13 June 2011
Goodyear India Limited
“Deep Value Buy”
Initiating Coverage Goodyear India Ltd.
Recommendation BUY Snapshot
CMP (Rs.) Rs. 298 Goodyear India Limited (Goodyear) has managed its margins
Sector Auto-ancillary relatively well as compared to its competitors in case of rising
raw material prices, natural rubber. The company has one of the
Stock Details
strongest Balance Sheets in the sector.
BSE Code 500168
Bloomberg Code GDYR IN Investment Rationale
Market Cap (Rs. cr) 687 Strong ability to maintain margins: Goodyear has maintained
Free Float (%) 16.5 the margins relatively well as compared to its peers, in case
52- wk HI/Lo (Rs) 340/203 of rising raw material prices also. We expect the margins to
Avg. Volume BSE (Monthly) 23,914 improve going forward considering the fact that raw material
Face Value (Rs) 10.0 prices have shown a declining trend since the beginning of
this calendar year.
Dividend (CY 10) 70%
Shares o/s (Crs) 2.30 Excellent Balance Sheet: Goodyear has one of the strongest
Relative Performance 1Mth 6Mth 1Yr Balance Sheets in the tyre sector. The net cash and cash
Goodyear(%) 2.1 -5.2 2.1
equivalent of the company stood at Rs.217.9 crore,
translating into a cash per share of Rs.94.4. This figure is
NIFTY(%) 5.4 1.2 8.2 equivalent to more than 30% of the present price of the
company.
Sale of land to improve cash position further: The company
has announced the sale of a portion of its land at
Ballabhgarh. This should improve the cash position further.
High probability of a special dividend: Goodyear has
announced a dividend of Rs.7 per share for CY’10. On the
back of improving cash flows, we do not rule out the
possibility of a one-time special dividend from the company.
Valuation & Recommendation
Shareholding Pattern as of 31 March2011 We expect Goodyear to post a net profit of Rs.85 crore on net
Promoters Holding 74% sales of Rs.1450.5 crore in CY’11E on the back of declining raw
material prices. This translates into an EPS of Rs.37 for CY’11E.
Institutional (Incl. FII) 6.4%
We expect the cash in the books of the company to be around
Corporate Bodies 3.1% Rs.283 crore, translating into a figure of Rs.122.7 per share
Public & others 16.5% (~41.2% of the present price). Considering all these positives, we
expect the share price of the company to be Rs.400 over the
Vishal Jajoo – Sr. Research Analyst next 9 to 12 months.
(+91 22 3926-8136)
Email id: vishal.jajoo@nirmalbang.com
Year Net Sales Growth EBITDA Margin PAT Margin % EPS PE P/BV EV/EBITDA
(Rs cr) (%) (Rs cr) (%) (Rs cr) (%) (Rs) (x) (x) (x)
CY 08 919.1 3.3% 65.9 7.2% 32.2 3.5% 14.0 21.4 4.3 6.1
CY 09 1015.1 10.4% 127.4 12.6% 73.1 7.2% 31.8 9.4 3.2 3.2
CY 10 1297.2 27.8% 129.8 10.0% 74.8 5.8% 32.5 9.2 2.5 3.1
CY 11E 1450.5 11.8% 142.5 9.8% 85.0 5.9% 37.0 8.1 2.0 2.8
(Source: Company, Nirmal Bang Research)
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Initiating Coverage Goodyear India Ltd.
INVESTMENT RATIONALE
Strong ability to maintain margins, further improvement expected going forward
Goodyear India Limited’s (Goodyear) performance for CY’10 is a testimony of the fact that
the company has the ability of maintaining margins even in the toughest of times. The
price of natural rubber which contributes than more than 50% to the total expenditure of
the company registered an increase of more than 55% during the calendar year
2010.(Source: rubberboard.org.in)
Raw material price increase was an area of concern which would have impacted the
business but the company remained committed to bringing in new processes and
technological improvement to keep the impact to the minimal, thus maintaining the
earnings at a healthy level.
