13 June 2011 Goodyear India Limited Deep Value Buy

Transcription

1 Goodyear India Limited Deep Value Buy 13 June 2011

2 Recommendation BUY Snapshot CMP (Rs.) Rs. 298 Sector Auto-ancillary Stock Details BSE Code Bloomberg Code Market Cap (Rs. cr) Free Float (%) 52- wk HI/Lo (Rs) Avg. Volume BSE (Monthly) Face Value (Rs) Dividend (CY 10) Shares o/s (Crs) GDYR IN /203 23, % 2.30 Relative Performance 1Mth 6Mth 1Yr Goodyear(%) NIFTY(%) Goodyear India Limited (Goodyear) has managed its margins relatively well as compared to its competitors in case of rising raw material prices, natural rubber. The company has one of the strongest Balance Sheets in the sector. Investment Rationale Strong ability to maintain margins: Goodyear has maintained the margins relatively well as compared to its peers, in case of rising raw material prices also. We expect the margins to improve going forward considering the fact that raw material prices have shown a declining trend since the beginning of this calendar year. Excellent Balance Sheet: Goodyear has one of the strongest Balance Sheets in the tyre sector. The net cash and cash equivalent of the company stood at Rs crore, translating into a cash per share of Rs This figure is equivalent to more than 30% of the present price of the company. Sale of land to improve cash position further: The company has announced the sale of a portion of its land at Ballabhgarh. This should improve the cash position further. High probability of a special dividend: Goodyear has announced a dividend of Rs.7 per share for CY 10. On the back of improving cash flows, we do not rule out the possibility of a one-time special dividend from the company. Valuation & Recommendation Shareholding Pattern as of 31 March2011 Promoters Holding 74% Institutional (Incl. FII) 6.4% Corporate Bodies 3.1% Public & others 16.5% Vishal Jajoo Sr. Research Analyst ( ) id: vishal.jajoo@nirmalbang.com We expect Goodyear to post a net profit of Rs.85 crore on net sales of Rs crore in CY 11E on the back of declining raw material prices. This translates into an EPS of Rs.37 for CY 11E. We expect the cash in the books of the company to be around Rs.283 crore, translating into a figure of Rs per share (~41.2% of the present price). Considering all these positives, we expect the share price of the company to be Rs.400 over the next 9 to 12 months. Year Net Sales Growth EBITDA Margin PAT Margin % EPS PE P/BV EV/EBITDA (Rs cr) (%) (Rs cr) (%) (Rs cr) (%) (Rs) (x) (x) (x) CY % % % CY % % % CY % % % CY 11E % % % (Source: Company, Nirmal Bang Research) 2 P a g e

3 INVESTMENT RATIONALE Strong ability to maintain margins, further improvement expected going forward Goodyear India Limited s (Goodyear) performance for CY 10 is a testimony of the fact that the company has the ability of maintaining margins even in the toughest of times. The price of natural rubber which contributes than more than 50% to the total expenditure of the company registered an increase of more than 55% during the calendar year 2010.(Source: rubberboard.org.in) Raw material price increase was an area of concern which would have impacted the business but the company remained committed to bringing in new processes and technological improvement to keep the impact to the minimal, thus maintaining the earnings at a healthy level. However, the company managed to leverage it s strong brand and thereby, managed to restrict the impact on the margins to just 320 bps at 9% in CY 10 compared to 12.2% registered during CY 09. Margins set to improve on the back of falling raw material prices The price of natural rubber has corrected by almost 10% from it s highs in 2011 to the present price of Rs.226 per kg. In the present financial year, the price has corrected 3% to the present levels of Rs.220 per kg. We expect significant improvement in the operating margins of Goodyear India on the back of falling raw material prices. Cash & Cash equivalent totaling to 31.8% of the marketcap of the company Excellent Balance Sheet The company is debt-free with net cash and cash equivalent of Rs crore in the Balance Sheet on December 31, This translates into cash per share of Rs.94.4, which is equivalent of 31.8% of the present market-cap of the company. Goodyear is the only listed tyre manufacturer in the country having a debt-free, cash rich Balance Sheet. Sale of land should lead to further improvement in cash position During Q1CY 11, the Board of Goodyear has approved the sale of a portion of land at Ballabhgarh for an undisclosed amount. We expect the sale proceeds to be anywhere between Rs.100-Rs.150 crore. This coupled with the profit for CY 11E should significantly improve the cash in the books of the company at the end of the present calendar year. We expect the cash in the books of the company at the end of the year at Rs.283 crore, translating into a figure of Rs.123 per share(~41% of the present price) without considering the sale proceeds of the land. After considering the same, we expect the cash in the books to be around Rs.363 crore, translating into a cash per share of Rs P a g e

