Stock Pick From The Auto Ancillaries Sector

HERE’S WHY:

• Aggressive expansion plans with a capital outlay of Rs 850 crore
• Expansion into international markets 
• Entry into premium segments to improve profitability

Govind Rubber (GRL) is part of the Siyaram Poddar Group which consists of companies like Siyaram and Balkrishna Industries. Its primary operations comprise the manufacturing of tubes and tyres for two and three-wheeler vehicles. The company has now outlined an aggressive plan for expansion, execution of which has already begun and is likely to help the company to scale new heights.

The company has planned a capital expenditure of up to Rs 850 crore. Of this amount, Rs 750 crore would be invested in a Greenfield project at Dahej, Gujarat. This plant will have a capacity of 225 tonnes per day and is expected to start production by the end of 2014 or the beginning of 2015. It is also expanding its existing capacity at its production plant in Ludhiana, Punjab where it produces three million units of tyres and 3.6 million units of tubes per annum.

In line with the expansion plan, GRL acquired an Indian tyre firm called Mewat Tire & Rubber Company in the previous year. Mewat is present in bias-ply agricultural, speciality and off-the-road tyres. GRL would be upgrading its plant at Alwar, Rajasthan into radial tyres and spending Rs 100 crore in the first phase of modernisation. With this acquisition, it would expand into premium categories and command further premium with the fast-growing trend of radialisation.

It recently entered into a joint venture with a local partner for the manufacturing of highly specialised rubber by setting up a plant at Busan, South Korea. While the cost of this project was approximately Rs 11 crore, GRL expects revenues worth Rs 150 crore from this project in the next two years. It would cater to the markets of Korea, Indonesia, Vietnam, China and India through this project.

To work on expanding its presence in the international markets, GRL has set up an office and warehousing facilities through its wholly-owned subsidiary in the Netherlands, GRL BV, and will market its full range of tyres and tubes in Europe through this.

In terms of revenues, GRL’s performance has been robust over the years. From 2008 to 2012, it has averaged revenue growth of almost 10 per cent year on year. Its revenues for FY12 reached Rs 355 crore. With this aggressive expansion plan in place, the topline has only increased to grow at a faster rate over the next two years.

This will positively impact the company’s operational margins to a large extent. Moreover, the company will benefit on account of scale and the stabilisation of rubber prices at levels that are more than 20 per cent lower as compared to the previous year. All these factors are expected to positively impact the company while interest payments weigh on the company’s financials.

With this plan in action, GRL is likely to see a boost in its topline and profitability and hence seems like a good investment at the current levels with a time horizon of two years.