Customized Research Report

Indag Rubber Limited

Independent Equity Research

January - 2016

Equentis Wealth Advisory Services (P) Ltd

Registered Office:
712, Raheja Chambers, Nariman Point,
Mumbai – 400021 India

Tel: +91 22 61013800

Email: info@researchandranking.com
 INDAG RUBBER LIMITED

Background and Business

Indag Rubber Limited (Indag) is the second-largest tyre re-treader in the organized cold processing segment (~20-25%
market share) in India. The largest player is the unlisted company Midas which has market share of ~35%.Indag was
incorporated in 1978 as a JV between the Khemka group and Bandag Inc (US). In FY06, the JV with Bandag was
terminated and the Khemka group took over 38.3% shares in the company. Indag then set up a new plant in Nalagarh
(Himachal Pradesh) in FY06 and ramped up capacity from 6,000MT to 13,800MT (75% capacity utilization in FY15)
during FY06-10. It plans to further expand this capacity by 4,200 MTPA to 18,000 MTPA by FY16 end. This brown-
field expansion is expected to cost Rs.70mn which is to be funded through internal accruals.

Management

Indag is owned by the Khemka family with nearly 75% stake held by promoters and their group companies with nil
pledging. Khemka family has business interests in Energy, Mining, Real Estate, Infrastructure, Private Equity, etc. and
has offices in India, U.K. and Russia. Institutional ownership in Indag is low at 0.44%.

Key Drivers to growth

Rationale – 1) The retreading industry in India is currently valued at more than Rs.30bn. It is split almost equally
between organized and unorganized players. The passage of GST would reduce price differential between
organized and unorganized players. This is expected to help organized players like Indaggain greater market share
from the unorganized ones owing to their superior product quality and greater brand recall. 2) The level of retreading
in India is lower than that in other countries. It is ~20% in India against ~100% in the American continent and Europe
and global average of ~70%. Given the advantages that retreading offers with respect to cost saving (in the range of 30-
50% vis-à-vis purchasing a new tyre), we expect penetration of the same to increase to ~40-50% levels over next 3 –
5 years. 3) The Commercial Vehicle (CV) segment, which is prime user of retreaded tyres and also accounts for
~90% of Indag’s sales, has shown some signs of revival after reporting decline for past two fiscals. After decline in
sales of 2% and 20% in FY13 and FY14 respectively, the segment reported marginal de-growth of 3% in FY15 and 6%
in H1FY16. Going ahead, with the expected pick-up in GDP growth rates, we expect CV sales and consequently
retreading business to increase in India, though with a lag effect. 5) The business of retreading is a stable one with
high return ratios and consistent demand. The company would improve its volume growth in the retreading segment
on back of growth in road freight with pick-up in economic activity; increase in organized players’ market share, its
strong distribution network and with its strong branding.

Risk Factors

1. The unorganized segment currently has 60% market share owing to extensive market coverage and price
differential arising from local tax effect. However, Indag has superior brand image and better quality compared
to competitors. Hence, a gradual shift from unorganized to organized segment will benefit Indag over the
longer term.
2. Secondly, going ahead, margins for the company may come under pressure due to ending of the 10-year
excise duty benefit period at its Himachal Pradesh plant in February 2016. However, in line with the industry
trend, if the company is able to pass-on the excise duty outgo to its customers then it may be able to keep its
margins insulated.

2
Key Financial Parameters

Parameter FY10-15 Commentary and Outlook

Revenues - CAGR
EBITDA – CAGR
EBITDA Margin % (Avg.)
Interest + Depreciation - CAGR
PAT – CAGR
PAT Margin % (Avg.)
Dividend Payout (%) (Avg)
D/E (x) - (Avg)
ROCE (%) (Avg)
Asset Turnover (x) (Avg)
16.8% While sales growth for the company was robust during FY10-12 (average more than 40%) in line with the
broader economy, sales growth was tepid during FY13-15 (average less than 4%) due to weakness in
sales of CVs. Given that top-line growth for Indag hinges on growth in CV volumes, we expect top-line
growth for Indag to bounce back over the next 2 - 3 years in line with improving GDP growth.
25.6% Company has been able to ensure robust EBITDA growth due to control over Raw Material (RM)
14.0% expenses which mainly comprise of rubber (more than 50% of RM cost). Consequently, RM as % of sales
has dropped nearly 1,000bps between FY10 and FY15. Company has been able to maintain healthy
EBITDA margins due to control over RM expenses as mentioned above. Consequently, margin has been
on a constant uptrend during the period expanding more than 500bps over FY10-15 (from 12% to 17%).
2.9% Given the near debt-free status and low capex requirement, combined interest and depreciation charges
for Indag have remained low.
23.0% Low interest and depreciation cost and constant tax rate have ensured that PAT growth has almost
10.5% mirrored EBITDA growth.
18.0% Company has been a consistent dividend payer over the years.
0.06 Debt equity ratio has remained low due to near debt free status& funding of capex from internal accruals.
39.6% Company has maintained RoCEat ~40% levels aided by superior asset sweating and EBITDA margins.
2.18 This ratio has average between 1.6xsand 2.7xs during the period under consideration.

