Indag Rubber - inflection point?

Forced to look closely at Indag Rubber, post the excellent results over last 2 quarters. Well-meaning friends like Ayush and Viraj have been nudging me for months:). We already have 2 excellent companies in the rubber industry -BKT, and Gujarat Rubber followed well at this forum. Makes sense to add another seemingly promising(?) candidate from the industry - easier to track and understand!

Selected Extracts from a Nov 4, 2011 HDFC Sec report on Indag. Think this can bring all of us quickly on the same page:)

Company Background

Indag Rubber Ltd (IRL) was incorporated in 1978 in collaboration with Bandag USA who provided technical assistance to thecompany till H1FY07, when the promoters bought back Bandagas 38.3% holding. The company is in the business ofmanufacturing precured tread rubber, un-vulcanized rubber strip gum, universal spray cement and tyre envelopes. IRL sells itsproducts through its own depots/franchisees (C&F agents) appointed all over the country while the actual retreading operation iscarried out by the retreaders. The company provides the franchisees not only with the retreading material but also with supportservices and training. The company is concentrating on utilizing the full potential of the existing depots/franchisees and settingup new depots/franchisees in unrepresented areas so as to have a larger and more efficient network.

IRL has two plants, one at Bhiwadi (Rajasthan), which is shut since 2006 due to labour problems, and the other at Baddi(Himachal Pradesh) with a capacity of 13,800 MT for tread rubber, 1,800 MT for rubber strip gums and 300 KL for rubbercement. Close to 90% of the companyas revenue is generated from the sale of precured tread rubber. The company has ~25depots pan India, which sell to retreaders. Some of these depots are owned and operated by IRL while the rest are operated byfranchisees.


Retreading is a process in which a new tread is applied on the body of worn tyres. The retreading sector is highly fragmentedwith over 10,000 players in the unorganised sector and ~6 players in the organized sector. Midas Treads, Vamshi Rubber, ElgiRubber International, MRF Ltd, JK Tyres and Indag Rubber are the only significant players in the organized sector. Theseplayers supply their tread material to unorganised players who retread tyres.

In the precured retreading process, a precured tread strip is applied to the casing with a thin layer of bonding gum. Close to 75%of the total truck operators in India are small fleet operators. Retreading by small fleet operators is high as they operate overshorter distances. Organized fleet operators that operate over large distances prefer buying new tyres to retreading as the costof breakdown is high. Old tyres of organized players are often retreaded and sold to smaller operators. The cost of retreading is~20-25% of the cost of a new tyre and its life is ~50-60% that of the life of a new tyre. Average life of a new tyre is 60,000-65,000 kms while that of a retreaded tyre is 30,000-35,000 kms. However, IRLas precured retread costs ~30-35% that of a newtyre and has a higher average life of ~70% that of a new tyre subject to standard loading, good road condition and standardpressure maintenance of the tyres.

A tyre can be retreaded 2-3 times depending on the quality of the casing. Demand for retreading is dependent on the economicscenario. Transporters tend to retread more during economic downturns due to the cost advantage. Retreading is moreprevalent in the Southern region due to better condition of the casing due to better road conditions and driving habits. The totalsales in acold retreada market of the industry are estimated at ~Rs.2,700 cr with a volume of 8,000 tonnes/month. aHot retreada(an older technology) sales are estimated at ~12,000 tonnes/month.

Some interesting pointers

**Replacement tyre demand to remain high till FY13: **

Replacement tyre demand grew at 22.7% in FY10 and ~6.0% in FY11 and is expected to grow at ~14% in FY12 and ~10% inFY13. A healthy growth in OEM tyre demand in FY10 and FY11 due to an increase in sales of vehicles will lead to an increasein replacement demand in FY12 and FY13. Replacement tyre demand is expected to account for ~70% of the total tyre demandin these two years. Levels of radialization, increase in transport and replacement cycles affect the growth in replacementdemand. The growth in replacement tyre demand will lead to higher demand for retreads as well.

