Have a GOODYEAR!!!
The story so far ………..
Goodyear India is one of the largest tire makers in India with a significant presence in the PV, farm equipment and CV segments. Goodyear is one of the major tire suppliers in both OEM as well as replacement markets since the inception of the Indian subsidiary of the US based parent Goodyear Tire and Rubber Company. Among the PV segment, the company is a vendor to the likes of Tata Motors, Nissan, Renault, Maruti Suzuki and M&M. The company has strongest presence in farm equipment segment with one of the highest market share there and supplies to all the major tractor manufacturers in India. With its strong balance sheet, the company is staged to benefit from the improving auto OEM as well as replacement tire demand.
The story ahead ………..
The auto industry is already showing signs of recovery; particularly in the PV and CV industries, with the advent of stable government, improvement in consumer sentiments and expectations of better prospects for the sector in terms of new launches and economic development going forward. This will definitely culminate into higher demand for tires wherein Goodyear stands a great chance to increase its topline growth and profitability given its anchored position in the Indian tire industry.
We all are aware that India is an agri economy and FY14 was not so strong year for the farm equipment sector. Though monsoon was just good this year, we are expecting the rabi crop to be better, thus helping the demand for tractors to improve. At the same time, non-farm use of tractors is also on an up-move due to labor shortage. This in FY 16 will also lead to higher tractor demand. Goodyear being the market leader in farm equipment tire segment will be able to fetch the maximum benefit out of this. As excise duty sops are rolled back now, the PV demand which will be hit in the short term, will start recovering with the new launches and economic stability. Modi government’s emphasis on starting up stuck up infra projects will improve CV demand thus fuelling CV tyre demand as well.
The company has a strong and enviable margin profile within the tyre sector with CY13 operating margins growing more than 250 bps over FY13 at 10.8% and YTD CY14 margins close to 12%. Going forward, the sharp fall in natural rubber and crude prices off late will further impact the margins positively. With global auto demand remaining sluggish, we believe the global production of natural rubber to outcast demand thus triggering further downside for rubber prices which would augur well for the entire tire sector.
Goodyear had strong cash reserves of Rs310crs at the end of CY13 which we estimate to grow upto Rs 400crs by the end of CY14; a part of which we believe the company may give out as rich dividends to its shareholders in the ensuing years. Goodyear has a debt free balance sheet with CY13 return ratios to the tune of 24.4% (ROE) and 37.3% (ROCE), which have seen a mammoth jump over CY12. We recommend a BUY rating on the stock with a one year target of Rs 824.
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