Indag Rubber Management Q&A: Nov, 2011

Management Q&A


Kindly take us through this journey- what changed, for the company? Tax incentives leading to tax free status for first 5 years was a major contributor no doubt, but even at the operating level there was a big shift, isn’t it?

Yes, there were a number of tax-duty incentives. 10 year excise exemption, with a 5year income tax holiday, and 30% tax exemption for another 5 years.

Retreading is a labour-intensive operation. The Himachal plant was a completely new plant set up in 2006 with a number of technological improvements brought in. We brought in new staff, productivity, morale and efficiencies were all up. Marketing intensity was cranked up to take advantage of all the improved operating efficiencies from the new plant.

We started investing significantly in R&D in developing new cost-effective material and tread patterns. These R&D Investments have now started paying off, and these has been evident from the results of the last 2 years.

Was it that Labour issues at the Bhiwadi plant being put behind, was the major spur? While Bhiwadi plant was closed in 2006, just when were all the plant/machinery shifted to Baddi?

The Bhiwadi plant was already 14 years old. Small plant with 82 MT/month capacity.  And yes, the labour issues were behind us for good.

How was the Bandag Association? And why did it end?

Indag introduced the cold retreading process in India with Bandag technology in 1982. The technology was superior to existing hot retreading process. There was nothing new added to the technology in the 20+ years since introduction. The association ran its course and ended when the promoter family bought over Bandag’s stake in the company consequent to Bandag’s worldwide operations being sold off to Bridgestone in 2006.


Kindly give us a little background of the Promoter group and their involvement in the running of the company. Promoter Group stake need to come down to 75% by FY13 – any moves on that expected soon? When did the current Management take charge? 

The promoter family are Khemkas. They have sizeable overseas interests in Russian and CIS markets in Oil & Gas, and some other sectors. Indag Rubber is a very small operation in the overall scheme of things.

The company is run by professionals led by CEO Mr K K Kapoor who has been steering the company for the last 10 years or so. He is assisted by a professional team who have also been around for a number of years. The Promoter family attends Board meetings and is around for strategic decision-making, but do not need to be there for day-to-day operations.

No idea about transactions for bringing stake down. Will happen in due course.


Kindly comment. What are the factors that have contributed to increasing realizations for Indag over the last 5 years? Increasing RM costs being passed on, better performance and acceptability vis-à-vis competition, brand building efforts, what?

Indag as a brand has got fairly established. A certain segment of quality conscious customers do ask for Indag brand. We have made sure that our products are always available. There is not much price difference between products from organised sector.

Higher price realisations have accounted for much of the growth achieved. We have been able to pass on our Input costs – RM, power, fuel, etc.


Please take us a little bit through the competitive scenario how it was 5-10 years back and the position now?

Elgi and Indag both started around the same time and followed similar exclusive retreaders business model. And offered a support network. Midas went a different route and appointed dealers and scaled that up aggressively. They did not offer any support.

Post 2006 Indag stopped exclusive retreaders. Market competitiveness remains the same. Indag is more established as a brand now, we have increased our distribution reach, and are growing at a faster pace. Price points vary within 150-200 Rupees among leading brands. There are 5-6 organised players and rest from unorganised sector.

Most/All of these have been in the business for 25-30 years plus, right – what has Indag done right, that its rated almost at the top of the pack – in margins & profitability, at the least. How much of a difference/contribution did the Bandag JV bring to the table?

In 1982 Indag introduced the cold retreading process in the country with Bandag technology which is superior to the hot process, but requires higher 10-15 Crs capital investment. Hot retreading is used by unorganised sector mainly. The technology has remained the same over the years – not much change.

Our quality has stood out over the years. For example we are the only retreader who can collect advance payment from some State Transport Units (STU) like the UP STU. The STUs have years of retreading experience and data with them. They have organised and evaluated that data to come out with a cost/km rating for all manufacturers. Indag stands out in those ratings and is thus able to do good business with the STUs. Currently about 200 MT/month is accounted for by STU segment.

We have introduced newer materials and more effective tread patterns that have started paying off in the last couple of years. We have started growing at a much faster pace now.

Kindly comment on the Chinese cheap tyre threat. What’s the current outlook?

