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Indag Rubber Ltd Research Report - 16th Dec 2015

Tyre | Published on Jan 31st 2015


Indag Rubber (IRL) to benefit from recovery in commercial vehicle industry: IRL manufactures pre-cured tread rubber and ~90% of its revenue comes from the commercial vehicle (CV) industry. The company would be a beneficiary of improving CV OEM sales although retreading revenues accrue with a lag of 5-6 month of new vehicle sales; retreading of new tyres is undertaken after 50,000km of the vehicle’s running, which typically happens in six months. During FY2013 and FY2014, the CV industry reported disappointing volumes owing to slow down in GDP growth and commercial activities which is also reflected in company’s performance (de-growth of ~1% in FY2014). In 9MFY2015, medium and heavy commercial vehicles (MHCVs) volumes have witnessed a recovery; also, there has been a recovery in light commercial vehicle (LCV) volumes with they showing relatively lower de-growth in 9MFY2015 compared to FY2014. This has been partly reflected in IRL’s 3QFY2015 revenues and further benefits would be visible hereon given the improving economic cycle. We expect growth momentum to continue in the CV segment and expect ~10% CAGR in the segment over FY2014-17E on back of about 8% volume CAGR in the segment. Lower penetration level to drive growth: Penetration level of retreading is lower in India as compared to other developed regions like USA, Europe etc. In India, the penetration level of retreading is at ~40% compared to 100% in USA and ~80% in Europe as stated by the company. We believe that going forward, penetration of retreading would increase on back of growth in road freight with improvement in economic activity, improving road infrastructure, and growing radialisation; demand for retreading will rise as new radial tryes are expensive and retreading would prove to be a cheaper alternative towards increasing the life of the tyres. Outlook and Valuation: We expect IRL to report a net sales CAGR of ~10% over FY2014-17E to ~`311cr and net profit CAGR of ~11% over the same period to Rs37cr. At the current market price of Rs897, the stock trades at a PE of 14.9x and 12.7x its FY2016E and FY2017E EPS of Rs60.1 and Rs70.8, respectively. We initiate coverage on the stock with an Accumulate recommendation and target price of Rs992, based on 14x FY2017E EPS, indicating an upside of ~11% from the current levels.

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CMP 897
Target Price 992
Investment Period12 Months

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Shareholding Pattern (%)

Public & Others25.0
Grand Total100.0

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