Recommendation:

Particulars (Rs. Mn.) FY15 H1FY16 FY16E FY17E FY18E

Net Sales 2,419 1,351 2,709 3,115 3,583
YoY (%) 4.2% 16.0% 12.0% 15.0% 15.0%
Tax as % of PBT 22.5% 33.5% 33.5% 33.5% 33.5%
PAT 326 167 335 393 452
YoY (%) 18.3% 6.4% 12.0% 10.0% 10.0%
PAT Margin (%) 13.5% 12.3% 12.4% 12.6% 12.6%
EPS (Rs.) 12.41 6.35 13.90 15.29 16.82
P/E (xs) w.r.t CMP Rs.172.00 13.86 27.09 12.37 11.25 10.23
Target PE (xs) 15.00 15.00
Intrinsic Value (Rs.) 229 252
Avg FY17E&18E Intr Value 241
(Rs.)
Upside (%) 40%
Note: CMP as on closing of 20th January, 2016.

Basis above explained growth opportunity and Indag’s strong competitive positioning, we forecast EPS to grow at
~11% CAGR over FY15-18E. We forecast base case EPS at ~Rs. 14 in FY16E, ~Rs. 15 in FY17E and ~Rs. 17 in
FY18E.The stock currently trades at ~12xs its FY16E EPS, ~11xs its FY17E EPS and ~10xs itsFY18E EPS.

Indag is set to face adverse effects of expiration of excise duty holiday at its Himachal plant in Feb’2016 and removal
of available rebate of 30% in Income Tax post FY16. While it may be able to pass on the excise duty burden to its
customers, rise in income tax would affect margins. The effect of the same is already visible in its tax rate which has
gone up to 33.5% in H1FY16 vs ~25% in H1FY15 and 22.5% in FY15.Hence, PAT growth would be restricted to 11%
CAGR over FY15-18E vs 23% CAGRover FY10-15. Given these headwinds that Indag is expected to face going
ahead, we arrive at intrinsic value of ~Rs. 240 for the stock valuing its average FY17E&18E EPS at 15xs PE
multiple, which implies no re-rating in its current P/E multiple. This implies potential upside of ~40%.

However, if there is a significant improvement in demand environment,then stock could see multiple re-rating at
20xs its average FY17E&18E EPS, implying intrinsic value of ~Rs. 320 and potential upside of ~90%.

3
Recommendation scale:

INDAG RUBBER – Buy - 4

Potential Upside Range Recommendation Rating Rationale for the Recommendation Mode of Action
over next 12-18 months
Strong Buy 5 Implies very strong and reliable management track record, Fresh buying strongly
> 50%
extremely robust financials & very strong business outlook recommended
Buy 4 Implies strong management track record, robust financials Fresh buying recommended
30% - 50%
and fairly strong business outlook
Hold 3 Decent Management track record, stable (though not very Hold the stock if it is already
20% - 30% strong) business outlook and moderate financials present in your portfolio but do not
initiate fresh buying
Sell 2 Mixed management track record,unstable business outlook May consider selling and replacing
0% - 20%
and stable (though not very strong) financials with a better recommendation
Less than 0% (downside Completely Avoid 1 Mixed management track record, weak business outlook Selling strongly recommended
expected) and poor financials

Key Market Data Table

Close of 20th January, 2016
Bloomberg Code
Last Price, M. Cap, 52w H/L
Shares outstanding, Face Value
Promoter holding (as on 30th September, 2015)
Institutional holding (as on 30th September, 2015)
Marquee Investors (as on 30th September, 2015)
IDR IN
Rs. 172.00/- (BSE) – Rs. 4.69bn/ USD 179mn Rs. 237.00/138.10
26.25 mn , Rs. 2/-
Promoter holding at 74.76% (Nil share pledge). Holding at 74.77% as on 30th September,
2014 and 30th June, 2015.
FII –0.43% (vs 0.93% as on 30th September, 2014 and 0.43% as on 30th June, 2015).
DII – 0.01% (unchanged vs 30th September, 2014 and 30th June, 2015)
None

Indag Rubber Limited - Daily Price Chart for 3 years (BSE)

230

180
Price

130

80

30
Jan-13

Jan-14

Jan-15

Jan-16
Jul-13

Jul-14

Jul-15

Period

4
 DISCLAIMER

Equentis Wealth Advisory Services Private Limited (EWASPL) is registered under the SEBI (Investment Advisers) Regulations,
2013.

