Hit Ji,
They need to sell 107467 shares & not 10500.
See here-
So my take is stock can correct quite a bit if promoters stick to their plan of 1 lakh shares sale in secondary market only & that too in the mentioned time frame as given in the above plan.
I doubt a 2% selling would be a big overhang and be the reason for a major correction from here. 2% is not a big qty, if there is clarity on the business model and growth ahead.
We should remember that the stock has already corrected from a high of abt 330, 6 months back to 200 despite good results in Q3 and correction in rubber prices.March qtr results should be a good pointer if the earnings are intact despite the sluggish business environment.
Yes, 180 should be a very good price for this co.
Ayush
jatin,
thanks for the pointer on number of shares. Maths it seems is not my strong point.
regards
hitesh.
Do we expect any impact of it being included in the list of illiquid stocks by BSE ?
Complete articlehttp://www.moneylife.in/article/bombay-stock-exchange-declares-2050-companies-as-illiquid/32018.html
raj,
I saw the list of scrips provide thru the moneylife link and it seems most of the scrips listed are the proverbial âkachraâ grade scrips barrring some of them like abc bearings, plastiblends etc but these are less than 10%.
So it might not be a bad move by sebi and the exchanges after all. Most of these scrips are trading firms etc which I think might be easily manipulated by operators in cahoots with promoters.
Cant find companies like astral, mayur uni, vst tillers, kaveri seeds etc in the list.
regards
hitesh.
Company has completed, bringing down the promoter stake to 75%
http://www.bseindia.com/xml-data/corpfiling/AttachLive/Indag_Rubber_Ltd_030613.pdf
Q1/Fy 13-14 Results outâŚ
Total Income DOWN 1.3% to 58.25 Cr from 59.00 Cr.
EBIDTA up 5.4% to 9.62 Cr from 9.13 Cr.
Net Profit up 9.1% to 7.26 Cr from 6.65 Cr.
EBIDTA margin is 16.5% v/s 16.2% (MQ-13) and 15.5% (JQ-12)
NET Profit margin is 12.5% v/s 11.7% (MQ-13) and 11.3% (JQ-12)
Total Raw material costs as a %ge to Income is 67.0% v/s 67.3% (MQ-13) and 70.4% (JQ-12)
Employee costs to Income is 6.2% v/s 6.4% (MQ-13) and 5.1% (JQ-12)
Other expenses to Income is 10.3% v/s 10.0% (MQ-13) and 9% (JQ-12)
Tax Rate 22.9% v/s 25.7% (MQ-13) and 22.3% (JQ-12)
EPS 13.83 v/s 12.67 Y-o-Y
Recorded TTM (sum of last 4 quartr) diluted EPS: Rs. 48.73
On 19/07/2013, stock on BSE closed flat at Rs. 199/-
Hi All,
Interesting discussion and analysis on the company. However, I could not understand the reasons for remarkable turnaround of the company post 2006. The company was making losses and struggling before that. The events that happened during that time a) Exit of foreign partner, b) Shutting down of Bhiwandi plant and shifting entire operations to HP, c) Company reduced focus on state transport utilities, d) appointment of more franchises across the country, e) Domestic economy went through difficult times from 2007 onward etc. There is also some talk about exports but I could not get the data on any increase in share of exports in overall sales.
If any body has shed some light what has actually turned the fortunes for the company after 2006, that may help us in understanding the sustainability of the RoEs. RoEs seem to be too good to be true. If a business can report such high RoEs, I am sure competition will kick in and reduce the RoEs.
On valuations, even if company can sustain current RoEs for just three years, shareholders should make money, but I believe three years is a long time is a commodity business with low capital requirements.
Thoughts are welcome.
Hi Nidhesh,
The events mentioned by you were the critical factors behind the turnaround in the fortunes of the company. I think the current performance is very much sustainable till the expiry of some of the taxation benefits the co has due to its plant in HP. Post that the income tax will rise and some margins may get impactedâŚbut the same is 2-3 years away.
Hi Ayush,
Thanks for the comments. I am unable to understand how exactly these events helped the company insuchspectacular improvement. If taxation is the only reason, competition from unorganized sector should have limited RoEs for INDAG. I am still not able to understand how the company been able to generate such high RoEs despite very low entry barriers in the business. What exactly is the moat for the company?
