Wednesday, June 15, 2011

Goodyear India Ltd - Seeking Answers

I have been tracking Goodyear since quite some time. The reasons I really like this company are:

  1. Excellent brand and brand recall: Goodyear is associated with quality and blah blah (You get the point)
  2. Good positioning in the industry: Goodyear manufactures farm and medium commercial truck tyres and trades in radial passenger tyres and off-road tyres (manufactured by an associate company). Their positioning in replacement market is also very good and the company is making active efforts to improve it further.
  3. Extremely strong balance sheet: Cash of Rs.217 cr against a market cap of Rs.700 cr. The company is selling some land in Ballabgarh, which is expected to bring in another Rs.150 cr as per broker reports.
  4. Decent valuations: At about 10x trailing and 2.2% dividend yield, it isn't over the top expensive.
  5. I will not talk about the delisting angle, because thats been done-to-death in today's market.
However, there are some points in my mind where I am horribly stuck! They are as follows:
  • The company's main raw material is rubber. Does Goodyear use higher proportion of synthetic rubber? What is this proportion? What are the cost advantages here? (For CY2010, their per kg rubber cost was Rs.153)
  • What is the break-up of manufactured goods sales and trading sales? (essentially, I am trying to understand the margins they make in the tyres they procure from an associate company)
  • The AR states that this arrangement with the associate company (Goodyear South Asia Tyres Pvt Ltd) is on a non-exclusive basis and can be terminated by either party after giving four months' notice. If this happens, what is the back-up plan that Goodyear India has? (These sales constitute approximately 20% of the company's total sales)
  • Almost all tyre companies are aggressively putting up capacities. Goodyear India seems to be chilling out. Their installed capacity has increased just from 12.7 lakh tyres in 2005 to 14.2 lakh tyres in 2010. The AR also does not talk of any aggressive growth plans. Why this contrarian approach? What is the management's thought process?
  • What is the break-up of OEM sales and replacement market sales?
  • Goodyear India pays money to the parent under heads such as 'expenditure of trademark fee' and 'expenditure of regional service charges'. The amount paid is about Rs.35 cr. Is this a formula based payment (such as percentage of sales, etc) or is it arbitrary? 
If anyone has answers to these questions, I would be highly indebted if you mention them in the comments to this post or email me on research.neeraj@gmail.com

Cheers and happy investing!!

3 comments:

Manish said...

Hi Neeraj,

Though I have not gone through annual report of the company but I am not very enthu about industry.

Tyre industry as a whole is not good industry due to following reasons :
1. Highly capital intensive.
2. Due to commodity nature of the product margins are not high and if high not sustained in long run.
3. Subject to flactuations in RM mainly rubber prices and abilty to pass on increase is very limited.
4.If you look at multy year picture of the industry it is not very attractive.

Regards,

Fellow investor

Manish

Neeraj Marathe said...

Hi Manish,
Thnx for your views..
cheers!
Neeraj

Kunal Pawaskar said...

One good thing is that their margins and return ratios are better than peers. Negative working capital too. I too liked this stock after seeing it purely from the angle of financial parameters and a steady past.

Related party dealing is interesting. Raw material purchases from AR would help you find out that tyre purchase price is Rs. 2116. They purchased 1,387,000 tyres at Rs. 293 cr in FY2010 (year ending Dec). The listed entity manufactured 1,279,000 tyres (these should be the farm vehicle and MCV tyres)

They sold 2,660,000 tyres in the same accounting period yielding gross sales of Rs. 1,300 cr. This gives a figure of Rs. 4887 per tyre sold.

23% of net sales are linked to products procured from Goodyear South Asia. On net sales in FY10 of Rs. 1297 cr, this works out to Rs. 298 cr. This is very close to the number I computed above.

If someone could fill in with what the avg price of a Goodyear farm tyre, mcv tyre and passenger tyre respectively is we could then study some more questions which would deal with whether pricing is fair between the two companies. Because preliminary analysis is indicating that that there may be high gross margins because of the trade business. Would that mean that there are quite low profits on the tyres they manufacture themselves? Might throw some more light (or raise further questions on the relationship)

The second point about the contract was that, sometimes it might pay to read outside the contract too. A colleague had once mentioned that there were analysts who would question Page Industries master agreement for Jockey product distribution in India - that there was a rollover risk. That was true if you looked at it contractually. But then I learnt (have not verified myself) that the Page promoters have been working with Jockey for many years even in geographies outside India, namely some South East Asian countries.

Overall, there are more questions here than answers. Would love to hear from any analysis that people have done... Thanks.