Tolins Tyres IPO analysis

Tolins Tyres IPO will open for subscription on September 9, 2024 and close on September 11, 2024. We break down the tyre and tread rubber manufacturer's strengths, weaknesses, and growth prospects to help investors make an informed decision. Tolins Tyres IPO in a nutshell Quality : Its three-year average ROE and ROCE were 19.1 per cent and 19.6 per cent, respectively, during FY22-24. Growth : Its revenue and net profit grew 41.6 and 542 per cent per annum, respectively, during FY22-24. Valuation : Post the IPO, the stock will be valued at a P/E and P/B of 34.3 and 3 times, respectively. Overview: The automotive sector and the replacement market of the industry are on a steady upswing. Demand for auto tyres is thus expected to remain buoyant, which will benefit Tolins Tyres. Moreover, its export market growth in the Middle East and Africa are also favourable factors. However, the company operates in a competitive and highly cyclical industry, which has limited entry barriers. About Tolins Tyres Tolins Tyres, primarily a B2B player, manufactures tyres and tread rubber. Tread rubber, the rubber that makes contact with the road surface, generates most of its revenue. It made up 76 per cent of the company's FY24 revenue. Under the segment, the company majorly offers retreaded rubber, meaning it replaces a tyre's outermost worn rubber with a new one. It operates three manufacturing facilities, two located in Kerala and one in the UAE. The majority of its revenue comes from the domestic market. Exports accounted for only 5.4 per cent of its FY24 revenue. Strengths of Tolins Tyres Capacity expansion: The company has recently been making acquisitions, expanding its manufacturing capacity to 1.51 million tyres from 0.3 million tyres annually in order to meet the automotive segment demand. Its total capacity utilisation (including tyres, tread rubbers and other rubber compounds) is around 33.4 per cent at present, which it intends to increase up to 75 per cent. Since most capex meant for its expansion has already been taken, the company will likely benefit from the resulting operating leverage ahead. Highest industry margins: The company's average operating margins were 10.5 per cent during FY22-24, the highest of its industry peers. It plans to prepay loans, which may help margin expansion going forward. Weaknesses of Tolins Tyres Client concentration: Auto dealers and distributors account for over 70 per cent of the company's revenue. However, it does not form any long-term contracts with them. This is a key risk as distributors easily shift vendors in a commoditised business like tyres. This can lead to significant fluctuations in its sales and operations. Moreover, sales through distributors often involves reduced gross profit margins. There is also limited direct contact with end customers. Tolins Tyres IPO details Total IPO size (Rs cr) 230 Offer for sale (Rs cr) 30 Fresh issue (Rs cr) 200 Price band (Rs) 215-226 Subscription dates September 9-11, 2024 Purpose of issue To repay loans and fund working capital needs Post-IPO M-cap (Rs cr) 893 Net worth (Rs cr) 301 Promoter holding (%) 68.5