However, the company managed to leverage it’s strong brand and thereby, managed to
restrict the impact on the margins to just 320 bps at 9% in CY’10 compared to 12.2%
registered during CY’09.
Margins set to improve on the back of falling raw material prices
The price of natural rubber has corrected by almost 10% from it’s highs in 2011 to the
present price of Rs.226 per kg. In the present financial year, the price has corrected 3% to
the present levels of Rs.220 per kg. We expect significant improvement in the operating
margins of Goodyear India on the back of falling raw material prices.
Excellent Balance Sheet
The company is debt-free with net cash and cash equivalent of Rs.217.9 crore in the
Balance Sheet on December 31, 2010. This translates into cash per share of Rs.94.4,
Cash & Cash
equivalent totaling to which is equivalent of 31.8% of the present market-cap of the company.
31.8% of the market-
Goodyear is the only listed tyre manufacturer in the country having a debt-free, cash –rich
cap of the company
Balance Sheet.
Sale of land should lead to further improvement in cash position
During Q1CY’11, the Board of Goodyear has approved the sale of a portion of land at
Ballabhgarh for an undisclosed amount. We expect the sale proceeds to be anywhere
between Rs.100-Rs.150 crore. This coupled with the profit for CY’11E should significantly
improve the cash in the books of the company at the end of the present calendar year. We
expect the cash in the books of the company at the end of the year at Rs.283 crore,
translating into a figure of Rs.123 per share(~41% of the present price) without considering
the sale proceeds of the land. After considering the same, we expect the cash in the books
to be around Rs.363 crore, translating into a cash per share of Rs.157.
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Initiating Coverage Goodyear India Ltd.
High probability of a special dividend
The company has announced a dividend of Rs.7 per share for CY’10. We expect the
dividend pay-out to improve significantly in this calendar year on the back of improved
profitability due to the prevailing stability in rubber prices. We do not rule out the
possibility of a special one-time dividend on the back of gains accruing to the company by
disposing off a portion of its land at Ballabhgarh. Usually, MNC companies have a track
record of high dividend pay-out ratios. In the past, companies like Glaxosmithkline Pharma
have announced special dividends out of the proceeds received from the sale of the
property at Worli.
Scope for extra-ordinary gains on the back of any delisting offer
Goodyear India is a 74% subsidiary of Ohio-based Goodyear Tire and Rubber, USA. The
company came out with a delisting proposal in the year 2010. The price discovered through
the book building process was Rs.245 per share. However, the buyback process failed on
the back of poor response from the shareholders.
It is to be noted that for any buyback process to be successful, higher of the following two
should happen:
1. Minimum 50% of the outstanding shares for which the offer has been made should be
tendered – The promoter holding in the company is 74%, therefore, for delisting
purpose the offer should be made for the balance 26%. Half of this figure comes to
13%.
Or
2. The holding of the parent company should increase beyond 90% - This implies the
shares tendered through the book building route should constitue 16% of the total
equity considering the promoter holding of 74%, taking the total figure beyond the
required 90% mark.
The buyback offer failed during Q1CY’10 when the cumulative holding of the the
company’s share in strong hands viz. institutions, corporate bodies and FIIs stood at 6.9%
whereas the public shareholding stood at 19.2%. As per the above two criterion, the
requirement for the buyback to be successful, shareholders should tender 16% of the
total equity of the company, which in this case is marginally more than 80% of the total
number of shares held by the public.
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Initiating Coverage Goodyear India Ltd.
As per the latest shareholding pattern, the public holding in the company has tilted in
favour of institutions with 9.6%. With an almost 40% increase in shares being held by the
institutions, we feel that another buyback offer, if any, should not be successful unless
and until the company raises the de-listing price substantially.
Shareholding pattern (%) Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11
Public holding 19.2 18.0 17.5 15.9 16.1 16.5
Institutions, Corporates & FIIs 6.9 7.9 8.5 10.1 9.9 9.6
The shareholding pattern of the company is skewed more in favour of shares held in
physical format. Only 21.6% of the shares are in demat form as on December 31, 2010.
The promoter holding in the company stands at 74%.