Indag always has been a bit premium name over the other retreaders. They claim that their retreads provide the best efficiency in the industry and hence they get better margins (though the diff is not big in pricing). The management is very conservative and has always focussed on cash flows rather than just growthâŚalso they operate with a very low cost base.
The ROEs have improved as the co has been scaling up from the capacity created several years back.
Many often there are not clear answers to the Moat in a coâŚit could just be the management, size and the efficient ways in which the business is being done.
Ayush
insuchspectacular
Anyone still tracking this company? any views at current valuation?
FY15 revenue at 242cr compared to 232cr growth of 4.3% YoY. Net profit 32.6cr compared to 27.5cr in fy14, 18% growth YoY.
Below Jan-2015 report shows a pick in commercial vehicle sales.
The stock is available at a decent PE of 12. Company is debt free. Looks attractive at this point.
Spoke to CFO Mr. JK Jain. Key points:
Company had income tax exemption till FY15. Now onward will have to
pay normal tax rate.
Company enjoys 6% excise benefit at its plant in HP. This will come
to end by Jan 2016. The company will not be able to pass the same to
the end customers.
End customers industry is very fragmented and competitive. Anyone
with Rs.15lakh can set up retreading unit. Can take material from
Indag or others and retread the tyre. Its take typically 3-4 hours
to retread tyre. After that it may need 24hrs for cooling of the
same.
Radialisation may increase retreading. But as the tyre are good
quality, requirement of retreading will come after more running of
KMs than current.
Company donât have a pricing power to its buyers
Rajasthan plant got shut down due to issue with labor unrest.
Apart from this my finding on Khmeka - Sun group:
This is a very mall part of the group. Mr. Khemka is busy with Russia, work and ties related to that. Dont know how much time he spent on this company.
Disc: Had invested but exited post the call with MR. CFO
Thanks jaitoshniwal1 for the info. Tax exemption till FY15 and Excise benefit are very objective information which I tried to search in the Annual Report for 2015 but couldnât find it.
They seem to be paying tax may be there is some special rate but shouldnât it be mentioned in Annual Report?
Profit before tax 4204.95
Profit after tax 3258.86
Similarly there is nothing much about Excise duty.
Disc: Invested and novice in reading financial statements.
there has hardly been any sales growth over the past 4 yrs.Operational efficiencies though have increased.operating profits are up 30% over 4 yrs. Operating profit margins are stable at ~15%.company is debt free.
Point is without sales growth can one really expect any further appreciation in the stock price.
Disc - invested
Retreading business in mainly in Commercial Vehicle segment and segment is growing at very good pace. You can check from multiple source. SIAM data, check monthly disclosure by Stip steel wheels on stock exchange, CV company disclosure.
Also we know road projects and mining is picking up because of government capex.
This business generally lags CV sales and therefore will have very good next few years as far as I can see.
Invested.
The recent price erosion has again made this companies valuations very attractiveâŚ
-Company is trading at an EV/EBIDTA of 6x FY17.
-Company has expanded its capacity almost 50%(from 13,500tons p.a. to 20,000 tons p.a) by doing a 7 cr capex at its existing facility. hence the asset turnover which is already 4.5x plus will further enhance to 5.5-6 levels.
-The excise duty hike will eat away 5% from the operating margins. this should reduce further as the plant reaches 90% utilisation.
-Biggest take away is the companies free cash flows. More than half the balance sheet is liquid(cash and equivilents). by FY17 there should be 100 crs of cash in the books.
-If the budget has made such a lot of provisioning for the Road and infra space , CVs and retreading by default will gain the mostâŚ
-I however maybe suffering from Confirmation Bias, The Q1FY17 quarterly result will be the litmus test for this stockâŚ
Disclosure: 2nd Largest Holding. Im Biased.
Great discussion guysâŚ
I recently refreshed Indag Rubber after 2 years, first I bought during 2011.This is what it looks to me now, opinions and criticism most welcome.
Competitive Advantage: Moderate
Indag rubber have a mild competitive advantage when it comes to switching cost. This is largely due to a strong dealer network, more than average quality product. At a teaser price company is able to maintain its consistency which can be seen robust return on capital and free cash flow.
The competitive advantage period will be bit wide considering building a dealer network takes time. As this is a non technology based activity it may take several years to replicate. However the depth is weak, all Indag can do is add teaser pricing to product, beyond a point teasing will stop working, customer have abundant choices.