Land at Bhiwadi, Rajasthan:

IRLas Bhiwadi plant located near Alwar in Rajasthan is shut since 2006 when the Himachal Pradesh (HP) plant went on stream.All workers at Bhiwadi have been relieved. The Plant & Machinery has been shifted to the HP plant and there are no plans ofrestarting this plant. The possible sale of this land or putting it to alternative use could unlock value going forward though thetiming of this is uncertain at this point.

Low utilization:

IRL has not been using its plant to maximum capacity. The plant was only ~56% utilized in FY11. Utilization levels have beenhigher in the past but the plant has never been used at full capacity. We expect the company to increase its utilizations slowlygoing forward with increasing demand. The company also shut down its plant at Bhiwadi (Rajasthan) in 2005-06 and transferredthe equipment to its plant in Himachal Pradesh.Going forward, IRL may not need to invest in fixed assets for 2-3years and may have more free cash.

Low debt but high interest expense and low cash:

IRL has a low gearing ratio of 0.2 with total debt of Rs. 7.2 cr on a net worth of Rs. 44.4 cr. However, interest expense in FY11was Rs. 1.1 cr indicating an interest rate of ~15.5%. Interest expense in H1FY12 has been higher than normal at Rs. 0.8 cr onan outstanding loan of only Rs. 5.7 cr at the end of H1FY12. This could indicate additional borrowings during the quarter andrepayment before the end of the quarter. Debt equity at the end of H1FY12 was 0.1. IRL has no term loans. An increase inworking capital loans is normal during upswings in the business. The company has low cash on its books (Rs. 1.3 cr in FY11and Rs. 1.5 cr in H1FY12). Net change in cash is negligible every year (Rs. 0.2 cr in FY11 and no change in Y10) however,cash earning per share is good (Rs. 24.2 in FY11 and Rs. 25.2 in FY10). Most of the cash generated so far has been used tofund fixed assets and/or working capital (mainly inventories).

Quarterly Results

Y-o-Y: IRLas Q2FY11 net sales grew by 51.8% to Rs. 54.1 cr from Rs. 35.6 cr in Q2FY11. The company reported a 110.1%growth in operating profit, from Rs. 3.6 cr in Q1FY12 to Rs. 7.6 cr in Q2FY12. The total expenditure as a % of net salesdecreased from 90.3% in Q2FY11 to 86.1% in Q2FY12. The operating margins rose by 300 bps to 14.1%. Interest expense(which increased by 56.5% from Rs. 0.3 cr in Q2FY11 to Rs. 0.4 cr in Q2FY12) and depreciation expense (which increased by18.1% from Rs. 0.5 cr in Q2FY11 to Rs. 0.6 cr in Q2FY12) were higher but in line with growth in sales. PAT increased by135.7% to Rs. 5.2 cr from Rs. 2.2 cr in Q2FY11. The tax rate in Q2FY12 (21.3%) was significantly lower than that in Q2FY11(23.0%). PAT margins improved by 350 bps to 9.7%. EPS for the quarter stood at Rs. 10.0 vs. Rs. 4.2 in Q2FY11.

Q-o-Q: Sequentially, the net sales increased by 12.5% from Rs. 48.1 cr. The operating profit & PAT increased by 28.0% &37.0% respectively. OPM rose 170 bps from 12.4% while PAT margins improved by 170 bps from 8.0%. The rise in OPM can beattributed to lower raw material cost.

Quick questions for those who track Indag Rubber:

1). Rubber prices have been falling in last 2 quarters. and steeply in the last month. Globally rubber has fallen to Rs 180/kg from Rs 231/kg or so a quarter back. RM is like 70& of Sales for Indag, so this should be a very good factor for Indag for H2??

2). Slowdown in IIP and correlation with MHCV Sales…consequently effect on retreading. While the slowdown over FY11 is dramatic in 1HFY12, Indag has shown no signs of decelerating. Instead it is setting a higher trajectory? Gaining at the cost of others, Operating leverage, Too good to last?