The parent company is cash-rich with net cash and cash equivalent totaling to USD2005
million as on December 31, 2010. Moreover, recently the company sold off its wires
business for a consideration of USD50 million to Hyosung of USD50 million. Considering
the cash in the Balance Sheet of the parent company, another delisting offer at a higher
price cannot be ruled out. However, even in the absence of any delisting offer, the
fundamentals of the company are strong enough to command premium valuations.
Asset-rich company available at significant discount to the replacement cost
The company with an installed capacity of 12.6 lakh tyres is available at less than Rs.715
crore. This figure includes cash and cash equivalent totaling to Rs.283 crore which is
equivalent to almost 41% of the present market-cap of the company. This figure is
relatively much cheaper compared to peers. JK Tyres has recently completed the
expansion of its installed capacity by 4 lakh tyres to 8 lakh tyres with an expenditure of
Rs.315 crore.
In case of Goodyear, the company with an installed capacity of 12.6 lakh tyres would be
available at an enterprise value of less than Rs.350 crore. This substantiates the fact tha
the company is available at significant discount compared to its actual replacement cost.
Play on the rural and the automotive growth story of the country
The company derives a significant portion of its revenues from tyres for the farm
equipment. Goodyear caters to all leading tractor manufacturers in the country.
Considering the buoyant rural income, strong cashflows on the back of improvement in
MSP(Minimum Support Price) and prediction of above normal monsoons by the Indian
Meterological Department(IMD) augurs well for the rural economy.
Goodyear is the pioneer in launching tubeless tyres in the country. The company has also
launched tyres for the mid-size car segment in the country. A significant number of large
MNC players setting up units to roll out small cars augurs well for the tyre industry as well
as Goodyear. A large number of cars including names like Santro Xing, Hyundai i10, i20,
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Initiating Coverage Goodyear India Ltd.
Chevrolet Aveo U-VA, Maruti Wagon R VXi, Estilo VXi, Swift, SX4, Ford Fiesta, Figo, Ikon,
Honda Civic, Octavia, Toyota Corolla, etc are fitted with Goodyear Tyres. Even PSU majors
like Andrew Yule and others prefer Goodyear Tyres over others for their use.
Retailing initiative of the company to improve performance further
The company has started the retail initiative with the first-of-its-kind stores being set up
with Bharat Petroleum Corporation Limited(BPCL). Two of such stores are under
construction and are being prepared for launch soon at Chandigarh and Jaipur.
The margins of the company are expected to improve on the back of these iniatives. We
expect the full impact of the same to be witnessed from CY’12E onwards.
In 2010, Goodyear India had Wheelcare outlets in 20 cities. Expanding its presence and
reaching out to all its consumers, Goodyear outlets are now present in 36 cities. Some of
the cities added include Tirupati, Combatore, Hosur, Satara, Navi Mumbai, Surat, Sirsa,
Korba and Chandigarh. With convenient locations nationwide, consumers are expected to
find great deals on tyres and premium services, with highly trained staff ready to give the
right information to help them make the best purchase for their tyres.
Significant gains accruing to the company on the back of improvement in rural
cashflows
The company derives a significant portion of its revenues from tyres for the farm
equipment. Goodyear caters to all leading tractor manufacturers in the country.
Considering the buoyant rural income, strong cashflows on the back of improvement in
MSP(Minimum Support Price) and prediction of above normal monsoons by the Indian
Meterological Department(IMD) augurs well for the rural economy.
New launches during the year were “Vajra Super” and also ‘Packaged Tubes’ for farm
range of tyres. These new products, supported by the efficient supply chain network,
helped the company increase the customer base and market presence.
The company has introduced the Vajra range of farm products comprising front farm and
smaller sizes in rear farm tyres to cope with changing requirements of the farm sector.
The Vajra Super brand of farm tyres was designed to solve the Indian customer’s
problems of hard soil and sharp thorns, without sacrificing the tyre’s performance or
mileage.
The company has successfully developed the manufacturing capabilities for Radial Farm
Tyres which will be launched in 2011. Goodyear would be amongst the first in the industry
to drive relevant innovations across the product portfolio which ensures the continued
business success.
