On The Road To Growth

Despite the fact that the broader markets continue to surge ahead, there are still some fundamentally strong companies that are available at low valuations. We believe that these will soon catch the fancy of the inves-tors. Hence it makes sense to be proactive and catch these value picks early for better returns. We feel that Indag Rubber (IRL), which is engaged in the business of retread tyres, is one such counter which is available at cheap valuations but has mostly been ignored by the investors’ community. We have many reasons for rec-ommending IRL. The first and foremost factor is its strong financial performance for 9MFY10 wherein its topline and bottomline have been better than the whole of FY09.
Secondly, the company has paid dividends in the last two fiscals. Also, in FY09 it announced a final dividend of Rs 2 and in 9MFY10 it announced two interim dividends of 15 per cent each (Rs 1.50 per share) in the quarters of September 2009 and December 2009. Further, it is also pitching in for expansion with the management’s focus now being on exports. Its debt-free status is an added advantage here. On the valuation front, the scrip is placed well. While its CMP of Rs 86 discounts its trailing four quarter earnings by 3.90x (EPS of Rs 21.93), its EV/EBITDA is only 3.34x. Our recommendation is that investors should buy the scrip at its current levels with a target price of Rs 110 in the next one year.
IRL manufactures pre-cured tread rubber (PTR), ungalvanized rubber strip gum, universal spray cement and tyre envelops.  But the main source of revenue is PTR. Currently the company has a production capacity of 8,950 MTPA of PTR, 1,450 MTPA of repair cement and 1,150 MTPA of rubber strip gum. Although the capacity utilisation was a bit lower in FY09, the company is quite buoyant about the increase in demand from the export markets. Further, the domestic demand is also expected to increase as the trade increases along with the improving economy. Demand is also expected to improve on account of rising rubber prices resulting in increased prices of tyres. The reason is that as the retreading is done on old tyres, the demand for retreading increases as the new tyres get costlier. The company is therefore expanding its capacity of PTR to 18,000 MTPA.
Minor capacity addition is also expected for gum and spray cement. The details regarding capex amount and time of completion are unavailable. Our emails sent to the management remained unanswered. As regards its financial performance, it has been very good in 9MFY10 wherein it has managed to cross the topline as well as bottomline of FY09 as a whole. In 9MFY09 it posted a topline of Rs 79.40 crore and bottomline of Rs 8.36 crore as compared to Rs 57.65 core and Rs 4.47 crore respectively for 9MFY09. On the valuation front, the scrip is trading at 3.90x of its trailing four quarter earnings with its EV/EBITDA at 3.34x. Also, its December interim dividend has not yet been paid and hence anyone buying now would get Rs 1.50 per share. Considering all these factors, we recommend that investors should buy the scrip at its current level with a target price of Rs 110 in the next one year.