3). Any insights vis-a-vis Midas, Elgi, MRF, JK, Vamshi Rubber??



1). Yes it should result in a better performance. But I understand that Indag passes on its raw material costs with a lag. So prices will likely be cut too after 1-2 qtrs if low rubber prices persist.

2). MHCV sales reflect new vehicles while retreads are typically used on already running vehicles. So robust CV sales of past 2 yrs should keep demand reasonably strong. Also much of Indag’s sales are driven by tour operators/small truck fleet owners. At a time when inflation is high they could possibly tend to use more retreads. I understand retreads are 30-40% cheaper.

3). No clue

Disclosure: Hold from lower levels

Hi Donald,

Good to see you picking up Indag for in-depth research :slight_smile:

Indag has been a consistent performer but perhaps due to mis-conceptions and boring industry, the same has been ignored.

Despite being from a boring industry, the co has fantastic ratios - like

1). Almost debt free

2). Consistent growth of 25%+

3). High ROCE of 30%+

4). Very low inventory and debtors and hence solid cash flows.

5). Good dividend

Yes, falling rubber prices should be a good point but - the topline growth might stop and margins might increase.

Re-treading work is notdependedon new vehicles. Infact recession should lead to more re-treading due to costconsciousness :slight_smile:


“Topline growth might stop” - what is the rationale?

That brings us to the question - the source of this growth for Indag?

a) utilisation levels have always been low for the company - so I dont see a situation like BKT where growth was constrained by supplies in the past. Implying that Marketinmg/Competition are still bigger challenges for Indag

b) So why has the company grown at such high rates - increasing franchise network. if the overall retreading market is growing at a very fast pace and Indag is keeping pace with that, why will it slowdown in H2? Like you and GreyF mention, Retreading market should grow in a slower growth/high inflation situation, right?



I had a decent enough bet on this one and as a short term mispriced bet and having gotten out at around 165 I am again accumulating between 145-150 levels.

Here is what I put up on the relevant thread on theequitydesk recently.



Indag Rubber manufactures Tyre Retreads â precured tread rubber which is mainly used in the retreading of tyres.

The process of refurbishing old worn out tyres to enable its re use is known as retreading.

Retreaded tyres offer significant cost benefits in case of tyres for Commercial Vehicles. The cost of a retreaded rubber amounts to around 25-30% of a new tyre and hence is used in the CV industry.

An old tyre can be re treaded almost three times before being discarded. The retreading has not found much use in vehicles for passenger cars but is a growing business in the CV segment. Indag Rubber is trying to move into the retreaded segment of the OTR (Off the Road) tyres mainly in tractors, earthmoving equipment, defence vehicles etc.


The company has a small equity base of 5.25 crores with 52.5 lac shares outstanding.

Promoter holding is around 77% with no pledging.

Debt is low at around 6 crores as on Sep 11.

Last Few Years Results







Hy 12

Hy 11
























































The first two quarters of FY 12 have been very good with excellent growth in the sales and profits along with higher profit margins. Based on these figures, the company is likely to post EPS in excess of 30 with ROE in excess of 30. Company has finished expansion during fy 10 and fy 11 and can go up to sales of around 270 crores without further capex.

The Rajasthan facility of the company has been closed since 2006 and can add some land bank to the company which whenever sold can add significantly to the valuation of the company.

Currently the company has manufacturing facility in Himachal Pradesh which has excise benefits. Tax benefits to the company have expired post fy 10 and going further the company is likely to pay taxes at the rate of around 22%.


The company has been growing steadily and since past few quarters has been showing strong growth which is reflected in very high earnings.

Low debt company inspite of expanded capacity.

High ROCE and ROE

Very High promoter holding

Negligible fund/FII holding.

Increasing dividend payment.


Poor liquidity

Input price volatility could affect profits because rubber is the main raw material and sudden spurts in prices of rubber could affect profitability.

Being a small cap stock the inherent risks of the category apply here.

