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Recommendations India

Goodyear India 2QCY2014 performance highlights and results update

August 1, 2014, Friday, 11:01 GMT | 07:01 EST | 15:31 IST | 18:01 SGT
Contributed by Angel Broking

For 2QCY2014, Goodyear India (GIL) reported a good set of results. Its top-line improved marginally by 2.5% yoy to Rs.433cr, which is slightly lower than our estimate of Rs.442cr. Raw material cost as a percentage of sales declined by 78bp yoy to 70.7% while other expenses as a percentage of sales declined by 54bp yoy to 13.6%. The EBITDA came in at Rs.45cr, up 10.7% yoy, while margins expanded by 78bp yoy to 10.3%. Consequently, the net profit came in at Rs.29cr, 12.8% higher yoy and in-line with our estimates.

Tractor tyre demand to drive future growth: GIL is a market leader in the tractor tyre industry. Tractor tyres accounted for ~60% of the company’s tonnage off-take in CY2012. As per industry reports, tractor sales are likely to grow in the range of 7-9% over CY2014-15E. Thus, we expect GIL to register a 6.3% CAGR in revenue over CY2013-15E.

Outlook and valuation: On the back of strong growth in the tractor tyre market and decline in rubber prices, earnings are expected to grow at a CAGR of ~13.8% over CY2013-15E to Rs.122cr in CY2015E. Moreover, we forecast GIL’s CY2015E cash reserves to be at Rs.514cr, which is ~39% of its current market capitalization. After discounting its CY2015E cash reserves by 50%, the stock is trading at EV/EBITDA of 6.1x for CY2015E. We recommend a Buy rating on the stock with a target price of Rs.723, based on a target EV/EBITDA of 8.0x for CY2015E.