Goodyear India :: Angel Broking Diwali Top Picks (Diwali Muharat)

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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 

Technicals:: Rolta, Goodyear, Punj Lloyd, Wockhardt, Gateway Distriparks ::Business Line

Company Update on Goodyear India. ::Angel Broking

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Company Update on Goodyear India.

For 4QCY2011, Goodyear India Ltd. (GIL) reported lower-than-expected top line at `395cr as against our expectation of `441cr. However, the company’s EBITDA margin remained flat on a yoy basis despite higher raw-material cost, which was offset by lower other expenses. Net profit for the quarter came in at `20cr, 8.8% lower than our estimate of `22cr. We maintain our Buy view on the stock.

Branded business and tractor tyre demand to drive future growth: GIL is a market leader in the tractor tyre industry. Tractor tyres accounted for ~60% of the company’s tonnage offtake in CY2010. The tractor industry witnessed growth of 27% in 2010 and is expected to grow at the same pace going forward, helping the company to register a ~17% CAGR in revenue over CY2011-13E. Moreover, GIL caters to high-end brands such as Audi, BMW, Land Rover, Mitsubishi and Porscheand has a brand name in the commodity business with stupendous ROIC of 1,022.7% for CY2011 in comparison to less than 30% of other listed peers. Furthermore, the company is debt free with cash reserves of `249cr for CY2011.

Outlook and valuation: We expect GIL’s revenue to post a 17.2% CAGR over CY2011-13E along with a 239bp expansion in its EBITDA margin on account of easing rubber prices, which is evident from a 29% decline from the high of `243/kg in April 2011 to `188 as on February 27, 2012. In addition, we expect the company’s net profit to witness a 37.5% CAGR over CY2011-13E to `122cr. At `358, the stock is trading at PE of 6.8x its CY2013E earnings. We maintain our Buy recommendation on the stock with a revised target price of `484, based on a target P/E of 8.0x for CY2013E earnings.

  

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Company Update - Goodyear India

Buy Goodyear ::Business Line

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We recommend a buy in the stock of Goodyear India from a short-term perspective. It is apparent from the charts of the stock that after retracing 61.8 per cent Fibonacci retracement level of its prior up move from February low of Rs 203 to its July peak of Rs 375, the stock found support around Rs 270 in late November. This level is also a key long-term support level.

The stock subsequently continued its up move triggered by the positive divergence in the daily moving average convergence divergence indicator. The stock has been on a short-term uptrend since its November trough at around Rs 270. On Wednesday, the stock penetrated its significant immediate resistance level at Rs 290 by gaining 3.7 per cent with above average volume. Moreover, the stock managed to close above its 200-day moving average in that session.

The 14-day relative strength index has entered the bullish zone from the neutral region and weekly RSI is heading towards the bullish zone. The daily MACD is moving higher in line with the stock price and is likely to enter positive territory. Both daily and weekly price rate of change indicators are featuring in the positive terrain implying buying interest.

We are bullish on the stock from a short-term perspective. We expect its up move to prolong and reach our price target of Rs 313 or Rs 322 in the forthcoming trading session. Traders with short-term perspective can consider buying the stock with stop-loss at Rs 294.5.