Technically the stock has broken out of its all time high in the region of 120 levels and has been consolidating between 135-145 levels after having posted high in region of 160.

Since the stock price is technically in a free zone, targets on the upside are difficult to predict.

Overall I think the stock offers excellent risk reward ratio.

Coming to donald's queries

1. falling raw material prices should benefit indag.

2. regarding the demand as greyfool mentioned there should be a lag effect in demand slowing. So next few quarters should also be good.

3. regarding comparative peers, I think Midas seems to be a big enough player but many reports indicate that indag quality is the best.

I think this one still remains a good short term bet for around 30-50% upsides.

Elgi Rubber made sales of 140 cr from re treading division in FY11.That is almost same as Indag Rubber which made 150cr in FY11.

In fact, Elgi rubber is also into reclaimed rubber and manufacturing of retreading machinery.

1 Like

ICRA assigned A+ Stable rating for Indag Rubber.

Growth in sales is similar across industry.But growth in net profits confined only to Indag may be due to better management of raw material and strong sales through franchisees.In retreading industry those sold through tender based are low margin and through Franchise are better margin products.

Please took a glance at Vamshi Rubber a strong player in south.So that we can analyse further.

Thanks Omprakash. Will try and compile competition figures in some time, as I learn more of the industry.

Meanwhile wanted to understand one aspect. Indag always has had low capacity utilisation figures. Going back to 2006, capacity utilisation was a lowly 42%.






Operating Cash flow












Gross Block






Installed Capacity (#MT)






Production (#MT)






Capacity Utilisation






Sales (MT)












What does this data tell us

a) That the company will not need to spend significantly on capex in next 2 years,but then capex in this business looks negligible, anyways - 5000 MT @6 Cr

b) So next expansion may easily be funded by operating cash flows coming in

c) happy to see the generally increasing relaisations trend







Total Assets






Asset Turns






Return on Assets






Total Debt






Shareholders Equity







Financial Leverage


















Return-on-Capital Emp






d) The business has excellent return characteristics. Even with 50%-60% utilisation, the company is achieving high asset turns, leading to high RoEs. With higher utilisation, the returns will scale northwards

The questions that come up for me:

1. Do we think utilisation will be higher in FY12 and FY13, than the 50-60% seen so far

2. If so, what has changed in the market dynamics/company strategy that will make for higher production/utilisation

e) Get a feeling the company been deliberately holding back taking on low margin business (e.g the tendered State Transport Units business). So do we know if the private vehicles retread demand share has gone up significantly in the say the last 2 years, simply because private fleet has gone up much more than the STUs

f) Tax impact change in FY11 accounts for the significant change in net margin profile over last 3 years. But even at operating level, OPMs had dipped badly in 2011, though this has picked up in 2012 Q1 and Q2

Any comments to explain/interpret above from those tracking the stock will help me come up to speed fast.



[quote="Donald, post:10, topic:267144442"] Indag always has had low capacity utilisation figures. Going back to 2006, capacity utilisation was a lowly 42%. Operating Cash flow | 4.73 Gross Block | 39.30 Installed Capacity (#MT) | 13800 Production (#MT) | 7739 Capacity Utilisation | 56.08% Sales (MT) | 190 What does this data tell Any comments to explain/interpret above from those tracking the stock will help me come up to speed fast. Thx Donald [/quote]


Please note that capacity enhanced by company in 2010 is meant for tax benefits. (Source: AR 10 P no:3).

I think capacityutilizationwill depends on rubber rates.If rubber prices are high leads to highertyrerates and increasing retreading demand.The key aspect is managements capability to manage raw material and pass on to the customers.I think journey so far is good and expecting same for future.











































Domestic tyre manufacturers increased tyre prices 14-15 % in june and 2.5-3% in august.So accordingly retreads prices might increase in proportionate ratio.Although Rubber prices fall from 245 per KG to 185 per kg tyre companies are not willing to take price cuts.