New tyres at 6000-8000 Rs was a novelty difficult to resist. But the quality and mileage achieved was poor. So these poor quality chinese imports have not affected us significantly.

How do you rate the smaller players like Vamshi Rubber and Eastern Treads?

They are there for a number of years. Yet to be significantly big players.


Kindly take us through your sales and Marketing set up.

We have about 365 retreaders on a countrywide basis up from about 150-200 retreaders in 2006. We have started appointing dealers in the South and West belts. There are some 20 dealers appointed in the Southern region and looking to scale up in Maharashtra. Our direct sales force about 55 people engages and looks after this setup.

Do the retreaders buy retread material from company owned depots/franchisee (C&F Agent) stores.

We have about 25 depots/C&F Agents. Of these 2-3 are company owned. Rest are operated by Franchisees. Retreaders are supplied from the depots.

If it’s basically a stocking operation at depots (C&F Agents), how do you manage the retreader relationship well? Is this on an exclusive basis? How is end-product quality assured/monitored?

Well Elgi and Indag started at around the same time and with similar business model of appointing exclusive retreaders. Over time market forces have ensured that this could not be sustained. Post 2006, there are no exclusive retreaders with anyone. We ensure that we support the retreaders well. Our support team visits, inspects and offer them free maintenance on their equipment every quarter.

Are there completely different retreader segments – ones that cater to organized sector players, and other segment that caters to unorganized sector? Is there cannibalization in sales within the organized segment between different brands. If not, and every retreader maintains retreading options say at different price points, how do you manage the sales & marketing objectives?

Retreaders stock material at every price point and from every manufacturer. They need to, that’s the nature of his business. He may push some products depending on the incentives from manufacturers. Indag as a brand is established. So our sales force needs to track sales and ensure ready availability from any of our depots. Availability is the main criteria after the price point and brand. We have ensured that we have a depot in every state.

Is there any kind of customer pull or brand preference, at play? Why would a customer prefer a Indag retread over say an MRF retread? What kind of sales promotion and brand building activities, if any, does Indag participate in?

We hear bigger transporters, quality conscious customers asking for Indag retreads by name. There is a certain segment that understands the difference in quality and the impact on a cost/km basis, but that’s niche.

Our direct sales force engages with local transporters, educates them about the quality and performance standards, shares with them Indag data, and gives them samples to test and use before purchase decisions are made.


Kindly share your understanding of how the numbers stack up in the retreading industry. Let’s say a 100 tyres reach end-of-useful-life, how many are replaced by new tyres, how many are retreaded, and how many are sold off as scrap?

Well as per our data, almost 55-58% of the used CV tyres cannot be retreaded. Its probably to do with consumer education – trucks are almost always overloaded, road conditions are bad, and most of the tyres are driven till the stage that the base becomes so weak as not fit for retreading. And some of the tyres genuinely go burst, cut and otherwise worn out to end up as scrap.

Only 2% go for New CV Tyres! So roughly 40% go for retreading.

And Globally, how would the percentages be?

Globally things are pretty different. Retreading is a pretty established trend in commercial vehicles. The road conditions are much better. Overloading is not allowed, tyre pressures are maintained. All the tyre majors have retreading arms and the quality of the retreads available are superior. And there exists a well-established franchisee network that periodically collects tyres for retreading.

If a new CV tyre costs Rs. 18000, what is the range that retreads sell at 4000-6000? Where is Indag positioned/priced in this range vis-à-vis a Midas, a Vamshi, or a MRF retread?

Retreads typically sell at 4500-4800 range. Not much difference between different brands. Hardly Rs 150-200 at the most.

Please share with us some perspective on the total market size. How much is Unorganised? Please give us some idea on the scale of operation, current production capacities say at Midas, MRF, Elgi, JK Tyres, Vamshi and Eastern Treads. Have you seen any significant scaling up by Competition recently?

We can’t say about installed capacities. But from whatever figures we hear, Midas used to produce about 2200 T/month which they say they have scaled up to 4000MT/month so they are producing about 45000-50000 MT/year from some 15-20 units. Indag is at 800 MT/month. MRF, JK Tyres are not producing significantly. Vamshi and Eastern may be producing lower than 500 MT/month, while Elgi may be slightly higher – their production is difficult to track/estimate because of overseas factory/markets.


