Expectation of normal monsoon to energize stagnant tractor demand: Goodyear
India (GIL) is a leader in the farm tyre segment in India with it having strong tieups
with OEMs as well as a dominant presence in the replacement market. Farm
tyres account for ~50% of the company’s overall revenues; however, the segment
has been under pressure owing to poor monsoons and erratic rains in the past
two years which has impacted tractor demand during the period. This has not
only hurt OEM demand but also impacted the replacement market. Given that
tractor sales have strong correlation with monsoons, the expectation of a normal
monsoon this year should translate into higher tractor sales and resultantly higher
demand for tractor tyres. GIL being a market leader in tractor tyres segment should
stand to benefit on this account.
Expansion drive to lead to recovery in top-line: GIL has laid out plans to
significantly grow its presence in the passenger vehicle (PV) segment in India over
the next five years. The company aspires to be one of the top players in the mid to
premium and SUV sub-segments of PVs. It is also evaluating an entry into newer
segments; in order to reach its goal, the company is weighing organic as well as inorganic
growth options. We believe that this increased focus on growing its presence in the PV
segment and entry into newer segments will provide additional boost to the revenues.
Strong balance sheet with high RoIC: GIL is a debt free-cash rich company with
RoIC estimated at ~84% for FY2018. The company’s cash and equivalents are
Rs334cr for FY2016, which amount to ~28% of the current market cap. More
importantly, GIL is one of the cheapest MNC stocks available to invest in, in the
similar market cap range.
Quarterly performance: For 5QFY2016, GIL’s top-line grew by 7.3% yoy to
Rs295cr and the EBITDA margin stood more or less stable on a yoy basis at 9.3%
(v/s 9.6% in the same quarter of the previous year). The margins witnessed a mild
compression despite of a 97bp yoy decline in raw material cost/sales as other
expenses/sales expanded by 128bp yoy. Factoring this, the EBITDA grew by 3.5%
yoy to Rs27cr and the bottom-line remained flat at Rs16cr.
Outlook and valuation: On an adjusted basis (for financial year end March), we
expect the top-line to post a CAGR of 7.5% over FY2016-18E to Rs1,704cr mainly
on account of rebound in tractor tyre volumes. We have also considered higher
raw material costs and factored in a rubber price of ~Rs130/kg for FY2017E and
~Rs140/kg for FY2018E. As a result, the EBITDA margin is expected to be at
10.2% in FY2018E. Consequently, the net profit is estimated to be at Rs121cr in
FY2018E. At the current market price, the stock is trading at a PE of 9.8x its
FY2018E earnings. We maintain our Buy rating on the stock and assign a target
price of Rs631 based on a target PE of 12.0x for FY2018E.

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