Indag Rubber - inflection point?

Stock Opportunities Not-so-Hidden Gems
41

Please look at the 2007-2012Rubber price chartattached.

When I correlate this data with Indag’s performance, lot of perceptions/interpretations change, for me:)

1). Prices went through a very steep climb from Sep 2010 to March 2011 (almost doubling from 150 to 270)

This kind of steep hike in a very short time was difficult for the company. Company had to absorb some of the price hikes and could only get a 30% higher price realisation (compared to the 90% hike in costs). Operating Margin contraction by some 1.5%, Tax free status changing from 0% to 22%, and higher interest cost, meant the company suffered a de-growth in EPS, despite 30%+ higher sales.

2). from Mar 2011 to Mar 2012 - entire FY12 - Prices steadily corrected back to same levels by Dec 2011 (150), and gone up a little to 170 by Mar 2012.

Was a real double-whammy sweet-spot for the company in whole of FY12, with retread prices holding steady but RM prices significantly lower. Marginal Price reductions were effected in H2. Margins expanded by over 3%. Tax impact was neutral as was interest costs, and we have the exemplary results!

Ayush/Viraj/Others - Can you throw more light? too many scenarios at play. Need to think thru

1). In a regular steady hike situation - company is not much affected as it can pass on price hikes with lag effect. Sales grow higher than volume growth, margins steady

2). In a more or less steady price scenario or very gradual hike scenario, company will grow only by volume growth, where the record is pretty average 10-15%. Normalised margins are like 10-11%

3). In a steep hike followed by steady correction, company is in a sweet-spot.

The odds are ON that, given the hike-correction cycle played out in 2011 & 12, we are now in for a steady or a steep hike situation in FY13 & 14.

That means we can expect normalised 12-13% OPM, and 25-30% kind of Sales growth in the next 2 years at the minimum. if the company cranks up the distribution effort, results can be better??

I may be boring the purists with too much of analysis (?) that too for a commodity-like business (it isn’t actually), but there are definite patterns here to recognise. Especially since we are invested here from 70-90% lower levels, it makes sense tp prepare for the Odds!

Cheers!Views invited.


42

Hi Donald,

Good to see so much of efforts at your end. From the rubber price trend some of my observations are:

1). Steady raw material prices is the best thing for the co. During FY 2008, the rubber prices remained stable in a 10% approx band and the co reported highest margins ever at 15.09%. This is the same for most of the cos.

2). Rising or volatile rubber prices are negative for them as it takes time to pass on the costs. But it does help in bringing the growth.

3). Falling rubber prices are good for the co and it helps in margin expansion…like this year but restricts topline growth.

So I think the normal margins for the co can be expected to be in the 12-13% range and the volume growth to be 15%.

Donald, I see Indag as a simple good company doing ethical and careful business (cash flows) in a commodity/highly competitive industry. I think I would rate FY 12 to be the best year for them as this is the year of volume growth backed by mgmt efforts (inc in capacity utilization, inc in dealers etc)

I don’t see this stock as a multibagger from here but its a good co. Look at the other ratios also…like very low inventory, very low debtors, very high ROCE, good dividends etc. Those sitting on good gains shouldn’t worry or try to shift out until n unless there is something very attractive. I don’t think there is much to loose here.

43

Thanks Ayush.

With 12-13% normalised margins, and a 15% volume growth aided by some price hike growth, all indications seem to point to a 20-25% CAGR at the least if one remains invested for the next 2 years.

Effort was needed from my side as my familiarity with Indag business was low - it was only a short-term 6-9 months portfolio prospect for me. But with improved performance from the company and indications of expanding dealer network, higher capacity utilisations,I wanted to make surethat I do not prematurely exit.

It still is not exciting enough for me to migrate to the Long-Term portfolio, but very decent prospects to retain in the Short-term portfolio. Actually it makes sense to add more at this stage and add more on declines.

We should also take into account full Tax impact of 33% from 22% will accrue in 3 years time. And in the longer term, the excise benefits will expire and might remove much of the current sheen.

44

Here are my conservative projections for Indag for the next 2 years. Take it with a pinch of salt as familiarity/involvement with the business is still low for me.

Indag Rubber 2007 2008 2009 2010 2011 2012 6 yr CAGR 2013E 2014E
Growth 60.99% 21.41% 2.99% 46.16% 34.30% 44.45%
25.00% 25.00%
Net Sales 60.90 73.94 76.15 111.30 149.47 215.90 28.80% 269.88 337.35
Equity Dividend 0.00 1.05 1.05 2.10 2.1
25.99%