Kindly take us through the reasons for this cautiousness/approach so far? Are we going to see a little more aggressiveness at play from here on?

You need to understand that the Himachal Facility was a greenfield facility set up from scratch. As explained before there was a complete change effected in productivity and plant efficiencies achieved. We have always tried to grow without stretching the balance sheet too much. We have also tried always to be a little ahead of the demand curve. Expansions when undertaken have to be done in 300-400 MT increments, whereas your demand scenario might not be keeping the same pace.

The last expansion undertaken in FY10 was also to take the maximum benefit that we could take for the excise duty exemptions angle.

With the emphasis on setting up dealer networks, especially in the South and West, we expect to grow faster.

In the last AGM it was mentioned that company will not need any further Capex till reaching 300 Crs in sales? When is the next capex cycle planned? And by when?

If the business keeps growing at the pace we are seeing, we will need to initiate some capital expenditure next year during Oct-Dec time frames. Now whether that’s an incremental expansion of 300-400 MT or  upwards of 500-1000 MT, that remains to be seen.


This is a sizeable asset lying idle for the last 5 years. What are the plans going forward?

There are some plans for utilisation of the same in partnership with some interested parties. various options are being considered.

Operating Cash flows if sustained seem more than enough to fund future capex requirements and working capital, so why not dispose of this land, and return some money to shareholders?

As mentioned, there are no plans for disposal in the near future, for sure. The utilisation plans are big and may take some time to take concrete shape.


Kindly elaborate on the Dividend Policy followed by the company. Why is it not increasing somewhat in tandem with earnings. Post FY11 and the recent 1HFY12 earnings, we were expecting higher dividends after being stagnant for the last 2 years!

There is no enunciated dividend policy in place. Well interim dividend has been declared at the same level as last year. The company is considering some OTR retreading expansion plans for which ~5-7 Cr may be required to be kept aside.

10.   1HFY12 RESULTS

Kindly give us some perspective on the sales growth achieved? How much is on account of volume growth and how much from higher realizations? What is the outlook for 2HFY12? Is it likely to be as robust?

Well we produced 4678 MT in 1HFY12. In FY11 we had produced some 8560 MT, so if we consider on half year basis, the volume growth has been of that order 9-10%. The rest of the growth has come from higher realisations.

We expect to grow at similar rates in the second half of the year. Demand is robust, we have not seen any slowdown in demand for retreads, with manufacturing or industrial activity slowing down.


In developed markets, every tyre major has a retreading arm. With MNC tyre majors taking an increasing presence in India, do you see any moves from the tyre majors at acquiring retreading arms? How far are we from that kind of consolidation in Indian markets?

Retreading is not yet a serious business in India for any of the Tyre majors, yet.  MRF, JK Tyres have a presence but not on any significant scale. We are some years away from seeing consolidation efforts.

Michelin has announced its plans for India. And there are some radical changes/products proposed. For example, we usually see 10-12 kg retreads being offered in the Indian industry. But Michelin has said they will be launching the 15 Kg treads in India.

End of the day a retreaded Michelin tyre has to do 80-90% of the mileage that a new tyre gives. A regular 10-12 kg retread on a well-preserved Michelin tyre base should do the same job


What would you say is your biggest challenge or vulnerability as the company attempts to scale up and go to the next level. Where do you see Indag by 2015?

Indian retreading market had been fairly steady in the last several years. The unorganised sector continues to play its role. The organised sector has seen the entry of the tyre majors like MRF, JK tyres but that did not make for any significant impact. With the entry of Michelin and its plans of heavier, costlier 15 Kg retreads, we will see some changes and new challenges.

Indag should continue to do well and grow at our normalised rates for the next few years.


Ayush Mittal: No Holdings in the Company; ;
Donald Francis: No Holdings in the Company; ;
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Indag Rubber


Indag Rubber Limited (IRL) was incorporated in July 1978 as a joint venture between Khemka group and M/S Bandag Incorporated, USA, one of the biggest players in the US retreading industry. The company was listed on the Bombay stock Exchange in 1984. In 2006, the above joint venture was terminated with Bandag’s 38.3% shareholding taken over by the Khemka Group.