The industry margin has been fairly high with consistent sales growth if not no decline other wise. Even cyclical exposures are not deep cut.
Quality of Management: Substantial
Owner operator and long term tenured combination management. Have a high stake in business, continue to do day to day business. Manipulative transactions are absent in terms board, related party etc.
Communication appears to be conservative though management has not been trumpeting either.
The track record has been good which can be seen higher financial metrics. Though I feel in terms of capital allocation management could or can buy back a bit of stocks. May be due low capital base the decision is avoided, that may bring down liquidity of floating stocks which is already bad.
There is a issue with management, both managers are in 70âs now. Management has not listed a back up plan on paper at least.
Risk Management: Substantial
All most all the risks are mitigated, smaller ones are tolerated which also adds to margin. Though alternatives are available the nature of last mile delivery and fragmented customer base negate these risks.
Customers will continue to pay the teasing price to Indag due to superior product, more so against unknown and fragmented competitors Indag is a clear winner.
Supplier choices are plenty including import which will keep raw material price in check.
Inflation doesnât impact a great deal due to debt free status and low capex requirement. In addition Indag has headroom in improving inventory time cycle.
Financial management is excellent when it comes to debtor, creditor or inventory though there is a scope for improvement. The capex requirement is going down with little asset base requirement and with free Cash Flow Company has stacked up quite a bit current investments. There is no debt on balance sheet which allows low cost leverage from equity capital only.
The expenses have been going down over the years for operations resulted a superior gross margin. Though there is a point , margin will come down post tax incentives.
The growth of top line has been stagnated a bit, perhaps thatâs the reason it has gone for expansion. Quality of growth is excellent as every rupee earned is hitting the cash flow. This can be reflected in fabulous return on capital and assets. Though additional capita invested back to business has not generated that superior return as management would like to. Perhaps this is the reason Indag is not expanding big time even the cost of expansion is minimal.
Long term and short term financial management including capex is outstanding.
Financial integrity is above par. There is very minor change to depreciation policy.
Future Catalysts: Moderate
Retreading business is expected to grow as human population grows so is the need for products and hence the requirement for any direct needs such as commercial vehicles. However with alternate products at hand, the product itself is an substitution it will enjoy patronage as long as it enjoys strong price advantage against the main product.
Industry doesnât expect a proprietary tool or technology to knock them out. If a technology is going to available its going to be for all.
Indag has not shown any signs of slow down rather expanding on their own cash flow. The organic growth with high promoter stake will benefit the share holders. The presence of Tej Trivedi gives assurance as well.
Indag has right ingredient be its infrastructure or incentive to take advantage growth if any. The biggies will not jump into industry though few tyre manufacturers also got into retreading as a forward integration.
Improving financial health indicates enough fire power.
The only reason I have downgraded to moderate is pace of growth, it will grow consistently but not rapidly.
Margin of Safety: Substantial
Price behavior
Indag rubber has little been affected by credit cycle or inflation due to its nature of debt free, limited competition. Market has recognized its fundamental growth though there is a minor time lag in recognition. The speculation growth of last year of 14% is actually came down to speculation loss, the correction from 205 to 150 is 25% which is way above 14%.
Relative Valuation
The price to sales valuation was high last year due to its earnings expansion, with a nine month data of current year even with 25% lesser price , estimated price of 200 looks lucrative.
Price to book got adjusted in tranches as the growth in book value primarily from retained earnings.
As a matter of fact price to earnings against book or sales have been totally inconsistent and un reliable. However the current cash return of 7% is very healthy in Indian scenario.
Risk based absolute PE valuation resulted a buy PE of 13.19 against current range of 11-12. The book value based sticker price has fallen flat due to less capital intensive.
Intrinsic Valuation
As expected Indag enjoys bit of moat, the liquidation value is way below market value and ruled out. The asset protections around 156 Cr again 40% of market value. Even the current earnings power of 255 Cr supports 65% of current market cap. The additional valuation comes from franchise factor of 2.8 which takes Indag to 714 Cr way above the current market value. Question is can we pay this franchise value?
One of reason to support is cheaper access to capital almost zero cost of capital if company wants. This is augmented by low capex requirement, as long as Indag can sell they will make free cash flow and money. Indag as a brand also enjoy reputation as virtually competitors are no match when it comes to quality.
On the negative side growth prospects are not accelerated, even Indag ramp up the capacity growth is going to be moderate paced or slightly better.
