Indag Rubber Ltd - Rs 56.00

Established in 1978, Indag Rubber Ltd (IRL) was formed as a joint venture company between Khemka group and Bandag Inc-USA for the manufacture and marketing of pre-cured retreads. Today, it is one of the largest players in tyre retreading business and operates thru franchisee business by offering the technology, specialized equipment, retreading material, technical back up etc to the franchisee. It also sets up captive retreading plants for various state road transport corporations. Retreading is basically a process of bonding a new flap of pre-vulcanized rubber in place of the worn-out flap which increases the tyre life. Retreading can be done either thru conventional hot process or the new advanced precured cold process. Cold process has various advantages, mainly improving the fuel efficiency and increased tyre life & performance in comparison to hot process. Notably, IRL is among the very few, offering the 'genuine' cold process precured retread in India.

IRL has a state of the art manufacturing unit at Bhiwadi, Rajasthan to produce precured tread rubber along with allied items like rubber cement, cushion gum, extrusion gum, envelopes, other accessories and specialized equipment for retreading. Of late it has set up a new plant in Nalagarh, Himachal Pradesh to increase its market share. Presently, company has a capacity to produce nearly 800 tons of pre cured rubber per month. It supplies the precured tread regularly to its more than 100 franchisee outlets, who eventually carry out the retreading operation at their place. The company is concentrating on utilizing the full potential of the existing franchisees and is setting up new franchisees in unrepresented areas so as to have a larger and more efficient network of franchisees. It also has a training center to impart high quality on-the-job training to its license customers. As there are very few organized players in this business, IRL enjoys a good branding and a dominant position especially in northern India. In the recent past, the joint venture between Indian promoters-Khemka’s and foreign promoters-Bandag Inc, USA has been mutually terminated and accordingly Khemka’s have acquired the latter’s stake thereby taking their total holding to 81%.

Due to high prices of tyres, retreading of tyres has become all the more necessary. Tyres retreaded with quality material and retread process give about the same mileage as new tyres, at a much lower cost per mile and are environmental friendly. Not only do they consume two-third less petroleum products, but every retreaded tyre also saves a tyre from going to a landfill. Importantly, retreading is becoming popular in India as well. Moreover due to increase in level of radialization in tyres, increase in share of multi-axle trucks and aggressive road infrastructure development, tyre retreading in the commercial vehicle segment holds huge potential. However the sharp increase in basic raw material prices such as PBR, natural rubber, carbon black and rubber chemicals have put pressure on both – tyre industry as well as retreading business. Despite this IRL is expected to do well in coming years. Financially, company made a smart turnaround in FY07 and continued its strong growth in FY08 as well. It reported 20% growth in top line to Rs 74 cr whereas PAT doubled to Rs 8.30 cr thereby posting an EPS of Rs 16 for the year ending March 2008. Notably, it declared maiden dividend of 20% against that. For Q1FY09 it registered double digit growth and is expected to clock a turnover of Rs 85 cr and PAT of Rs 7.50 cr on a conservative basis. This translates into EPS of Rs 14 on equity of Rs 5.25 cr. That means at current market cap of Rs 29 cr, scrip is trading at a PE ratio of less than 4x times. Investors are recommended to buy at current levels as share price can appreciate 50% in a year’s time.

Click here to download Report (PDF)