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 / 71 52-wk High/Low (Rs.) 237 / 146 3M Avg. daily volume (mn) 11554 Beta (x) 1.1 Sensex/Nifty 26867 / 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* 16 14 12 1 8 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 2322 2419 2528 251 281 EBITDA 387 442 59 371 453 EBITDA Margin (%) 16.6 18. 19.8 14.6 15.8 Net Profit 276 326 32 243 31 EPS (Rs.) 1.5 12.4 12.2 9.2 11.5 RoE (%) 29.8 28.2 22.4 14.7 16.3 PE (x) 5.5 11.9 15.8 19.9 16.1 ; *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 4-3321 6271 ashok.ramineni@karvy.com 1
Company Financial Snapshot (Y/E Mar) Profit & Loss (Rs. Mn) FY16 FY17E FY18E Net sales 2528 251 281 Optg. Exp (Adj for OI) 269 2166 248 EBITDA 59 371 453 Depreciation 28 29 3 Interest 3 3 3 Other Income 51 36 6 PBT 479 339 42 Tax 136 96 119 Adj. PAT 32 243 31 Profit & Loss Ratios EBITDA margin (%) 19.8 14.6 15.8 Net margin (%) 12.4 9.6 1.5 P/E (x) 15.8 19.9 16.1 EV/EBITDA (x) 9.8 13. 1.6 Dividend yield (%) 1.2 1.3 1.3 Balance sheet (Rs. Mn) FY16 FY17E FY18E Total Assets 1867 273 2341 Net Fixed assets 318 39 294 Current assets 938 943 136 Other assets 61 82 11 Total Liabilities 1867 273 2341 Networth 1571 1738 1963 Debt Current Liabilities 27 39 352 Other liabilities 26 26 26 Balance Sheet Ratios RoE (%) 22.4 14.7 16.3 RoCE (%) 33.4 2.3 22.5 Net Debt/Equity (x) (.) (.) (.) Equity/Total Assets.8.8.8 P/BV (x) 3.2 2.8 2.5 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 479 339 42 Depreciation 28 29 3 Interest (net) (19) (33) (57) Tax (135) (96) (119) Changes in WC (27) 11 (41) Others 26 36 6 CF from Operations 299 249 233 Capex (74) (2) (15) Others 26 36 6 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
Recovery in Commercial vehicle growth: Exhibit 4: Commercial Vehicles (Units) 28 21 14 7 2553 Source: Company presentation, Karvy Research New capacities coming on stream: Exhibit 5: Capacities over the years 23274 26669 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. 2 15 1 5 2 35 655 895 138 2 1983-84 1989-9 25-6 26-7 29-1 215-16 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 4 3 2 1 11. 17. 19. 22. 26. 33. 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
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) 32 22 12 2-8 247-58 189 38-28 28 299-74 225 249-2 229 233-15 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
Exhibit 8: Business Assumptions Y/E Mar (Rs. Mn) FY15 FY16 FY17E FY18E Comments Revenue 2419 2528 251 281 Revenue Growth (%) 4.2 4.5 (1.1) 12. EBITDA 442 59 371 453 EBITDA Margins (%) 18. 19.8 14.6 15.8 PAT (normalized) 326 32 243 31 Fully Diluted EPS (Rs.) 12.4 12.2 9.2 11.5 Fully Diluted EPS Growth (%) 18.3 (1.9) (24.1) 24. Net CFO 38 299 249 233 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 28 225 229 218 Lower capex led to same levels of free cash flow. 5
Exhibit 9: Revenue growth 3 2 1 8.6 2346 2322-1. 2419 4.2 4.5 2528 251-1.1 12. 281 FY13 FY14 FY15 FY16 FY17E FY18E Net Revenue (Rs. Mn) Revenue Growth (%) 15 1 5-5 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 6 4 2 3. 33.6 35.2 15.1 16.6 18. 19.8 4.4 39.5 39.8 14.6 15.8 1.6 11.8 13.3 12.4 9.6 1.5 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) 32 22 12 2-8 247-58 189 38-28 28 299-74 225 249-2 229 233-15 218 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(%) 4 38.6 36.3 33.4 3 2 1 29.8 22.5 28.2 2.3 22.4 14.7 16.3 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
Exhibit 13: Dividend Payout(%) 2 15 1 5 19. 15. 17. 19. 19. 2. 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 1 2 3 4 5 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
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 3.5 3. 2.5 2. 1.5 1. 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
Financials Exhibit 16: Income Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Revenues 2322 2419 2528 251 281 Growth (%) (1.) 4.2 4.5 (1.1) 12. Operating Expenses 1951 21 269 2166 248 EBITDA 387 442 59 371 453 Growth (%) 8.9 14.2 15.1 (27.2) 22.1 Depreciation & Amortization 25 2 28 29 3 EBIT 362 423 482 342 423 Other income 16 34 51 36 6 Interest Expenses 2 2 3 3 3 PBT 36 42 479 339 42 Tax 86 17 136 96 119 Adjusted PAT 276 326 32 243 31 Growth (%) 1.3 18.3 (1.9) (24.1) 24. Exhibit 17: Balance Sheet YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Cash & Cash Equivalents 33 42 43 3 49 Trade receivables 255 338 31 323 362 Inventory 319 34 294 29 325 Loans & Advances 53 59 73 83 93 Non current Investments 185 14 537 737 917 Investments 215 495 297 297 297 Net Block 229 223 275 39 294 CWIP 42 44 43 Other current assets 1 4 4 4 4 Total Assets 1333 165 1867 273 2341 Current Liabilities 287 366 27 39 352 Debt LT provisions and Deferred Tax Liabilities 15 4 26 26 26 Total Liabilities 32 37 296 335 378 Shareholders Equity 53 53 53 53 53 Reserves & Surplus 978 1228 1519 1685 191 Total Networth 131 128 1571 1738 1963 Total Networth & Liabilities 1333 165 1867 273 2341 9
Exhibit 18: Cash Flow Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E PBT 36 42 479 339 42 Depreciation 25 2 28 29 3 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 247 38 299 249 233 Inc/dec in capital expenditure (58) (28) (74) (2) (15) Inc/dec in investments (185) (126) (32) (2) (18) Other income 9 15 26 36 6 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 (%) 16.6 18. 19.8 14.6 15.8 EBIT Margin (%) 15.5 17.2 18.7 13.5 14.8 Net Profit Margin (%) 11.8 13.3 12.4 9.6 1.5 Dividend Payout Ratio (%) 19. 19. 2. 26. 2.9 Net Debt/Equity (x) (.) (.) (.) (.) (.) RoE (%) 29.8 28.2 22.4 14.7 16.3 RoCE (%) 38.6 36.3 33.4 2.3 22.5 Exhibit 2: Valuation Parameters YE Mar FY14 FY15 FY16 FY17E FY18E EPS (Rs.) 1.5 12.4 12.2 9.2 11.5 DPS (Rs.) 2. 2.4 2.4 2.4 2.4 BV (Rs.) 39.3 48.8 59.9 66.2 74.8 PE (x) 5.5 11.9 15.8 19.9 16.1 P/BV (x) 1.5 3. 3.2 2.8 2.5 EV/EBITDA (x) 3.8 8.7 9.8 13. 1.6 EV/Sales (x).6 1.6 2. 1.9 1.7 ; *Represents multiples for FY14, FY15 & FY16 are based on historic market price 1
Stock Ratings Absolute Returns Buy : > 15% Hold : 5-15% Sell : <5% Connect & Discuss More at 18 425 8283 (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. 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