JOINDRE CAPITAL SERVICES LTD. SEBI REGN NO. INH / INB / INB

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1 RESEARCH REPORT 11 th May 2017 INDAG RUBBER LIMITED BSE : INDAG Sector: TYRE RETREADING BSE: View - BUY CMP : Rs. 212 Target Price: Rs. 280 (In next 12 to 15 mths) BUSINESS BACKGROUND Indag Rubber Limited (IRL) started in 1982 is engaged in providing retreading material ranging from pre-cured treaded rubber (PTR) strip to other retreading accessories like envelopes and rubber cement. IRL sells its products through its retreader and dealer network spread across India. It also routes its sales to State Transport Units. IRL has one manufacturing plant, which is located in Nalagarh in Himachal Pradesh with a total installed capacity of MT per annum for manufacturing PTR and allied accessories. IRL was initially operating as a joint-venture between the Khemka group and M/S Bandag Incorporated, USA - one of the largest players in the US retreading industry. However, the joint venture was terminated in 2006 with Bandag s shareholding being taken over by the Khemka Group. INVESTMENT HIGHLIGHTS Strong Q4 and FY17 Performance IRL reported a strong set of Q4FY17 numbers with net sales up by 11% YoY to Rs crs, with EBIDTA growing by 34% to Rs 9.32 crs from Rs 6.94 crs in Q4 last year. The PAT in Q4 FY17 grew by 36% YoY to Rs 5.62 crs as compared to Rs 4.15 crs in Q4 last year. For FY17 the company has recorded net sales of Rs 190 crs, a EBIDTA of Rs 35 crs and a PAT of Rs 22 crs from Rs 32 crs last year. IRL paid a dividend of 120% for FY16. IRL enjoys a strong brand recall with a well diversified customer base vscore: vscore (Value Score) is our proprietary company rating system f In 1982 Indag introduced the cold retreading process in India with Bandag technology which is superior to the hot process, but requires higher capital investment. Hot retreading is used by unorganised sector mainly. This strategy has paid off very well for Indag which is a now a leader in the organised sector which accounts for 50% of the total market and where IRL control around 25% share. On a annual basis the retreading market is growing by 10-12% with the industry still quite fragmented. IRL has one plant in Himachal Pradesh and has a country wide pan india network with over 150 dealers, around 1200 dealer checkpoints, around 25 Depots pan india and operates largely in the radial and bias range in segments like passenger bus, truck, OTR and Tractors with STUs and Truck Fleet owners being key customers for IRL. Assured Long term Drivers for DHFL look good in view of the following deve KEY DATA FACE VALUE Rs 2.00 DIVD YIELD % WK HI/LOW 231/158 NSE CODE BSE CODE INDAG MARKET CAP RS 557 CRS SHAREHOLDING PATTERN PROMOTERS - 75% BANKS, MFs & DIIs - % FIIs - % PUBLIC - 25% KEY FUNDAMENTALS YE FY17 FY18 FY19 Rev Gr% EBIDTA Gr% PAT Gr% EPS Gr% ROCE % Precise ROE % Advice EPS (Rs) P/E (x) 19 16

2 IRL has also entered the export markets with a branded product called Zoma while for the domestic market it has lauched the Max Mile brand. Why is Retreading gaining traction Retreading is a technology where the old tyres are made serviceable by removing worn out and damaged treads and replacing it with new treads. This can be done via two technologies that is cold process which is technically superior which IRL uses and the other technology is the Hot process. In the Cold process precured rubber of high density & available in various tread designs is lined with cushion gum before applying to a buffed casing where Curing is done in a pressure chamber at low temperature 100 C & pressure. While in the Hot process uncured rubber is added to a buffed casing & cured in the mold at temperatures of approximately 150 C-160 C. This temperature allows uncured rubber to flow in the matrix forming the tread design during vulcanization Some of the benefits of Retreading include In retread tyre only 25% Natural rubber is used whereas; in new tyre around 80% of Natural rubber is required Retreding requires minimum costing and investment by the customers as it is only required on the part of the retreading plant (no expensive moulds) Retreaded Tyres are safe and tested to same stringent performance criteria as new tyre Retreading also extends the life of used tyres thus saving even more energy, CO2 and raw materials with each product cycle Retreading Tyres is also environment friendly and requires 7 gallons of crude oil to produce a retread as opposed to 22 gallons of oil to manufacture a new tyre However the most important reason for Retreading to grow is that it costs around 60 to 70% cheaper to the price of a New tyre with life nearly the same as New tyre IRL has recently increased installed capacity at its existing HP facility by 6200 tpa IRL has recently increased its Himacha Pradesh plant capacity from MT to MT. This was done via a brownfield expansion at a cost of Rs 7 crs which was funded entirely from internal accruals. It is indeed quite commendable that in the last ten years all expansions have been completed via internal accruals only thus ensuring optimum use of internally generated capital without any reliance on debt or equity. The expanded capacity has also already gone in to commercial operation from Q1 of 2017 onwards and we expect a higher operative capacity utilisation over the next 2 years.