Manufacturing plant is at Baddi (Himachal Pradesh) with a capacity of 13,800 MT for tread rubber, 1,800 MT for rubber strip gums and 300 KL for rubber cement. The company had one other plant at Bhiwadi (Rajasthan), which is shut since 2006.

Main Products/Segments

The company manufactures precured tread rubber, un-vulcanized rubber strip gum, universal spray cement and tyre envelopes for the tyre retreading industry.

Close to 90% of the company’s revenue is generated from the sale of precured tread rubber.

Main Markets/Customers

Indag Rubber caters largely to LCVs and Trucks & Buses segments.

Midas Treads, Vamshi Rubber, Elgi Rubber International, MRF Ltd, JK Tyres and Indag Rubber are the significant players in the organized sector. These players supply their tread material to unorganised players who retread tyres.

Retreading is a process in which a new tread is applied on top of worn out tyres. In the precured retreading process, a precured tread strip is applied to the surface with a thin layer of bonding gum. Indag Rubber sells its products through its own depots/franchisees (C&F agents) appointed all over the country while the actual retreading operation is carried out by the retreaders. This apart, it also routes its sales to State Transport Units on a Tender-ed basis. Nearly 10-15% of Sales comes from this lower-margin tender business.

The company has ~25 depots pan India, which sell to retreaders. Some of these depots are owned and operated by Indag Rubber while the rest are operated by franchisees.

Bullish Viewpoints

  • Decent growth record – In the last 5 years Indag Rubber has clocked a 25% plus CAGR in Sales. Sales touched ~150 Cr in FY2011 from ~60 Cr in FY07. Profits have grown along similar lines with a ~26% CAGR growing from 4.2 Cr in FY07 to 10.75 Cr in FY11. In the same period book value has compounded by over 35% CAGR growing to ~44 Cr in FY11from ~13 cr.
  • Superior Margins & Returns – Indag Rubber enjoys industry beating margins and returns. RoE and RoCE have generally been in the 25%-30% plus range beating competitors by a wide margin. Similarly operating margins have been in the 12-15% range. FY11 was an aberration year for Indag as it had to pass on price hikes as high as 30% to partially offset the abnormal hikes in raw material prices, suffering volume and margin pressures. This was impacted further with tax free status changing to a 22% tax rate in FY11. To its credit H1FY12 has seen margins climbing back and volume growth kicking in.
  • Strong Balance Sheet – Indag Rubber has a robust balance sheet. Debt has been progressively brought down from ~13 Cr in FY07 to about ~7 cr in FY11, with debt-to-equity ratio standing at a low 0.16 in FY11. For the last 3 years Indag has only been securing working capital requirements through loans from Banks, not needing any Term Loans. Capex requirements between ~2-6 Crs have been funded through internal accruals.
  • Strong Free Cash Flows – Indag has been generating stronger free cash flows over the last 5 years recording a  CAGR of over 54% . Free Cash Flow has increased from ~0.57 Cr in FY07 to about 3.22 Cr in FY11. FY10 was the only exception when the company decided to go in for aggressive expansion in order to take advantage of tax and duty exemptions valid till 2015. With no expansions needed/foreseen in next 2-3 years, the company will is set to continue generating free cash for some years.
  • Robust recent financial performance – The first half of FY12 has seen Indag clocking an excellent growth track. While Q1 had seen a 33% sales growth with a 90% Net Profit growth, Q2 results have made everyone sit up and notice the exemplary 51% growth in sales and a 135% growth in Net Profits! Margins have been helped along by the softening in raw material (natural rubber) seen in Recent months.
  • Good dividend payouts – Starting in 2008, the company has been gradually increasing dividend payouts. Dividend per share has increased from Rs 2 to Rs 4 per share with dividend payouts increasing from ~13% in FY08 to ~20% in FY11.
  • Attractive Valuations – at CMP of 140, the stock is quoting at <7x trailing and <5x 1 year forward. Dividend Yield at ~2.86% adds to the comfort.

