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Goodyear India Ltd Research Report - 10th Jun 2016

Tyre | Published on Jun 10th 2016


Expectation of normal monsoon to energize stagnant tractor demand: Goodyear India (GIL) is a leader in the farm tyre segment in India with it having strong tieups with OEMs as well as a dominant presence in the replacement market. Farm tyres account for ~50% of the company’s overall revenues; however, the segment has been under pressure owing to poor monsoons and erratic rains in the past two years which has impacted tractor demand during the period. This has not only hurt OEM demand but also impacted the replacement market. Given that tractor sales have strong correlation with monsoons, the expectation of a normal monsoon this year should translate into higher tractor sales and resultantly higher demand for tractor tyres. GIL being a market leader in tractor tyres segment should stand to benefit on this account. Expansion drive to lead to recovery in top-line: GIL has laid out plans to significantly grow its presence in the passenger vehicle (PV) segment in India over the next five years. The company aspires to be one of the top players in the mid to premium and SUV sub-segments of PVs. It is also evaluating an entry into newer segments; in order to reach its goal, the company is weighing organic as well as inorganic growth options. We believe that this increased focus on growing its presence in the PV segment and entry into newer segments will provide additional boost to the revenues. Strong balance sheet with high RoIC: GIL is a debt free-cash rich company with RoIC estimated at ~84% for FY2018. The company’s cash and equivalents are Rs334cr for FY2016, which amount to ~28% of the current market cap. More importantly, GIL is one of the cheapest MNC stocks available to invest in, in the similar market cap range. Quarterly performance: For 5QFY2016, GIL’s top-line grew by 7.3% yoy to Rs295cr and the EBITDA margin stood more or less stable on a yoy basis at 9.3% (v/s 9.6% in the same quarter of the previous year). The margins witnessed a mild compression despite of a 97bp yoy decline in raw material cost/sales as other expenses/sales expanded by 128bp yoy. Factoring this, the EBITDA grew by 3.5% yoy to Rs27cr and the bottom-line remained flat at Rs16cr. Outlook and valuation: On an adjusted basis (for financial year end March), we expect the top-line to post a CAGR of 7.5% over FY2016-18E to Rs1,704cr mainly on account of rebound in tractor tyre volumes. We have also considered higher raw material costs and factored in a rubber price of ~Rs130/kg for FY2017E and ~Rs140/kg for FY2018E. As a result, the EBITDA margin is expected to be at 10.2% in FY2018E. Consequently, the net profit is estimated to be at Rs121cr in FY2018E. At the current market price, the stock is trading at a PE of 9.8x its FY2018E earnings. We maintain our Buy rating on the stock and assign a target price of Rs631 based on a target PE of 12.0x for FY2018E.

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CMP 515
Target Price 631
Investment Period12 Months

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Shareholding Pattern (%)

Public & Others19.0
Grand Total100.0

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