Indag Rubber - inflection point?

Sorry guys for the delay.

Indag Rubber Management Q&A 21 Nov 2011, uploaded.

By all accounts this is a pretty decent company, with a strong BS, good profitability and returns. And of late, on a higher growth track.

Do you think this is a decent enough long-term bet, or an undervalued bargain (with solid fundamentals) to profit from in the next 6-9 months?

Please carry forward the discussion.

-donald

Thanks donald for the in depth interview.

Some positives and negatives emerging for the company out of the interview:

Positives:

Growth likely to continue

RM prices are pass through in nature to some extent

Management is actively thinking about increasing its business and about expansion and venturing into related area of OTR retreading

Financing for expansions seems to be well thought of.

They are thinking actively about utilisation of the vacant land.

From what the management re iterates it seems Indag does have some brand value howsoever small it may be.

Professionals running the company. Its a good concept that promoters and management team is different.

NEGATIVES:

Indag appears to be a much smaller player as compared to Midas.

Dividend payout is not likely to increase.

Land value of the Bhiwadi plant goes out for a toss. One must not consider it as a parameter while investing.

I think much of the negatives are factored in at cmp and although it might not be a multibagger from hereon, it looks like a stock with limited downside (we saw it even during the recent carnage survive about 135 levels) and potential to deliver around 40-50% returns safely if the second half is as good as the first half. And in current market scenario I think there might be a rush to solid but safe returns kind of plays.

I think one can bet around 10% of an aggressive portfolio here.

Excellent q3 fy 12 results from Indag.

Sales up from 37 to 47 crores.

Net Profit up from 2.87 crores to 5.3 crores.

9M EPS (not annualised) at 27.37 per share.

Special resolution from INDAG

)- getting into new business (infrastructure space - power etc)

)- Can some seniors shed some light? Do you think INDAG doesn’t have much growth in its tyre business?

)- File attached for referance

INDAG_Rubber_Spl_resln.pdf (91.1 KB)

It seems that the management wants to enter every conceivable business other than their core competence which is rubber .

1 Like

Time to pocket the gains and exit?

Indag made an entry into ValuePickr Short Term portfolio at ~120 about 4-5months back, if I remember correctly. Targeted 50% gains (from short term portfolio) are achieved.

In view of recent developments, this looks like an exit to me, post the Fy12 results.

-Donald

I think as rationale investors we should make decisions on facts even if targets have been reached.

Could anyone with access ask management the significance of the resolution? Is management really serious on diversifying into unrelated sectors and can they provide us with the time frame when this will start to reflect on the Company’s financials?

If management is really serious on embarking on non-core activities I would, like Donald, prefer to exit the stock. There is invariably going to be a period of volatility in the financials not to mention drainage of capital. I also do not believe we would have much information to analyse the robustness/validity of management’s future plans in unrelated sectors.

cheers,

Subbu

Hi,

Update based on an interaction with the finance head. The new articles have been inducted as at broader level the management wants to fast-track the growth. The opportunities are limited in the re-treading business and they can’t grow beyond a point (say as of today 300-400 Cr turnover). While as the promoter group is a big business house and has few other businesses also, they are contemplating if Indag can take up something new also. Nothing in the near term…its just a thought process. Details will be shared if something materializes.

On the business front, the co is doing well as usual :slight_smile:

Ayush

yes donald I tend to agree with you. At around 120-140 this was a great undervalued pick which looked safe in the face of market volatility.

Now with the stock price having moved up I think it might be a good idea to switch to other more lucractive options.

In that bracket my options would be unichem, sanghvi movers, vst tillers etc based on cmp.

Hitesh,Unichem is a very old company .What were the reasons for its underperformance so far n the recent development in the co?

any views on recently listed MCX,Symphony,Kajaria,Stanchart IDR,

Thanks Ayush for the clarification. Based on your input I still think its an undervalued stock trading at a PE ratio of less than 5 times. Although growth opportunities are not super-great I still believe its an under-valued stock in a low-capital business with not a lot of debt. More importantly it has limited downside owing to its low PE ratio - margin of safety principle.

Nice jump in net profits & decent dividend announced.

However, Sales has dropped.

Has the time to sell come???

Good Q4 nos, IMHO :slight_smile: Sales have increased 38% YOY and NP has increased 78% YOY.

Will you sell Ajinkya Rahane just because he is scoring too many centuries and putting up a great performance?

Considering LTM EPS of 40 Indag is trading at 6x EPS, which certainly is not very high considering the strong growth in earnings.

I have been tracking rubber prices and they have not increased substantially either. So I would still recommend a hold. It was a great buy at Rs 120 but its not a great buy. But it certainly is not a sell either.

Indag has posted some very good numbers. Management has walked the talk - when we had asked them if H1 exemplary results were replicable for the full year, they had expressed complete confidence for achieving equally good results. I need to revisit the Management Q&A and refresh:) turning out better than short term allocation bet, on the face of it!