4 High probability of a special dividend The company has announced a dividend of Rs.7 per share for CY 10. We expect the dividend pay-out to improve significantly in this calendar year on the back of improved profitability due to the prevailing stability in rubber prices. We do not rule out the possibility of a special one-time dividend on the back of gains accruing to the company by disposing off a portion of its land at Ballabhgarh. Usually, MNC companies have a track record of high dividend pay-out ratios. In the past, companies like Glaxosmithkline Pharma have announced special dividends out of the proceeds received from the sale of the property at Worli. Scope for extra-ordinary gains on the back of any delisting offer Goodyear India is a 74% subsidiary of Ohio-based Goodyear Tire and Rubber, USA. The company came out with a delisting proposal in the year The price discovered through the book building process was Rs.245 per share. However, the buyback process failed on the back of poor response from the shareholders. It is to be noted that for any buyback process to be successful, higher of the following two should happen: 1. Minimum 50% of the outstanding shares for which the offer has been made should be tendered The promoter holding in the company is 74%, therefore, for delisting purpose the offer should be made for the balance 26%. Half of this figure comes to 13%. Or 2. The holding of the parent company should increase beyond 90% - This implies the shares tendered through the book building route should constitue 16% of the total equity considering the promoter holding of 74%, taking the total figure beyond the required 90% mark. The buyback offer failed during Q1CY 10 when the cumulative holding of the the company s share in strong hands viz. institutions, corporate bodies and FIIs stood at 6.9% whereas the public shareholding stood at 19.2%. As per the above two criterion, the requirement for the buyback to be successful, shareholders should tender 16% of the total equity of the company, which in this case is marginally more than 80% of the total number of shares held by the public. 4 P a g e

5 As per the latest shareholding pattern, the public holding in the company has tilted in favour of institutions with 9.6%. With an almost 40% increase in shares being held by the institutions, we feel that another buyback offer, if any, should not be successful unless and until the company raises the de-listing price substantially. Shareholding pattern (%) Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Public holding Institutions, Corporates & FIIs The shareholding pattern of the company is skewed more in favour of shares held in physical format. Only 21.6% of the shares are in demat form as on December 31, The promoter holding in the company stands at 74%. The parent company is cash-rich with net cash and cash equivalent totaling to USD2005 million as on December 31, Moreover, recently the company sold off its wires business for a consideration of USD50 million to Hyosung of USD50 million. Considering the cash in the Balance Sheet of the parent company, another delisting offer at a higher price cannot be ruled out. However, even in the absence of any delisting offer, the fundamentals of the company are strong enough to command premium valuations. Asset-rich company available at significant discount to the replacement cost The company with an installed capacity of 12.6 lakh tyres is available at less than Rs.715 crore. This figure includes cash and cash equivalent totaling to Rs.283 crore which is equivalent to almost 41% of the present market-cap of the company. This figure is relatively much cheaper compared to peers. JK Tyres has recently completed the expansion of its installed capacity by 4 lakh tyres to 8 lakh tyres with an expenditure of Rs.315 crore. In case of Goodyear, the company with an installed capacity of 12.6 lakh tyres would be available at an enterprise value of less than Rs.350 crore. This substantiates the fact tha the company is available at significant discount compared to its actual replacement cost. Play on the rural and the automotive growth story of the country The company derives a significant portion of its revenues from tyres for the farm equipment. Goodyear caters to all leading tractor manufacturers in the country. Considering the buoyant rural income, strong cashflows on the back of improvement in MSP(Minimum Support Price) and prediction of above normal monsoons by the Indian Meterological Department(IMD) augurs well for the rural economy. 5 P a g e Goodyear is the pioneer in launching tubeless tyres in the country. The company has also launched tyres for the mid-size car segment in the country. A significant number of large MNC players setting up units to roll out small cars augurs well for the tyre industry as well as Goodyear. A large number of cars including names like Santro Xing, Hyundai i10, i20,