The discounted cash flow gives me a margin of safety of 56% which is more or less in line with margin of safety I got in EPV i.e. around 70%.
Special situation: Insiginificant
Multi bagger triggers are not visible at this point of time, not due to company specific but sluggish industry across the years. There is no other special situation at this point.
From short term special situation company is unlikely to take advantage of raw material situation or mark pricing via related party transactions. However the expansion in April 2016 likely to expand the EPS by 25% at least.
Off loading Indag Rubber working papers, please feel free to send me questions. I do have some shares in this company but my purchases are back in 2011, this is 2nd refresh document. The investment workings are based exclusively on publicly available information.
First about competitive advantage
Moat Overview
Excellent growth numbers in Sales, EPS and free cash flow. Book value has been mildly erratic as lots of free cash flows invested to bonds and shares. ROIC has been outstanding.
Free Cash Flow:
Except one case Indag has managed to generate a good amount of free cash flow. In percentage with sales last three years saw numbers above 10%. Also we can see FCF clocked more than 100% of net income in few years. Indicates two things:
Indag is able to generate more cash than earnings indicating low debt and non discretionary expenses, also not much of GAAP adjustments.
Constant free cash flow allows Indag to take more suitable decisions regarding capital allocation.
Return on Invested Capital
It tracked almost similar territory as ROE due to absence of debt.
Net Margins
The margin is in uptrend, now crossed 13%. 
The big competitors are not listed in market; the only player, which was listed, is GRP a bit bigger size with revenue of 340 Cr. The margin has been shrinking.
Return on Equity
Indag has posted a very healthy ROE across the years. The competitor GRP started almost similar fashion except loosing out in last few years.
Return on assets
Extra ordinarily high above 20. This also indicates Indag has been able to squeeze more out of assets. GRP had a good ROA , again lost out during last few years.
Good free cash flow, outstanding ROE and ROA, moderate but increasing profit margin are good indicators of moat.
Can moat be explained if any?
The financials hinted there may be some sort of moat, letâs look at moat component.
A detail exercise attached in WP-CBR1. At four places I could sense there could be a chance of moat:
Superior distribution network via dealers and retreaders, which may be creating a switching cost for non-financial pain.
Again after sales support, training help for retreaders, who may be creating a switching cost for non-financial pain.
Indag is a market leader may be involved in high volume manufacturing. Cost advantages.
Indag have a low degree of operating leverage. Cost advantages.
Longevity of moat
Depth of moat (High, Medium, Low)- Indagâs moat may be coming from switching cost which will not alter the usage pattern of customers. Same case with cost advantage. There is no depth of moat. Low depth of moat.
Width of moat (few, several, many)- the distribution network and after sales support may be required several years to get replicated by competitors. The one with cost advantage without technological advantage may be difficult to get replicated for several years. Hence the width of moat is for several years. This need to be confirmed with superior working capital position, capital efficiency and other similar factors below in different sections.
The Industry View
The market size and sales are on rise year after year. During last 7-8 years I didnât see any downward or cyclical trend in sales. Though firms are profitable competitors profit has gone down in last few years. The industry is fragmented, however in cold process segment Indag is market leader with a lion 65-70% share.
Operating and gross margin are fairly high above 25-30%.
The industry in general not high flying but moderately consistent. ROIC has been healthy for guys out there in retreading.
Driving force behind industry- lower cost of vehicle maintanence
Competition within industry- fierce but unorganized
Macro picture- will continue to grow
Industry trends- radial tyre is new generation tyre with high longevity.Hence retreading cycle will increase.
Cash conversion cycle- debtor and creditors are moderate where as inventory depends on location. If you are in south its more suitable due to rubber plantation.
Cyclical exposure- mild exposure, commercial vehicles are also used for essential goods. Even with economic down turn the maintenance will continue.
Pricing power- teasing
Demand volatility- retreading has lifecycle, less volatility.
Subtitute product-retreading itself is an substitute product, hence one can ignore and buy a new tyre instead.
Industry rivalrly- the competition is based on services , with more dealer network.
Low cost country threat- China.
Reason for failing- not came across a case of failure.
Pricing Power
As the quantitative data were not available related to sales I coudnt check the prices charged by Indag historically. However if Indag raise price for itâs products then customer will either switch to unorganized players or competitors.
But Indag comes with quality, a teaser price customer wont mind to pay as it will save him from frequent maintenance and support.