EBITDA 7.45 11.32 10.49 13.96 16.70 30.55 32.59% 35.08 43.85
EBITDA Margins 12.24% 15.31% 13.77% 12.55% 11.17% 14.15%
13% 13.00%
Depreciation 1.95 2.29 1.42 1.63 1.93 2.29
2.87 3.58
Depreciation/Sales 3.20% 3.10% 1.87% 1.47% 1.29% 1.06%
1.06% 1.06%
EBIT 5.51 9.03 9.06 12.33 14.77 28.26
32.22 40.27
Interest 1.69 1.31 1.39 0.41 1.12 1.25
1.00 1.25
Interest/Sales 2.77% 1.78% 1.83% 0.37% 0.75% 0.58%
0.37% 0.37%
PBT 3.82 7.71 7.67 11.92 13.65 27.01 47.87% 31.22 39.02
Taxes -0.39 -0.56 0.05 0.35 2.89 6.14
7.10 8.87
Tax rate -10.17% -7.32% 0.68% 2.91% 21.20% 22.73%
22.73% 22.73%
PAT 4.21 8.28 7.62 11.57 10.75 20.87 37.74% 24.12 30.15
Net Margins 6.91% 11.19% 10.01% 10.40% 7.19% 9.67%
8.94% 8.94%
# of Shares 0.53 0.53 0.53 0.53 0.53 0.53
0.53 0.53
EPS 8.02 15.76 14.52 22.04 20.48 39.75
45.95 57.43
EPS growth
96.58% -7.91% 51.86% -7.09% 94.10%
15.58% 25.00%
DPS 0.00 2.00 2.00 4.00 4.00 0.00 25.99% 0.00 0.00
P/E



11.28 5.81
5.03 4.02
P/Sales



0.81 0.56
0.45 0.36
Yield



1.73%






2007 2008 2009 2010 2011 2012 CAGR

Operating Cash flow 1.86 7.23 11.59 1.31 7.95



Capex 1.29 2.05 2.55 6.16 4.73



Free Cash Flow 0.57 5.18 9.04 -4.85 3.22
54.53%

Gross Block 25.26 26.18 28.35 34.63 39.30
11.68%

Installed Capacity (#MT) 8950 8950 8950 13800 13800 13800
13800 13800
Production (#MT) 4455 5401 4636 7849 7739 9287 15.83% 11144 13373
Capacity Utilisation 49.78% 60.35% 51.80% 56.88% 56.08% 67.30%
80.75% 96.91%
Sales (MT) 4472 5174 4636 7592 7849
15.10%

Realisation 136 143 164 147 190
8.74%











Total Assets 26.37 28.42 27.47 44.06 51.61 63.75


Asset Turns 2.31 2.60 2.77 2.53 2.90 3.39


Return on Assets 15.97% 29.12% 27.74% 26.27% 20.83% 32.74%


Total Debt 12.99 7.78 0.18 7.30 7.23 1.30


Shareholders Equity 13.21 20.25 26.94 36.06 44.38 61.59 36.06%

Financial Leverage 2.00 1.40 1.02 1.22 1.16 1.04


Debt-to-Equity 0.98 0.38 0.01 0.20 0.16 0.02


Return-on-Equity 31.87% 40.87% 28.29% 32.10% 24.23% 33.89%


Return-on-Capital Emp 21.02% 32.20% 33.43% 28.44% 28.62% 44.94%


Dividend Payout #DIV/0! 12.69% 13.78% 18.14% 19.53%



This might help you decide whether you should stay invested in something where most of us have already made 50-70%+ returns.

Please comment why you would not add more of Indag at this stage/and on declines. Where are the better opportunities??

45

25% top line growth is aggressive considering the slowdown in India. I think 15 - 20% is more reasonable. Rest is good.

46

The business is good and the company has been growing steadily. I have a small exposure in the company from lower levels.

Would it be advisable to add at the current levels ?

47

Indag’s AGM is going to be held at Sai International Center, Pragati Vihar, Lodhi Road, New Delhi on 14th July. As it is on Saturday, and the place is not very far from where I live, I am thinking of attending the same.

As I am attending AGM of a company for the first time, so I am bit ignorant about it. What exactly do I need to do other than to have the printout of the form with me.

Also do let me know if anyone from this forum going to attend it, so that we can meet up.

48

Hi Forum member’s,

Any feedback based on the 1Q results ? They seem to be above the forum’s expectation of 25% growth, while the prices have now corrected to decent levels giving an opportunity to add more.

Any thoughts ?

49

good time to enter stock is down after profit booking .

50

Any feedback from those on who attended the AGM? Was it a different AGM from typical Delhi based co AGMs where professional shareholders are motre interested in grabbing gift coupans and snacks packets ?

Any Recent interaction with management ?

Size of the opportunity appears to be large specially in slowdown but are the retreaded tyres allowed in newly opened expressways and NHAI highways?

Heard that due to accidents the retreaded tyres are banned from them?

Themanagementappears decent .Can the scrip be purchased at current price ?

51

Hi,

Yes, the co seems to have done quite well in Q1 nos…much higher than expectations. The stock seems undervalued as the earnings are of high quality and result in free cash flows.

The ROCE is also good and it seems the co will keep increasing dividend payout with the increase in earnings.

A friend had gone to the AGM and he seemed quite positive.