“Research & Ranking” is the brand under which the Research Division of EWASPL render’s its Research Services.

General Disclaimers: This Research Report (hereinafter called ‘Report’) is prepared and distributed by EWASPL for information
purposes only. The recommendations, if any, made herein are expression of views and/or opinions and should not be deemed or
construed to be neither advice for the purpose of purchase or sale of any security, derivatives or any other security through
EWASPL nor any solicitation or offering of any investment /trading opportunity on behalf of the issuer(s) of the respective
security(ies) referred to herein. These information / opinions / views are not meant to serve as a professional investment guide
for the readers. No action is solicited based upon the information provided herein. Recipients of this Report should rely on
information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive
at an informed trading/investment decision before executing any trades or making any investments. This Report has been
prepared on the basis of publicly available information, internally developed data and other sources believed by EWASPL to be
reliable. EWASPL or its directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the
accuracy, completeness, adequacy and reliability of such information / opinions / views. While due care has been taken to ensure
that the disclosures and opinions given are fair and reasonable, none of the directors, employees, affiliates or representatives of
EWASPL shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost
profits arising in any way whatsoever from the information / opinions / views contained in this Report.

Risks: Trading and investment in securities are subject to market risks. There are no assurances or guarantees that the
objectives of any of trading / investment in securities will be achieved. The trades/ investments referred to herein may not be
suitable to all categories of traders/investors. The names of securities mentioned herein do not in any manner indicate their
prospects or returns. The value of securities referred to herein may be adversely affected by the performance or otherwise of the
respective issuer companies, changes in the market conditions, micro and macro factors and forces affecting capital markets like
interest rate risk, credit risk, liquidity risk and reinvestment risk. Derivative products may also be affected by various risks
including but not limited to counter party risk, market risk, valuation risk, liquidity risk and other risks. Besides the price of the
underlying asset, volatility, tenor and interest rates may affect the pricing of derivatives.

Disclaimers in respect of jurisdiction: The possession, circulation and/or distribution of this Report may be restricted or
regulated in certain jurisdictions by appropriate laws. No action has been or will be taken by EWASPL in any jurisdiction (other
than India), where any action for such purpose(s) is required. Accordingly, this Report shall not be possessed, circulated and/or
distributed in any such country or jurisdiction unless such action is in compliance with all applicable laws and regulations of such
country or jurisdiction. EWASPL requires such recipient to inform himself about and to observe any restrictions at his own
expense, without any liability to EWASPL. Any dispute arising out of this Report shall be subject to the exclusive jurisdiction of the
Courts in Mumbai (India).

Disclosure of Interest: The Research Analyst(s) who have prepared this Report hereby certify that the views /opinions
expressed in this Report are their personal independent views/opinions in respect of the securities and their respective issuers.
None of EWASPL, Research Analyst(s), or their relatives had any known direct /indirect material conflict of interest including any
long/short position(s) in any specific security on which views/opinions have been made in this Report, during its preparation.
EWASPL, the Research Analyst(s), or their relativesdo not have financial interest in the issuer company(ies) of the said securities
nor have ownership of 1% or more individually or jointly till the date of this Report. EWASPL, the Research Analyst(s), or their
relatives have not received any compensation or other benefits from the said issuer company(ies) in last 12 months in any
respect whatsoever.

Copyright: The copyright in this Report belongs exclusively to EWASPL. This Report shall only be read by those persons to whom
it has been delivered. No reprinting, reproduction, copying, distribution of this Report in any manner whatsoever, in whole or in
part, is permitted without the prior express written consent of EWASPL.

EWASPL’s activities were never suspended by SEBI or any other authority. Further, there does not exist any material adverse
order/judgments/strictures assessed by any regulatory, government or public authority or agency or any law enforcing agency in
last three years. Further, there does not exist any material enquiry of whatsoever nature instituted or pending against EWASPL as
on the date of this Report.

Important These disclaimers, risks and other disclosures must be read in conjunction with the information / opinions / views of
which they form part of.

CIN: U74999MH2015PTC262812; SEBI Registration No.:INA000003874