Bearish Viewpoints

  • Limited presence outside North India: The company’s limited presence in alternative growth belts of Southern and Western India can be a limiting factor in the company’s growth attempts. Some of the companys competitors are better entrenched in these markets – e.g. Midas, Vamshi Rubber and MRF in the Southern belt.
  • Intense Competition – The retreading sector is highly fragmented reportedly with over 10,000 players in the unorganised sector and ~6 players in the organized sector. Midas Treads, Vamshi Rubber, Elgi Rubber International, MRF Ltd, JK Tyres and Indag Rubber are the significant players in the organized sector. These players supply their tread material to unorganised players who retread tyres. Nearly 70% share of the total retread industry (hot and cold) is accounted for by the unorganised sector.
  • Cheaper Chinese Imports – Cheaper Chinese tyres are a source of competitive challange to the Retread industry, especially in times of slowdown in economic activity. In 2007-08, this shift from retreading to buy cheaper Chinese tyres had garnered lot of momentum. However with the government imposing a duty on Chinese tyre imports and customer experience with low product quality has meant these have lost much of the sheen. Demand for quality retreads from players like Indag is expected to remain firm.
  • Lower-Margin State Transport Retreading business: Sales to State Transport Undertakings (STU) account for a significant 15% of the company’s sales. Gujarat, Maharashtra, Andhra Pradesh, Tamil Nadu, Karnataka, Uttar Prradesh and Himachal Pradesh are some of the states where IRL has significant salesto STUs. Tender based competitive bidding can erode margins, if the proportion of STU sales increase.
  • Low Capacity utilization: Historically capacity utilisation has been low. FY06 had seen a capacity utilisation of only 42%, which has only gradually moved up. Only once in the last 5 years has capacity utilisation touched 60%. The FY2010 expansion to 13800 MT capacity from ~9000 MT capacity again has meant utilisation falling below 60% to ~56% levels. However this should be seen in the context of availing tax exemptions on the entire exempted capacity completed by FY2010 for the next 5 years. This also means that IRL can scale up production with demand as needed, without incurring any significant capex for the next 2 years or so.
  • Volatility in raw material prices: Raw material constitutes between 70-75% of Sales. Natural and synthetic rubber account for 60-70% of raw material, both of which are vulnerable to global supply and demand, and crude movement. To its credit, Indag Rubber has been seen to be able to pass on the price increase to its customers, with a lag effect.

Barriers to entry

  • Strong distribution network – Indag has set up a strong distribution network over the years in its stronghold northern and eastern markets. And slowly expanding its presence in the Southern and Western belts. It has 25 depots and some 350 strong franchisee retreader network.
  • Strong State Transport Undertaking business – The company sells its products to State Transport Undertakings (STUs) via a tender system. Gujarat, Maharashtra, Andhra Pradesh, Tamil Nadu, Karnataka, Uttar Pradesh and Himachal Pradesh are some of the states where IRL has significant sales to STUs. Sales to STUs have been increasing, now accounting for ~15% of the company’s total sales.

Interesting Viewpoints

  • Land at Bhiwadi, Rajasthan: IRL’s Bhiwadi plant located near Alwar in Rajasthan is shut since 2006 when the Himachal Pradesh (HP) plant went on-stream. All workers at Bhiwadi have been relieved. The Plant & Machinery has been shifted to the HP plant and there are no plans of restarting this plant. The possible sale of this land or putting it to alternative use could unlock value going forward though the timing of this is uncertain at this point.
  • Ability to pass on price increases – With severe spikes in Natural rubber prices seen in FY11, Indag Rubber was forced to effect a 30% hike in retread prices. The company could manage a 34% hike in sales revenues with margiunal erosion in profits. This is testimony to the company’s ability to pass on price increases and protecting profitability to that extent. ICRA has upgraded the rating of Rs.14.50 crore fund based facilities of Indag Rubber Limited (IRL)† from [ICRA] A (pronounced ICRA A) to [ICRA] A+ (pronounced ICRA A plus) rating on long term scale. The rating has been assigned a stable outlook.
  • Stake sale by promoters: Promoters presently hold 77% stake in the company. As per SEBI regulations, they will have to bring down their stake to 75% by March 2013. This could create some uncertainty and consequently have an impact on the share price.


Donald Francis: No Holdings in the Company;