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.
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.
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 Companyâs 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 managementâs future plans in unrelated sectors.
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 canât 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 termâŚits just a thought process. Details will be shared if something materializes.
On the business front, the co is doing well as usual
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.
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:)
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??:)
Yup, mgmt has delivered more than what they talked 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.
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 - thatâs 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.
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 companyâs 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 canât create magic overnight, so look like a 15-20% volume growth may be expected, unless they have really moved on expanding the dealer network.
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.