For ex in latest concall of apollo tyres they told that Avg rubber prices for Q1 is Rs 245 and for Q2 is Rs 235.They indicated that decline in rubber prices can be expected in Q4 due to inventories and falling rupee.They indicated full impact of increase in tyre rates will reflect in Q3.They expects Q3 to be better than Q2.

In this scenario we can expect Q3 of Indag will be blockbuster.

#Invested and holding from 85 levels.

Indag Rubber stock story created.

Certainly deserves more attention from all of us. This has been a real crash job, so those who have been invested/tracking for long Ayush, Viraj, Om Prakash please check if we have done justice and covered the story from all angles - and provide a balanced picture.

Alert us if something is still missing.

We have got an opportunity to meet Management early next week. I am moving on to framing the questions for Management. Will be glad if you guys can pitch in and send in your questions, asap.


2 queries on the stock story: -

  1. Does the capacity utilisation calculation take into account the Bhiwadi plant which is closed now or only the Baddi plant.

  2. If the company has tax benefits until 2015, why it had an effective tax rate of 22% in FY 11.

Thanks. 65% revenue taxed at 33% tax rate gives approx 22% tax rate on 100% revenues.


1). Bhiwadi plant is closed since 2006. only land is available there

2). Tax exemptions are available to only 30% of the revenues from the Baddi plant from 2010-2015.

My study is only 2 days old of Indag! Omprakash, Ayush please correct if soemthing is wrong in above info!

This one seems to be so similar to Gujarat Reclaim!! Be it return ratios, valuation, growth, management track record etc!!

Some queries from my side:

1). How much market share does the organised and the unorganised market have? And among organised market share what percentage of market share does Indag have?

2). What kind of growth does Indag foresee for retreaded rubber in next few years?

3). Any plans for the vacant land in Rajasthan?

4). Any plans to move to regions other than where company is strong? Esp the western and southern region?

5). Any plans to hike dividend payout ratio looking at the free cash flow likely to be generated in next few years?

6). What kind of lag period is there to pass on increased raw material prices?

7). How much is the life of a retreaded rubber tyre?

Dear Viraj, Ayush, Hitesh

Thanks for your help in compiling a decent set of questions. I am reasonably happy with what we have doen in just a couple of days. Thanks for bringing me up to speed, fast!

Ninad - As discussed, please add value to our efforts. Have a look at the questions pasted below and add/modify, asap! Sorry again for the short notice.



Questions for Indag Rubber Management

1.Decent growth record - In the last 5 years Indag Rubber has clocked a 25% plus CAGR in Sales. Sales touched ~150 Cr in FY2011. Profits have grown along similar lines with a ~26% CAGR. In the same period book value has compounded by over 35% CAGR. But the story from 2002-2006 was entirely different â zero addition to BV, poor operating margins. Ever since the shift to the Baddi (Himachal Pradesh) Plant, Indag has not looked back!

Kindly take us through this journey- what changed, for the company? Tax incentives leading to tax free status for first 5 years was a major contributor no doubt, but even at the operating level there was a big shift, isnât it?

Was it that Labour issues at the Bhiwadi plant being put behind, was the major spur? While Bhiwadi plant was closed in 2006, just when were all the plant/machinery shifted to Baddi?

How was the Bandag Association? And why did it end?

2.Promoter Group â Khemkaâs and involvement

Kindly give us a little background of the Promoter group and their involvement in the running of the company. Promoter Group stake need to come down to 75% by FY13 - any moves on that expected soon? When did the current Management take charge?

3.Increasing Price realizations over last 5 years. If we look at last 5 years data â Volume growth CAGR was 15%, while Sales raced ahead at 25% CAGR.

Kindly comment. What are the factors that have contributed to increasing realizations for Indag over the last 5 years? Increasing RM costs being passed on, better performance and acceptability vis–vis competition, brand building efforts, what?

4.Entrenched Competition â Midas, Elgi Rubber, MRF, Vamshi Rubber, Eastern Treads, and the Unorganised sector. And the Chinese threat.