Goodyear has increased the addition to fixed assets amounting to Rs.34.2 crore against
Rs.18 crore in the previous year. The capital expenditure incurred amounted to Rs.57.3
crore.
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Initiating Coverage Goodyear India Ltd.
Awards and accolades from automobile manufacturers
The company received several awards and accolades from the most elite customers such
as Mahindra & Mahindra, Maruti Suzuki, Toyota, M&M Swaraj and International Tractors
Limited. Goodyear India has been awarded the “Superbrand” status for 2010-11.
In addition, the company was felicitated with the prestigious “Farm Proprietary Award” in
July 2010, by Mahindra and Mahindra, the largest tractor manufacturer across the globe.
COMPANY BACKGROUND
The parent company in the USA along with the NASA were awarded with the R&D 100
Award for an airless tyre capable of transporting large, long-range vehicles across the
surface of celestial bodies such as the Moon or Mars. The company has a long history of
113 years. The company manufacturers automotive bias tyres viz. Farm tyres and
Medium Commercial Truck Tyres at its Ballabhgarh plant and also trades in “Goodyear”
branded tyres (including Radial passenger and Off-the-road Bias Tyres) manufactured by
Goodyear South Asia Tyres Private Limited (GSATPL), Aurangabad.
The Aurangabad facility manufactures tyres for passenger cars, while the Ballabgarh unit
develops farm tyres. Besides manufacturing tyres, the company also distributes and sells
tyres, including tyres for cars, trucks, buses, motorcycles, airplanes, earthmoving and
mining equipment, industrial and agricultural equipment, among others.
The company mainly focusses on the tractors and passenger vehicles segment.
RISKS & CONCERNS
Significant slowdown in the automobile segment
Since the company’s fortunes are correlated to the automobile sector, any significant
slowdown in the automobile segment can be detrimental for the company’s performance.
Spike in price of natural rubber
Any signficiant spike in price of rubber, if not passed on to the end-user may negatively
impact the financial performance of the company.
VALUATION AND RECOMMENDATION
Goodyear registered net sales of Rs.1297.2 crore in CY’10, registering an increase of
27.8% y-o-y. EBITDA for the year stood at Rs.116.7 crore compared to Rs.124.2 crore.
The fall in the EBITDA margins was mainly attributable to the hike in raw-material prices.
The net profit of the company for the year stood at Rs.74.8 crore compared to Rs.73.09
crore during CY’10.
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Initiating Coverage Goodyear India Ltd.
The company has posted net sales of Rs.335.6 crore during Q1CY’11 compared to Rs.289.2
crore during the same quarter last year, registering an increase of 16.1%. The company
posted an EBITDA of Rs.24.4 crore compared to Rs.24.1 crore during the same quarter last
year. The net profit of the company registered a marginal decline of 2% to Rs.13.8 crore.
We expect the company to register net sales of Rs.1450.5 crore in CY’11E, an increase of
11.8% y-o-y. The net profit of the company should be around Rs.85 crore for CY’11E,
translating into an EPS of Rs.37. Considering the strong Balance Sheet, improvement in
earnings on the back of stability in rubber prices, we expect Goodyear’s share price to
reach Rs.400 over the next 9 to 12 months.
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Initiating Coverage Goodyear India Ltd.