3 IRL enjoys a strong market network with both dealers and direct customers IRL has over 450 retreaders on a countrywide basis up from about retreaders in IRL has also started appointing dealers in the South and West belts. There are some 20 dealers appointed in the Southern region and it is looking to scale up in Maharashtra. IRL has a direct sales force about 80 people which engages and looks after this setup. Additionally IRL has about 25 depots/c&f Agents. Of these 2-3 are company owned. Rest are operated by Franchisees. Retreaders are supplied from the depots. Retreaders stock material at every price point and from every manufacturer. They need to, that s the nature of his business. While any retreader may push some products depending on the incentives from manufacturers. Indag as a brand is established. Effectively IRL has put in a robust system which enables its sales force to track sales and ensure ready availability from any of our depots optimally. Availability is the main criteria after the price point and brand. IRL has ensured that it has a depot in every state. Brandwise IRL is a big brand with bigger transporters, and quality conscious customers asking for Indag retreads by name. There is a certain segment that understands the difference in quality and the impact on a cost/km basis, but that s niche. IRL s direct sales force engages with local transporters, educates them about the quality and performance standards, shares with them Indag data, and gives them samples to test and use before purchase decisions are made. Retreading Market is likely to record a steady 10-12% growth annually over the next 2-3 years As per IRL s own assessment almost 55-58% of the used CV tyres cannot be retreaded. Its probably to do with consumer education trucks are almost always overloaded, road conditions are bad, and most of the tyres are driven till the stage that the base becomes so weak as not fit for retreading. And some of the tyres genuinely go burst, cut and otherwise worn out to end up as scrap. Only 2% go for New CV Tyres! So roughly 40% go for retreading. Globally things are pretty different. Retreading is a pretty established trend in commercial vehicles. The road conditions are much better. Overloading is not allowed, tyre pressures are maintained. All the tyre majors have retreading arms and the quality of the retreads available are superior. And there exists a well-established franchisee network that periodically collects tyres for retreading Commercial vehicle (CV) owners are finding tyre retreading a feasible option, owing to the increasing tyre prices. The price of rubber has almost doubled in the past one year, and tyre manufacturers have hiked prices 2-3 times this year.despite this, the companies are unable to pass on the prices due to strong competition. Meanwhile, in the last six months, the demand for tyre retreading has risen 8-10% on month-on-month basis. The total turnover of this industry is Rs4,500 crore on an annual basis and 16,000 tonnes on a monthly basis. Currently, among tyre manufacturers, MRF Tyres, Apollo Tyres and JK Tyre are into the retreading business. Owning to the potential, companies like Ceat and Bridgestone have also announced interest in the same.

4 JK Tyre currently has a manufacturing facility in Rajasthan for retreading and is planning to expand capacity by next year. It also plans to increase the number of franchisees from current 60 to 200 by next year. In tyre retreading, a new tread is applied over the body of the worn tyre, giving it a fresh lease of life at a cost that is less than half the price of a new tyre. The process increases the life of a tyre by 40-70%, depending on the usage. Better road conditions and an increasing number of 14-, 18- and 22-wheel trucks have increased the demand for retreading tyres. Generally, buses and light CVs that carry short-distance haul go for retreading in order to save cost. With overloading being substantially curbed, trucks have also started going for this process. There are two types of retreading the conventional process and the pre-cured process. The pre-cured process is more advance and provides better performance and quality. It is currently the preferred option, while the conventional method is phasing out. Michelin has also announced its plans for India. And there are some radical changes/products proposed. For example, we usually see kg retreads being offered in the Indian industry. But Michelin has said they will be launching the 15 Kg treads in India. End of the day a retreaded Michelin tyre has to do 80-90% of the mileage that a new tyre gives. A regular kg retread on a well-preserved Michelin tyre base should do the same job In terms of pricing If a new CV tyre costs Rs , Retreads typically sell at Rs range. Not much difference between different brands. GST Implementation is likely to be a big game changer for the domestic retreading market IRL expects GST Implementation to be a big game changer for the domestic retreading industry as almost 50 to 60% of the local retreading industry is yet in the unorganized sector. Thus going ahead we expect a reasonable pricing gain for a player like IRL which is quality wise better and thus when pricing diffrencial will not exist this will enable IRL to capture significant market share gain at the cost of the unorganized sector players. Thus the next 2 years are likely to see a big shakeout in the domestic retreading industry which wil largely benefit the listed organized sector players like IRL and Elgi. IRL enjoys a strong balance sheet and both Topline and Bottomline growth is likely to remain steady going ahead IRL enjoys a strong balance sheet with no debt on the balance sheet as on FY17 as compared to a tangible networth of Rs 174 crs as on March Also additionally the company has liquid investments to the tune of around Rs 86 crs as on March 2017 which are invested in Mutual Funds of select equity and bond schemes and some direct equity investments. More Importantly both key operating parameters like ROCE, ROE are placed around 18% and 13% respectively which we believe look attractive but which are likely to improve further as volume growth improves further. We expect that going ahead overall bottomline growth in the next 2 years starting FY17 onwards should easily touch 18-25% and with no debt and healthy cash flows being generated we expect the company to fund its expansion plans largely from internal accruals making the capital structure healthy. Our expectation is that ROCE and ROE by FY19 should touch 20% and 18% respectively..

