my take on indag
INDAG RUBBER
About
Indag Rubber is engaged in the manufacturing and selling of Precured Tread Rubber and allied products.
In September 2020, the company announced the disinvestment of a 100% stake in Samyama Jyothi Solar Energy. The management declared that they want to remain focused on the core business of manufacturing Precured Tread Rubber.
The company pioneered the cold retreading technology in India.
The products
Read the marked circles
The retreaded tire’s life is 75-80% of a new tire on average, it can also be 100% if used under optimal conditions.
The customers are truck fleet owners, who own several trucks and are in the business of logistics, transport, supplying any and all types of goods among other things.
The customer reviews are impressive.
the key competitors to Indag in the retreading industry.
Midas Treads,
Vamshi Rubber,
Elgi Rubber International,
MRF Ltd and
Jk tires
Approximately half the total market is organized, and Indag has a 20 to 25% market share within the organized sector.
Have a loyalty program consisting of around 3 thousand retreaders.
Have a tie-up with Continental and Delhivery, for retreading their tires and providing other services.
A few years back (2016-17) the ROCE was around 30%, this was due to excise duty benefits, some other tax benefits, and lastly cheaper raw materials.
The raw materials are natural rubber, synthetic rubber, and carbon black.The
company can pass on raw material costs.
The raw material is purchased on a spot basis.
Triggers
Operating costs for fleet owners have increased by 30% to 60% due to higher fuel costs, inflation, and some other reasons. They will be looking to save costs wherever they can, this is where Indag comes in with their retreading products to help them save 70-80% on tires.
The cost for a new tire is 25-30 thousand, whereas the cost for a retreaded tire is 5-6 thousand.
To benefit from electric vehicle penetration, the company has a JV (Sun Mobility EV Infra), involved in the business of swapping stations and smart batteries.
While IC engines will become redundant over time, tires will not.
Hence there will be no impact on Indag caused by the transition to EV.
The organized retreading industry is expected to grow due to
- increasing demand for sustainable and cost-effective tires,
- expansion of the logistics industry,
- rising freight demand combined with improvements in road infrastructure resulting in faster movement of goods.
- Lastly, as commercial vehicle sales continue to recover, the market size is poised to expand in the next few years, creating strong growth prospects in the medium to long term.
The opportunities and things that will help INDAG.
Retreading is easier and more efficiently done on tires that are good quality and are used optimally, as the quality of roads is getting better, the damage to tires will be reduced significantly and thus retreading can be done more optimally and easily.
Looking at new products and chemistries which even exceed the life of new tires.
Radial tires are a type of tire that is structurally stronger and support more retreads.
The number of these tires being used is increasing and can therefore benefit Indag.
Tied up with a company called E-FLEET to collect data on how much money in total is retreading saving for its users. Data for 3500 tires were collected last year. Aiming to track data of 10 thousand tires this year.
This can help them in educating people more about retreading and its benefits, which would help them gain customers in the end.
Also provides consulting services, as retreading is a very complex process. This is an added benefit for the customers which would help Indag gain more customers. Only retreading company to provide both product and service.
The company has till now grown without any marketing, the plan is to increase spending in this area.
Out of the total 8 lakhs retreaded tires, 4 lahks were done by unorganized players. A lot of room is available to grow by taking over unorganized market share.
Cash transaction reduction is what will increase market share for organized players. The smaller fleet owners (lesser number of trucks) prefer the unorganized retreaders, as they are cheaper and ready to take cash. As these small fleet owners get most payments in cash they preferred to also do their payments in cash and therefore went for unorganized retreaders. But after demonetization, these transactions have reduced, and several other policies have been brought in which should help further. Now these people have no option but to do business with branded players, who also have a better quality and longer life cycle than an unorganized seller.
Indag has a total capacity of 18 thousand tons p.a., but the capacity currently being utilized is around 10-12 thousand tons p.a. Indicating that there can be operating leverage in the future.
As capacity utilization goes up the ROCE and margins should go up.
Aims to get 11-12% EBITDA margins, as volumes increase the efficiencies will increase, leading to higher cost savings.
The Exports are currently at an infant stage, expected to grow.
Financials
Q4FY23 revenues increased by 45% from ₹46Cr in Q4FY22 to ₹67 Cr, while their FY23 revenues reached ₹252Cr, up by 46% YoY from ₹173 Cr in FY22. Their growth during the year was largely driven by an increase in volumes.
The gross profit margin was close to 39% in FY2021, which has come down to 30% now.
Ebitda margins have increased from 4% in FY22 to 8% in FY23.
Pat margins have increased from 1.6% to 5.2% from FY21 to FY23.
Lease liabilities of 6cr suddenly hit the balance sheet in FY23.
Trade payables have significantly increased (indicating supply-side dominance?).
An interesting thing to note is that the 20 crore cwip (their current netblock is a bit higher than 20cr) in 2021 was used to buy an investment property, which is leased for 9 and a half years to an MRO center.
Now we don’t know whether it is leased to a third party or a part of their business entity.
But why would a business involved in tire retreading try to earn money through leasing?
Does the management not expect sufficient demand?
They could have invested this money to double their fixed assets and therefore resulting in the doubling of the financials. But instead bought land, maybe for future expansion? A big question.
The operating cash flows, although increased in 2023 compared to last year, have halved compared to 2021. This increase was majorly due to better working capital and higher noncash items.
Consistent dividend payout.
They had a working capital days target of, reducing it from 108 to 90 days and they brought it down to 80 days this year. The next target is 70-75 days.
Another interesting thing is that Indag didn’t grow from 2012 to 2022, instead, it degrew both topline and net profits. But suddenly the sales increased in 2023 (a bit higher than that of 2012) but the margins are still low at close to 6%.
What needs to be seen is whether they can sustain the growth they showed in 2023, or was it just a one-off.
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