Goodyear India: Enjoy the Ride

[Vaibhav_Gupta1]

Although company had great last 2 quarters, I am struggling on two ends

1. They are expecting that supply could be a constraint and they have to increase production. However that is not in their priority list.
   Below are two snapshots of same from FY21 annual report : Link

2. Although their cash balance is increasing but it is accompanied by Increasing Payables which would almost consume entire cash balance, and they have to rely to debt to have expansion plan. Hence, high dividend paid recently might impact them negatively

Would be really helpful to know if someone has any insights on Expansion plan and Payables

[adarshkumar]

Kenneth Andrade was heard saying the problem of oversupply will not just affect OEMs, but the auto ancilliaries who don’t have a lot of pricing power …Where do we see juxtapose the Tyre manufacturers here, Goodyear I guess is a but insulated since Farm OEMs follow a different cycle …Your thoughts, Dinesh ? On ubber prices, oversupply? … And hopefully the fat dividends should continue, isn’t it?

[dineshssairam]

@adarshkumar

Where do we see juxtapose the Tyre manufacturers here, Goodyear I guess is a but insulated since Farm OEMs follow a different cycle

I am not sure about the quote and in what context it was said, but the fact of the matter is that Goodyear India or even MRF for that matter do not have Pricing Power beyond a certain extent. In case of Goodyear India, their customers are much larger and stronger Corporates than them and in the case of MRF or similar firms, the competition in PVs is simply too high. The only company in this industry I have seen displaying good Pricing Power is Balakrishna Industries. Of course, the reason for that they compete is a completely different industry and geography.

For Goodyear India at least, I would say, it is not entirely bad news. They still pass on the inflation to customers. But they simply can’t increase Prices beyond that and have to keep the competition in mind. Hence why I say that their Pricing Power is limited.

The expectation (From me at least) is that the market size and opportunity for Automation, especially regarding tractors is very high. So, I expect the company to deliver on Sales Growth eventually (i.e. Not reliant on gains through increase in Margins). It is not an easy task, as farm holding are fragmented in India and farmers are still quite poor. And that’s the Risk.

@adarshkumar

And hopefully the fat dividends should continue, isn’t it?

The Cash Equivalents reduced from Rs. 600 Crores to Rs. 475 Crores after the recent Special Dividend. Assuming the new CEO wants to maintain a similar run rate, it will last around 3-4 years. But even outside this, Goodyear India generates a lot of FCF. So even after the Special Dividends stop, the ‘regular’ Dividends should continue to be good.

[adarshkumar]

Thanks Dinesh …You are always helpful

[adarshkumar]

Companies like CEAT are experimenting with no noise tyres to deal with the EV disruption …That’s what Anant Goenka was saying in the Concall, he was saying with EVs the noise shifts to the tyre and therefore the need for No noise tyres …haven’t heard what Goodyear proposes to do with EV disruption in the PV space …CEAT also speaks of ESG tyres, Goodyear?

(/Disc - Own both Goodyear and CEAT)

[nav_1996]

No noise tyre is required now also. Good petrol engines are not audible in mid-level + cars. All the noise comes from tyres.

[dineshssairam]

@adarshkumar

…haven’t heard what Goodyear proposes to do with EV disruption in the PV space …

The good news is that Goodyear India gets all the R&D from the parent (They have some R&D Centers in Asia as well). Well actually, one could argue that the 2-3% of Comission they pay the parent covers that.

Companies like CEAT, MRF, JKT have to spend from their own B/S in order to do these R&D investments.

But generally, Goodyear India hasn’t been much of hit outside Farm Tyres. For instance, they’ve been trying to crack the PV market for many years and still not that sucessful. It would be too early and too ambitious to start considering whether the company will be sucessful in producing EV tyres.

[Deep_Sukhwani]

I haven’t read the annual reports, but cursory looks show that the Indian company is a majority owned subsidiary of Goodyear Orient Company (Private) Limited (See Shareholdings section in screenshot below)

which in turn is a a wholly-owned USA subsidiary of The Goodyear Tire & Rubber Company, was registered in Singapore on December 1917

And the ultimate parent company, The Goodyear Tire & Rubber Company is heavily indebted and was in losses recently (previous two years before the year ended Dec 21)

The parent company has total debt of USD 8.4 billion, ~63063 INR crores (30x the market cap of indian entity) against total equity of USD 5.2 billion (Hence debt is considerably higher than the equity)

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Now Barron’s, in a recent article, says the parent would probably benefit from the EV boom, but I assume for the foreseeable future, this benefit would remain with Goodyear parent, and won’t cascade to Indian as in India, they don’t have that strong a standing in passenger vehicle segment.

Also at a business level, it further goes on to talk about somewhat dark times in near future due to increasing raw material costs, natural rubber costs, etc. But all these could be put aside as these might be short term gyrations. What makes it difficult to put aside though is, this company is a net cash negative incurring huge debt expenses. Hence the impact of short term gyrations could magnify depending on how extreme are these gyrations.

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Lastly, it doesn’t inspire confidence of management being a good capital allocator. Why are they paying special dividends at a subsidiary level while their interest expense at parent company level is almost half of their Net Income?

(Notice Net Interest Income of -354000 against Net Income of 764000)

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Summary
All in all, a company whose:

• Parent is not generating consistent profits (looking back past few years),
• Is heavily indebted, net cash negative (See Barrons) with possible near term negative consequences that could magnify due to large debt expense.
• Paying special dividends at subsidiary level and
• To top it all, at a parent level, is trading at a valuation much cheaper (in terms of earnings multiple) than its subsidiary (US entity is trading at 5x trailing earnings) despite being well discovered by market and several analysts following it (See Barron’s article linked above)

PS: I might be wrong as I am just trying to understand the larger org structure before I jump into its ARs. If you believe so, please ignore these thoughts

I just came across this through Barron’s, no holdings.

[dineshssairam]

GIL is largely into Farm Tyres. It’s not directly comparable to the Parent.

There’s your answer.

Regarding the Dividends, what would you have them do instead? Let it sit on the Balance Sheet and earn Treasury returns, as they’ve done in the past? The new CEO seems to be moving in the right direction with this.