The story so far ………..
Tyre Retreader – Indag Rubber grew its earnings at a scorching 100% last fiscal and crossed the Rs1bn market capitalization. We like its virtually debt-free asset light business model which has the ability to generate free cash flows and superior ROCE of almost 50%. The company has a wide distribution network of ~500 retreaders and dealers across the country and now commands a 15% market share in India.
The story ahead ………..
Indag has now expanded its capacity at Himachal Pradesh from 11000MT to 14000MT and plans to further increase capacity there at a cost of Rs15crs to leverage the growing replacement demand from retreaders and state transport undertakings. The company also has a manufacturing facility at Bhiwadi in Rajasthan.
Retreaded Tyres provide significant cost advantage to buyers as they are almost 70% cheaper and the Indag quality provides the added comfort. The company sold 11000MT last fiscal and have taken a 5% price increase which signifies pricing power in a growing market and with Indag manufacturing retreaded material for radialized tyres as well, we believe that the company is well poised to participate in the growth coming from radialization. In our view the renewal of the JNNURM scheme by the government can increase demand from state transport undertakings.
Although Natural Rubber constitutes half of the total raw material costs, we believe that the company can easily sustain EBIDTA margins of 13.5-14% this fiscal and the stock trading at 4.5xFY’13E earnings of Rs50 offers good value for money despite the fact that liquidity in the stock could be a constraint as the Promoters – Khemka Group own 77% of the company.
We believe that the 70% cost advantage for consumers without compromising on the product quality is the USP for Indag Rubber as it has successfully demonstrated its ability to grow earnings even when crude prices rise putting pressure on key raw materials like NR, PBR and Carbon Black. BUY INDAG trading at 3.8x one-year forward earnings for a price target of Rs360.
Thanks and Regards
LKP Advisory
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