5 IRL is a potential Buy Back and Bonus Candidate - IRL is a strong Buyback and Bonus candidate. This is because IRL has a very strong cash position of over Rs 86 crs as on March 2017 and which is expected to rise steadily. With most of the capex completed we believe that atleast for the next 2-3 years there is no urgency to utilize the cash as on date. Hence the Buyback possibility remains strong as the company s equity base is just Rs 5.25 crs with around 75% equity held by the promoters. Some more stake increase looks very much possible which will not have any strain on the existing cash and sah flow position, Also against a equity base of Rs 5.25 crs, IRL enjoys free reserves of Rs 166 crs which could comfortably afford a bonus issue to shareholders which is long overdue. The Buyback if implemented will result in a leaner balance sheet & improving the return ratios. Also another potential trigger for IRL can be the BHIWADI factory land value which is worth around Rs 50 crs and which is lying idle for the last 5 years. The management has stated that it has some plans for utilisation of the same in partnership with some interested parties and various options are being considered.

6 Business Outlook & Stock Valuation On a rough cut basis, in FY18, Net Sales are estimated to touch Rs 206 crs. On the bottomline level we expect the company to record a PAT of Rs 29 crs in FY18E. Thus on a conservative basis, IRL should record a EPS of Rs 11 for FY18E. For FY19E our expectation is that earnings traction for IRL would continue to be robust wherein we expect a EPS of Rs 13 respectively. IRL enjoys a strong balance sheet with no debt on the balance sheet as on FY16 as compared to a tangible networth of Rs 174 crs as on March Also additionally the company has liquid investments to the tune of around Rs 86 crs as on March 2017 which are invested in Mutual Funds of select equity and bond schemes and some direct equity investments. More Importantly both key operating parameters like ROCE, ROE are placed around 18% and 13% respectively which we believe look attractive but which are likely to improve further as volume growth improves further. We expect that going ahead overall bottomline growth in the next 2 years starting FY17 onwards should easily touch 18-25% and with no debt and healthy cash flows being generated we expect the company to fund its expansion plans largely from internal accruals making the capital structure healthy. Our expectation is that ROCE and ROE by FY19 should touch 20% and 18% respectively Hence we believe that the IRL stock should be purchased at the current price for a price target of around Rs 280 over the next 12 to 15 months. FINANCIALS For the Year Ended March RsCrs FY15A FY16A FY17A FY18E FY19E Net Sales EBIDTA EBIDTA % Interest Depreciation Non Operational Other Income Profit Before Tax Profit After Tax Diluted EPS (Rs) Equity Capital Reserves Borrowings GrossBlock Investments Source Company our Estimates

7 KEY CONCERNS Any down turn in the domestic auto sector can impact company s financials. Competitor's products and shortage of key raw materials can create pressure on margin and impact the sales of the company. Good Monsoon is a good trigger for the overall auto demand and bad or adverse monsoon can spoil the overall demand for companys products DISCLAIMERS AND DISCLOSURES This document has been prepared by Joindre Capital Services Limited and is meant for the recipient only for use as intended and not for circulation. This document should not be reproduced or copied or made available to others. Recipients may not receive this report at the same time as other recipients. The information contained herein is from the public domain or sources believed to be reliable. While reasonable care has been taken to ensure that information given is at the time believed to be fair and correct and opinions based thereupon are reasonable, due to the very nature of research it cannot be warranted or represented that it is accurate or complete and it should not be relied upon as such. In so far as this report includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. Opinions expressed are current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis, the information discussed in this material, Joindre Capital Services Limited,its directors, employees are under no obligation to update or keep the information current. Further there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Joindre Capital Services Limited, its directors and employees and any person connected with it, will not in any way be responsible for the contents of this report or for any losses, costs, expenses, charges, including notional losses/lost opportunities incurred by a recipient as a result of acting or non-acting on any information/material contained in the report. This is not an offer to sell or a solicitation to buy any securities or an attempt to influence the opinion or behaviour of investors or recipients or provide any investment/tax advice. This report is for information only and has not been prepared based on specific investment objectives. The securities discussed in this report may not be suitable for all investors. Investors must make their own investment decision based on their own investment objectives, goals and financial position and based on their own analysis. Trading in stocks, stock derivatives, and other securities is inherently risky and the recipient agrees to assume complete and full responsibility for the outcomes of all trading decisions that the recipient makes, including but not limited to loss of capital. Opinions, projections and estimates in this report solely constitute the current judgment of the author of this report as of the date of this report and do not in any way reflect the views of Joindre Capital Services Limited, its directors, officers, or employees. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. CONTACT DETAILS Mr. Avinash Gorakshakar (Research Head) Tel.: , avinashg@joindre.com COMPLIANCE TEAM Mr. A. P. Shukla (President & COF) Tel.: shuklaap@joindre.com Mrs. Sujata Poojary (Sr. Executive ) Tel. : compliance@joindre.com Mrs. Nikita Shah (Sr. Executive) Tel. : compliance@joindre.com