6 Chevrolet Aveo U-VA, Maruti Wagon R VXi, Estilo VXi, Swift, SX4, Ford Fiesta, Figo, Ikon, Honda Civic, Octavia, Toyota Corolla, etc are fitted with Goodyear Tyres. Even PSU majors like Andrew Yule and others prefer Goodyear Tyres over others for their use. Retailing initiative of the company to improve performance further The company has started the retail initiative with the first-of-its-kind stores being set up with Bharat Petroleum Corporation Limited(BPCL). Two of such stores are under construction and are being prepared for launch soon at Chandigarh and Jaipur. The margins of the company are expected to improve on the back of these iniatives. We expect the full impact of the same to be witnessed from CY 12E onwards. In 2010, Goodyear India had Wheelcare outlets in 20 cities. Expanding its presence and reaching out to all its consumers, Goodyear outlets are now present in 36 cities. Some of the cities added include Tirupati, Combatore, Hosur, Satara, Navi Mumbai, Surat, Sirsa, Korba and Chandigarh. With convenient locations nationwide, consumers are expected to find great deals on tyres and premium services, with highly trained staff ready to give the right information to help them make the best purchase for their tyres. Significant gains accruing to the company on the back of improvement in rural cashflows The company derives a significant portion of its revenues from tyres for the farm equipment. Goodyear caters to all leading tractor manufacturers in the country. Considering the buoyant rural income, strong cashflows on the back of improvement in MSP(Minimum Support Price) and prediction of above normal monsoons by the Indian Meterological Department(IMD) augurs well for the rural economy. New launches during the year were Vajra Super and also Packaged Tubes for farm range of tyres. These new products, supported by the efficient supply chain network, helped the company increase the customer base and market presence. The company has introduced the Vajra range of farm products comprising front farm and smaller sizes in rear farm tyres to cope with changing requirements of the farm sector. The Vajra Super brand of farm tyres was designed to solve the Indian customer s problems of hard soil and sharp thorns, without sacrificing the tyre s performance or mileage. The company has successfully developed the manufacturing capabilities for Radial Farm Tyres which will be launched in Goodyear would be amongst the first in the industry to drive relevant innovations across the product portfolio which ensures the continued business success. Goodyear has increased the addition to fixed assets amounting to Rs.34.2 crore against Rs.18 crore in the previous year. The capital expenditure incurred amounted to Rs.57.3 crore. 6 P a g e