Please take us a little bit through the competitive scenario how it was 5-10 years back and the position now?

Most/All of these have been in the business for 25-30 years plus, right â what has Indag done right, that its rated almost at the top of the pack â in margins & profitability, at the least. How much of a difference/contribution did the Bandag JV bring to the table?

Kindly comment on the Chinese cheap tyre threat. Whatâs the current outlook?

How do you rate the smaller players like Vamshi Rubber and Eastern Treads?

5.Sales & Distribution

Kindly take us through your sales and Marketing set up.

Do the retreaders buy retread material from company owned depots/franchisee (C&F Agent) stores.

If itâs basically a stocking operation at depots (C&F Agents), how do you manage the retreader relationship well? Is this on an exclusive basis? How is end-product quality assured/monitored?

Are there completely different retreader segments â ones that cater to organized sector players, and other segment that caters to unorganized sector? Is there cannibalization in sales within the organized segment between different brands. If not, and every retreader maintains retreading options say at different price points, how do you manage the sales & marketing objectives?

Is there any kind of customer pull or brand preference, at play? Why would a customer prefer a Indag retread over say an MRF retread? What kind of sales promotion and brand building activities, if any, does Indag participate in?

6.The Retreading Market in India.

Kindly share your understanding of how the numbers stack up in the retreading industry. Letâs say a 100 tyres reach end-of-useful-life, how many are replaced by new tyres, how many are retreaded, and how many are sold off as scrap?

And Globally, how would the percentages be?

If a new CV tyre costs Rs. 18000, what is the range that retreads sell at 4000-6000? Where is Indag positioned/priced in this range vis–vis a Midas, a Vamshi, or a MRF retread?

Please share with us some perspective on the total market size. How much is Unorganised? Please give us some idea on the scale of operation, current production capacities say at Midas, MRF, Elgi, JK Tyres, Vamshi and Easter Treads. Have you seen any significant scaling up by Competition recently?

7.13800 MT Capacity. Poor capacity utilization record 42% in FY2006 to 56% in FY11. Only once in last 5 years has capacity utilization touched 60%.

Kindly take us through the reasons for this cautiousness/approach so far? Are we going to see a little more aggressiveness at play from here on?

In the last AGM it was mentioned that company will not need any further Capex till reaching 300 Crs in sales? When is the next capex cycle planned? And by when?

8.Bhiwadifactory Land. Land Value mentioned in last AGM 40 Cr

This is a sizeable asset lying idle for the last 5 years. What are the plans going forward?

Operating Cash flows if sustained seem more than enough to fund future capex requirements and working capital, so why not dispose of this land, and return some money to shareholders?

9.Dividend Policy

Kindly elaborate on the Dividend Policy followed by the company. Why is it not increasing somewhat in tandem with earnings. Post FY11 and the recent 1HFY12 earnings, we were expecting higher dividends after being stagnant for the last 2 years!

10.1HFY12 Results

Kindly give us some perspective on the sales growth achieved? How much is on account of volume growth and how much from higher realizations? What is the outlook for 2HFY12? Is it likely to be as robust?

11.Bandag rubber acquired by Bridgestone in 2006 for $1.05 Bn. Bandag sales for 2005 $925 Mn

In developed markets, every tyre major has a retreading arm. With MNC tyre majors taking an increasing presence in India, do you see any moves from the tyre majors at acquiring retreading arms? How far are we from that kind of consolidation in Indian markets?

12.Challenges and Risks before the Company.

What would you say is your biggest challenge or vulnerability as the company attempts to scale up and go to the next level.Where do you see Indag by 2015?

@Donald - I had bought Indag last year, made some money and got out of it when I realized that the company has no pricing power at all. It even mentions that in 2010 or 11’s annual report (forget which one) as the reason for their poor performance. Maybe you could add a question on that.

I don’t want to stick with a commodity processor without any pricing power when the commodity can fluctuate wildly.