LKP BYTES : Goodyear India (Buy @ Rs249 with a target of Rs330)

The story so far ………..

Goodyear India, the 74% subsidiary of Goodyear Tire and Rubber Company, US is present in India since 1922. It operates out of two facilities - Ballabgarh in Faridabad and Aurangabad. It is engaged in  manufacturing of automotive tyres, tubes and flaps. Goodyear has got a leadership position in tractor tyres (22% in front tyres and 36% in rear tyres) and has a share of 13-14% in Passenger Vehicles. 

Goodyear is a supplier mainly to OEMs like Maruti, Hyundai, Tata Motors in the PV segment, and is a preferred tyre supplier within the foreign PV players in India like Volkswagen, GM, Toyota and Ford. On the tractor front, it supplies to all the leading names in India. Goodyear is a small player in CV tyre segment and is absent in the 2W segment. It follows a calendar year end and posted a net profit of Rs56crs on revenues of Rs1480crs during CY’2012. 

The story ahead ………..

Goodyear mainly caters to the OEM segment, but has recently expanded its dealership network into 36 cities in India in order to tap the growing replacement markets. Recently, the company has cut down its already low presence in MHCV bias tyre segment and has replaced it by high margin tractor tyres, which is their key vertical accounting for 60% of revenues. Also the company has announced to launch a couple of new brands in the radial tyre TBR segment. With low penetration of about 20% in MHCV radial tyres, there exists enough room for expansion. 

Although tractor growth was poor in FY 13, we believe that a good monsoon along with the 20% increase in agricultural allocation in the recent Budget would improve tractor demand by 5% during the current fiscal. Further, companies like Maruti and M&M (on the tractor side) are in a capacity expansion mode which is a positive for a player like Goodyear India.

Softening rubber prices (currently at Rs160/kg v/s an average of about Rs200/kg and a peak of Rs240/kg) would in our view help in improving the margins (EBITDA margins of 7.4% in CY 13E v/s 6.4% YOY). Entry into radial TBR segment and replacement markets will further improve margins. Cash reserves of ~300crs along with its debt-free status and value unlocking from real estate going forward provide comfort to the investor as the cash per share along with the value of excess real estate is almost equal to its present market capitalization. We recommend a BUY on Goodyear trading at 8xCY’13E earnings with a one-year price target of Rs330. 

Thanks and Regards

LKP Advisory 

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