Indag Rubber (IRL) to benefit from recovery in commercial vehicle industry: IRL
manufactures pre-cured tread rubber and ~90% of its revenue comes from the
commercial vehicle (CV) industry. The company would be a beneficiary of
improving CV OEM sales although retreading revenues accrue with a lag of 5-6
month of new vehicle sales; retreading of new tyres is undertaken after 50,000km
of the vehicle’s running, which typically happens in six months.
During FY2013 and FY2014, the CV industry reported disappointing volumes
owing to slow down in GDP growth and commercial activities which is also
reflected in company’s performance (de-growth of ~1% in FY2014). In
9MFY2015, medium and heavy commercial vehicles (MHCVs) volumes have
witnessed a recovery; also, there has been a recovery in light commercial vehicle
(LCV) volumes with they showing relatively lower de-growth in 9MFY2015
compared to FY2014. This has been partly reflected in IRL’s 3QFY2015 revenues
and further benefits would be visible hereon given the improving economic cycle. We
expect growth momentum to continue in the CV segment and expect ~10% CAGR in
the segment over FY2014-17E on back of about 8% volume CAGR in the segment.
Lower penetration level to drive growth: Penetration level of retreading is lower in
India as compared to other developed regions like USA, Europe etc. In India, the
penetration level of retreading is at ~40% compared to 100% in USA and ~80%
in Europe as stated by the company. We believe that going forward, penetration
of retreading would increase on back of growth in road freight with improvement
in economic activity, improving road infrastructure, and growing radialisation;
demand for retreading will rise as new radial tryes are expensive and retreading
would prove to be a cheaper alternative towards increasing the life of the tyres.
Outlook and Valuation: We expect IRL to report a net sales CAGR of ~10% over
FY2014-17E to ~`311cr and net profit CAGR of ~11% over the same period to
Rs37cr. At the current market price of Rs897, the stock trades at a PE of 14.9x and
12.7x its FY2016E and FY2017E EPS of Rs60.1 and Rs70.8, respectively. We initiate
coverage on the stock with an Accumulate recommendation and target price of Rs992,
based on 14x FY2017E EPS, indicating an upside of ~11% from the current levels.

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