc/dec in capital expenditure (58) (28) (74) (2) (15) Inc/dec in investments (185) (126) (32) (2) (18) Other income Cash flow from investing activities (128) (219) (181) (184) (135) Dividend paid (55) (67) (75) (76) (76) Interest paid (1) (2) (2) (3) (3) Cash flow from financing activities (56) (68) (77) (79) (79) Net change in cash 16 7 (7) (13) 19 Exhibit 19: Key Ratios YE Mar FY14 FY15 FY16 FY17E FY18E EBITDA Margin (%) EBIT Margin (%) Net Profit Margin (%) Dividend Payout Ratio (%) Net Debt/Equity (x) (.) (.) (.) (.) (.) RoE (%) RoCE (%) Exhibit 2: Valuation Parameters YE Mar FY14 FY15 FY16 FY17E FY18E EPS (Rs.) DPS (Rs.) BV (Rs.) PE (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) ; *Represents multiples for FY14, FY15 & FY16 are based on historic market price 1

11 Stock Ratings Absolute Returns Buy : > 15% Hold : 5-15% Sell : <5% Connect & Discuss More at (Toll Free) research@karvy.com Live Chat f in You Tube Disclaimer Analyst certification: The following analyst(s), Ashok Ramineni, who is (are) primarily responsible for this report and whose name(s) is/are mentioned therein, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer: Karvy Stock Broking Limited [KSBL] is a SEBI registered Stock Broker, Depository Participant, Portfolio Manager and also distributes financial products. KSBL has filed an application with SEBI, seeking registration as a Research Analyst and such application is pending for disposal. The subsidiaries and group companies including associates of KSBL provide services as Registrars and Share Transfer Agents, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment Advisory services, insurance repository services, financial consultancy and advisory services, realty services, data management, data analytics, market research, solar power, film distribution and production, profiling and related services. Therefore associates of KSBL are likely to have business relations with most of the companies whose securities are traded on the exchange platform. The information and views presented in this report are prepared by Karvy Stock Broking Limited and are subject to change without any notice. This report is based on information obtained from public sources, the respective corporate under coverage and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of KSBL. While we would endeavor to update the information herein on a reasonable basis, KSBL is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent KSBL from doing so. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. KSBL will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither KSBL nor any associate companies of KSBL accepts any liability arising from the use of information and views mentioned in this report. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Past performance is not necessarily a guide to future performance. Forward-looking statements are not predictions and may be subject to change without notice. Actual results may differ materially from those set forth in projections. y Associates of KSBL might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. y Associates of KSBL might have received compensation from the subject company mentioned in the report during the period preceding twelve months from the date of this report for investment banking or merchant banking or brokerage services from the subject company in the past twelve months or for services rendered as Registrar and Share Transfer Agent, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment Advisory services, insurance repository services, consultancy and advisory services, realty services, data processing, profiling and related services or in any other capacity. y KSBL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. y Compensation of KSBL s Research Analyst(s) is not based on any specific merchant banking, investment banking or brokerage service transactions. y KSBL generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. y KSBL or its associates collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. y KSBL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report and have no financial interest in the subject company mentioned in this report. y Accordingly, neither KSBL nor Research Analysts have any material conflict of interest at the time of publication of this report. y It is confirmed that KSBL and Research Analysts, primarily responsible for this report and whose name(s) is/ are mentioned therein of this report have not received any compensation from the subject company mentioned in the report in the preceding twelve months. y It is confirmed that Ashok Ramineni, Research Analyst did not serve as an officer, director or employee of the companies mentioned in the report. y KSBL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. y Neither the Research Analysts nor KSBL have been engaged in market making activity for the companies mentioned in the report. y We submit that no material disciplinary action has been taken on KSBL by any Regulatory Authority impacting Equity Research Analyst activities. Karvy Stock Broking Limited Plot No.31, 6th Floor, Karvy Millennium Towers, Financial District, Nanakramguda, Hyderabad, 5 32, India Tel: ; Fax: For More updates & Stock Research, visit 11