P&L (Rs. Cr) CY08 CY09 CY10 CY11E Balance Sheet (Rs Cr) CY08 CY09 CY10 CY11E
Net Sales 919.1 1015.1 1297.2 1450.5 Share Capital 23.1 23.1 23.1 23.1
% change 3.3% 10.4% 27.8% 11.8% Reserves & Surplus 137.7 191.8 247.7 314.2
Other Op Income 3.3 1.6 4.1 4.2 Minority 0.0 0.0 0.0 0.0
EBITDA 65.9 127.4 129.8 142.5 Eq app money 0.0 0.0 0.0 0.0
EBITDA margin 7.2% 12.6% 10.0% 9.8% Net Worth 160.8 214.8 270.8 337.3
Depn & Amort 11.2 12.6 15.3 20.5 Total Loans 0.0 0.0 0.0 0.0
Operating income 54.7 114.8 114.5 122.0 Total Liabilities 160.8 214.8 270.8 337.3
Interest 2.5 3.4 3.6 4.2 Net Fixed Assets 115.2 120.3 138.5 198.0
Other Income 0.2 3.2 13.1 9.3 Capital WIP 12.5 36.3 59.5 31.3
PBT 52.3 111.4 110.9 127.1 Investments 0.0 0.0 0.0 0.0
Tax 20.1 38.3 36.1 42.1 Cash & Bank 55.2 158.8 217.9 283.0
EO 0.0 0.0 0.0 0.0 Debtors & Other CA 184.8 166.7 177.2 188.5
PAT 32.2 73.1 74.8 85.0 CA 240.0 325.5 395.1 471.5
Sh o/s - Diluted 2.3 2.3 2.3 2.3 CL & P 207.0 267.3 322.3 363.5
Adj EPS 14.0 31.8 32.5 37.0 Net CA 33.1 58.2 72.8 108.0
Total Assets 160.8 214.8 270.8 337.3
Quarterly Jun.10 Sep.10 Dec.10 Mar.11 Cash Flow (Rs. Cr) CY08 CY09 CY10 CY11E
Revenue 328.8 339.8 339.4 335.6 Operating Cash Flow 52.3 111.4 110.9 127.1
EBITDA 33.5 33.2 37.8 26.1 Adjustments 8.2 19.4 13.7 12.5
Dep & Amorz 3.7 4.0 4.1 4.3 Change in WC -13.8 52.1 57.1 76.4
Op Income 29.8 29.2 33.7 21.8 Tax -16.7 -38.0 -36.1 -42.1
Interest 0.9 0.8 1.2 0.9 CF from Operation 30.0 144.9 145.6 174.0
Other Inc. 1.9 1.7 8.5 1.8 Investing Activities
PBT 28.9 28.5 32.5 20.9 Capex -22.4 -23.7 -70.6 -88.9
Tax 9.6 9.5 10.0 7.2 Oth Inc & Investments 1.5 1.6 5.7 1.5
MI & EO 0.0 0.0 0.0 0.0 CF from Investing -21.0 -22.1 -64.9 -87.4
PAT 19.3 19.0 22.5 13.8 Financing
EPS (Rs.) 8.4 8.2 9.8 6.0 Dividend paid -15.9 -15.9 -18.5 -18.5
Performance Ratio CY08 CY09 CY10 CY11E Share Capital 0.0 0.0 0.0 0.0
EBITDA margin (%) 7.2% 12.6% 10.0% 9.8% Loans & Others -2.5 -3.3 -3.0 -3.0
EBIT margin (%) 6.0% 11.3% 8.8% 8.4% CF from Financing -18.4 -19.2 -21.4 -21.5
PAT margin (%) 3.5% 7.2% 5.8% 5.9% Net Chg. in Cash 9.4 -103.6 -59.2 -65.1
ROE (%) 20.0% 34.0% 27.6% 25.2% Cash at beginning 64.6 55.2 158.8 217.9
Cash at end 55.2 158.8 217.9 283.0
Valuation Ratio CY08 CY09 CY10 CY11E Per Share Data CY08 CY09 CY10 CY11E
Price Earnings (x) 21.4 9.4 9.2 8.1 Adj EPS 14.0 31.8 32.5 37.0
Price/BV (x) 4.3 3.2 2.5 2.0 BV per share 69.7 93.1 117.4 146.2
EV/EBITDA(x) 6.1 3.2 3.1 2.8 Dividend per share 10.0 10.0 12.0 8.0
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Initiating Coverage Goodyear India Ltd.
Note
Disclaimer
This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). The
information, analysis, and estimates contained herein are based on Nirmal Bang Research assessment and have
been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient
only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only.
Nirmal Bang Research, its directors, officers or employees shall not in, anyway be responsible for the contents
stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information,
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