There is no restriction on re-treaded tyres anywhere. Re-treading is a good thing…it saves a lot of money. The issue is that there is a big un-organised market where the quality is not good and hence the results.

Ayush

52

management talked about expansion plan. Could some provide more information on this as i could not find anywhere?..

1). what is the capex for that?

2). when would expansion be completed ?

3). is it financed by debt or internal accruals

4). How promoter would make their holding 75% which is right now is approx 77% (Are they going to dilute equity or offload in market

Regards,

Milind

53

Hi Ayush,

The company has indeed announced it’s intention to consider dividend in the AGM next month.

With the recent surge in price, the decision checkpoint has come about, to hold or to sell. Please help me with your thought process behind the decision to sell ? What if the company continues to grow at the same rate as Q1 and price remains around current level.

Donald,

Can you please tell me, whats the rationale behind assigning PE of 5 and 4 for 2013 & 14 earnings in your estimates above.

Regards

Raj

54

Hi Ayush,

The company has indeed announced it’s intention to consider dividend in the AGM next month.

With the recent surge in price, the decision checkpoint has come about, to hold or to sell. Please help me with your thought process behind the decision to sell ? What if the company continues to grow at the same rate as Q1 and price remains around current level.

Donald,

Can you please tell me, whats the rationale behind assigning PE of 5 and 4 for 2013 & 14 earnings in your estimates above.

Regards

Raj

55

So the phoenix has started rising again. My old favorite stock from ROCE-table days (for those are really interested, see my portfolio thread in TED). An debt free company with ROE, ROCE exceeding 30, quoting a ridiculous cheap pe of 6.5 is a undervaluation beyond my understanding.

The day I saw it again reaching 52 weeks high, sold bunch of pharma stocks to load indag rubber upto 10% of my portfolio.

This is a perfect example of stock I like. Minimized downside risk because of huge undervaluation (pretty much guaranteeing that I won’t loose money), Hitting 52 weeks high day after day, implying it has started getting the due valuation that it deserves. A perfect harmony of positive fundamental and positive technical trend.

56

Great going Subash,

Indag is firing on all cylinders and at lifetime highs is in kind of a free zone with no resistances.

I think you should make a detailed post regarding your “52W-High” strategy with a few instances. We should keep our strategies open and adaptive at all times.

57

Hi Rudra,

Here my strategy is someway similar to CANSLIM way of investing. I look companies with high/consistent ROE/ROCE, very low/zero debt, 3 yr ROCE average/PE ratio as high as possible, stock giving market beating return in last 1yr and 2yr, and has started an upward tend

.

  1. C = Current quarterly earnings per share )- Earnings must be up at least 18-20%.
  2. A = Annual earnings per share a These figures should show meaningful growth for the last five years.
  3. N = New things )- Buy companies with new products, new management, or significant new changes in industry conditions. Most importantly, buy stocks when they start to hit new price highs. Forget cheap stocks; they are that way for a reason.
  4. S = Shares outstanding )- This should be a small and reasonable number. CAN SLIM investors are not looking for older companies with a large capitalization.
  5. L = Leaders )- Buy market leaders, avoid laggards.
  6. **I = Institutional sponsorship **)- Buy stocks with at least a few institutional sponsors who have better-than-average recent performance records.
  7. M = General market )- The market will determine whether you win or lose, so learn how to discern the market’s overall current direction, and interpret the general market indexes (price and volume changes) and action of the individual market leaders.

Read more: http://www.investopedia.com/university/stockpicking/stockpicking7.asp#ixzz27bF9IrMg Link: http://www.investopedia.com/university/stockpicking/stockpicking7.asp#ixzz27bF9IrMg

So the phoenix has started rising again. My old favorite stock from ROCE-table days (for those are really interested, see my portfolio thread in TED). An debt free company with ROE, ROCE exceeding 30, quoting a ridiculous cheap pe of 6.5 is a undervaluation beyond my understanding.

The day I saw it again reaching 52 weeks high, sold bunch of pharma stocks to load indag rubber upto 10% of my portfolio.

This is a perfect example of stock I like. Minimized downside risk because of huge undervaluation (pretty much guaranteeing that I won’t loose money), Hitting 52 weeks high day after day, implying it has started getting the due valuation that it deserves. A perfect harmony of positive fundamental and positive technical trend.

58

Hi,

Yes, the stock has done really well and is a 3 bagger in about a year :))

I have done some profit booking at current levels but if one looks at the trend - if they can do an EPS of 50 for this year then the stock is still at reasonable valuations considering the high quality if balance sheet and free cash flows.

But I feel, GRP is a better bet from Indag from these levels for longer term.

Ayush

59

Thanks Ayush. I am also booking some profit in Indag and increasing my holding in GRP :slight_smile:

60

Dear ALL,

Could somebody throw light on why these set of companies (Retreading) should always be regarded at such low valuations (~5-6 p/e)? Although they have significant ROE/ROCE, is it the tax implication going forward that is the spoil sport.

Thanks!!