7 Awards and accolades from automobile manufacturers The company received several awards and accolades from the most elite customers such as Mahindra & Mahindra, Maruti Suzuki, Toyota, M&M Swaraj and International Tractors Limited. Goodyear India has been awarded the Superbrand status for In addition, the company was felicitated with the prestigious Farm Proprietary Award in July 2010, by Mahindra and Mahindra, the largest tractor manufacturer across the globe. COMPANY BACKGROUND The parent company in the USA along with the NASA were awarded with the R&D 100 Award for an airless tyre capable of transporting large, long-range vehicles across the surface of celestial bodies such as the Moon or Mars. The company has a long history of 113 years. The company manufacturers automotive bias tyres viz. Farm tyres and Medium Commercial Truck Tyres at its Ballabhgarh plant and also trades in Goodyear branded tyres (including Radial passenger and Off-the-road Bias Tyres) manufactured by Goodyear South Asia Tyres Private Limited (GSATPL), Aurangabad. The Aurangabad facility manufactures tyres for passenger cars, while the Ballabgarh unit develops farm tyres. Besides manufacturing tyres, the company also distributes and sells tyres, including tyres for cars, trucks, buses, motorcycles, airplanes, earthmoving and mining equipment, industrial and agricultural equipment, among others. The company mainly focusses on the tractors and passenger vehicles segment. RISKS & CONCERNS Significant slowdown in the automobile segment Since the company s fortunes are correlated to the automobile sector, any significant slowdown in the automobile segment can be detrimental for the company s performance. Spike in price of natural rubber Any signficiant spike in price of rubber, if not passed on to the end-user may negatively impact the financial performance of the company. VALUATION AND RECOMMENDATION Goodyear registered net sales of Rs crore in CY 10, registering an increase of 27.8% y-o-y. EBITDA for the year stood at Rs crore compared to Rs crore. The fall in the EBITDA margins was mainly attributable to the hike in raw-material prices. The net profit of the company for the year stood at Rs.74.8 crore compared to Rs crore during CY P a g e

8 The company has posted net sales of Rs crore during Q1CY 11 compared to Rs crore during the same quarter last year, registering an increase of 16.1%. The company posted an EBITDA of Rs.24.4 crore compared to Rs.24.1 crore during the same quarter last year. The net profit of the company registered a marginal decline of 2% to Rs.13.8 crore. We expect the company to register net sales of Rs crore in CY 11E, an increase of 11.8% y-o-y. The net profit of the company should be around Rs.85 crore for CY 11E, translating into an EPS of Rs.37. Considering the strong Balance Sheet, improvement in earnings on the back of stability in rubber prices, we expect Goodyear s share price to reach Rs.400 over the next 9 to 12 months. 8 P a g e

9 P&L (Rs. Cr) CY08 CY09 CY10 CY11E Balance Sheet (Rs Cr) CY08 CY09 CY10 CY11E Net Sales Share Capital % change 3.3% 10.4% 27.8% 11.8% Reserves & Surplus Other Op Income Minority EBITDA Eq app money EBITDA margin 7.2% 12.6% 10.0% 9.8% Net Worth Depn & Amort Total Loans Operating income Total Liabilities Interest Net Fixed Assets Other Income Capital WIP PBT Investments Tax Cash & Bank EO Debtors & Other CA PAT CA Sh o/s - Diluted CL & P Adj EPS Net CA Total Assets Quarterly Jun.10 Sep.10 Dec.10 Mar.11 Cash Flow (Rs. Cr) CY08 CY09 CY10 CY11E Revenue Operating Cash Flow EBITDA Adjustments Dep & Amorz Change in WC Op Income Tax Interest CF from Operation Other Inc Investing Activities PBT Capex Tax Oth Inc & Investments MI & EO CF from Investing PAT Financing EPS (Rs.) Dividend paid Performance Ratio CY08 CY09 CY10 CY11E Share Capital EBITDA margin (%) 7.2% 12.6% 10.0% 9.8% Loans & Others EBIT margin (%) 6.0% 11.3% 8.8% 8.4% CF from Financing PAT margin (%) 3.5% 7.2% 5.8% 5.9% Net Chg. in Cash ROE (%) 20.0% 34.0% 27.6% 25.2% Cash at beginning Cash at end Valuation Ratio CY08 CY09 CY10 CY11E Per Share Data CY08 CY09 CY10 CY11E Price Earnings (x) Adj EPS Price/BV (x) BV per share EV/EBITDA(x) Dividend per share P a g e

10 Note Disclaimer This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). The information, analysis, and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in, anyway be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors, or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. 10 P a g e