1). There is some expansion in margins by some 3% or so in Q4,but that is primarily due to softening in RM prices as Subbu mentions

2). Debt reduced further - almost debt free

3). They do not need to infuse further capex to grow atleast for FY13, as their capacity utilisation was pretty low at some 56% or so in FY11.

4). If we factor in a 30% growth for FY13, Indag is still available less than <5x FY13 and at some 0.4x Price/Sales

Still looks very decent to me. Need to check if 30% growth is possible - from the Management Q&A earlier and other notes.

Those tracking - some important questions:

1). What kind of growth profile do you expect for FY13. Is a 30% growth possible, why?

2). How much of FY12 growth was based on price realisation growth and how much from increased production? (FY11 had a 34% growth by the way entirely based on price realisation growth; production was actually lower!)

3). Retread Sale Price is obviously linked to rubber/OEM tyre pricing. What was the trend in FY12? And what is the trend now in FY13:)

Hi

Couldn't resist posting the Capital Turnover profile for Indag. Good jumps in operating margin and Capital Turnover over last 2 years. with donald's comments it becomes clear that this is based mostly on price realisation increases in FY11, and probably for FY12 too.

Indag Rubber 2012 2011 2010 2009 2008 2007
Revenues 215.90 149.47 111.35 76.27 74.05 61.27
EBIDT 30.55 16.71 13.86 10.39 11.23 5.88
Depreciation 2.29 1.93 1.63 1.42 1.4 1.35
EBIT 28.26 14.78 12.23 8.97 9.83 4.53
Operating Margin 13.09% 9.89% 10.98% 11.76% 13.27% 7.39%
Working Capital 39.04 29.24 23.77 12.05 14.05 12.85
Net Fixed Assets 24.71 21.19 18.42 13.71 12.85 13.33
Net Other Assets





Invested Capital 63.75 50.43 42.19 25.76 26.90 26.18
Capital Turnover 3.39 2.96 2.64 2.96 2.75 2.34
EBIT/Invested Capital 44.33% 29.31% 28.99% 34.82% 36.54% 17.30%
ROIC 29.70% 19.64% 19.42% 23.33% 24.48% 11.59%

Growth based on price realisation increase is a good thing, right? but what about cyclicality, will this turn negative when rubber prices crash next. what had happened the last time with Indag? Tyre makers generally don't reduce the price back, right? So re-treaders too wouldn't need to reduce??:)

Hi Donald,

Yup, mgmt has delivered more than what they talked :slight_smile: They seem to be conservative people with full focus on profitable growth (and cash flow).

For FY 12, I think the majority of the growth would have been by way of volume growth as rubber prices had been correcting during the year. The capacity utilization might be close to 75-80% now and hence 15-20% vol growth might be possible for next year.

Ayush

Hi Ayush,

Yes, They have delivered more than what they talked about. I re-read the Indag Management Q&A with pleasure; somehow I remembered that as a sort of dull interview, but I see that it is packed with lot of v important details - thanks to detailed questions set by you and Viraj!

Some observations:

1.Last 5 years Volume growth CAGR has been less than 15%, but Sales CAGR is over 25%.The business has a happy situation of growing faster due to higher price realisation aiding volume growth. Indag and other leading brands do have the ability to pass on price increases, with a lag effect - that’s clear. and a Comfort factor. FY12 volume growth is 9-10% as mentioned in the Management Q&A!

2). They had 20 dealers in South/west belt appointed recently. We need to know how many more dealers they have appointed in FY12. Indag is an established brand - all that they need to ensure is availability of Stocks to grow Sales in a virgin belt. How much incremental Sales is expected from new dealers?

3). With rubber situation softening, the scope for price increases aiding growth in FY13 is limited?

Time for a reality-check with management on the outlook for FY13 - volume growth, pricing front and reasons for the same.

Hi TCX

Thanks for your diligence and the data you are posting. Please keep it up!

Some food for thought for us:

1). Over the last 5-6 years, Everything good in this business seems to be linked to the happy situation of natural rubber prices going up & up, and the companies ability to pass on those hikes. Higher OPM, Higher Capital Turnover and higher ROIC

2). Take out the effect of the price realisation hikes, and much of the fizz will be missing in this business. Whether regular hikes are here to stay or not, is a different matter.

3). It is possible that because of this happy situation, the management has not needed to be aggressive in expanding the distribution network, or in increasing capacities.

4). Would they have adopted a more aggressive strategy had natural rubber prices remained steady? If prices remain steady for the next 2-3 years, what will be the company’s strategy?

Given the steep climb in natural rubber in last couple of years, this may be time for steady prices. I will be happy if we can see some aggressiveness from Management in ensuring growth through distribution network expansion.

They can’t create magic overnight, so look like a 15-20% volume growth may be expected, unless they have really moved on expanding the dealer network.

Over to Ayush, for this critical diligence!

reduce??:))

Ayush,

They had talked about a possible expansion by Dec 2012. They were still deciding whether it should be a 300-400 MT expansion or a 1000 MT expansion, if I remember correctly.

Quizzing on that aspect and the timing of the investment may give us some clues.

-Donald