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.

Risk report

Company and business

• Are earnings before tax of Tolins Tyres more than Rs 50 crore in the last 12 months?
  No. The company reported a profit before tax of Rs 33 crore in FY24.
  
• Will Tolins Tyres be able to scale up its business?
  Yes. The automotive sector and the replacement market of tyres are expected to remain buoyant and generate steady demand for the company's products.
  
• Do Tolins Tyres have recognisable brands with client stickiness?
  No. The company majorly operates in the B2B segment with dealers and distributors accounting for over 70 per cent of its revenue. The company does not enter into any long-term contracts with the dealers.
  
• Does the company have a credible moat?
  No. It operates in a very competitive industry, crowded with many organised and unorganised players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. After the IPO, the promoters' stake will be 68.5 per cent.
  
• Do the top three managers have more than 15 years of combined leadership at Tolins Tyres?
  Yes. K V Tolkin, chairman and managing director, has been with the company since its incorporation in 2003.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
  
• Is Tolins Tyres free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE were nearly 19 and 20 per cent, respectively. In FY24, its ROE and ROCE were 26 and 35 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative cash flow from operations (CFO) in FY24.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company pared its net debt-to-equity ratio to 0.8x in FY24 from over 2x during FY22-23 by increasing its equity base. This happened as the company made acquisitions through share purchase agreements, and infused additional equity capital.
  
• Is Tolins Tyres free from reliance on huge working capital for day-to-day affairs?
  No. The business is working capital intensive. It recorded a working capital cycle of over 185 days in FY24.
  
• Can the company run its business without relying on external funding in the next three years?
  No. Since the company is going to utilise most of its IPO proceeds to prepay loans, it would have to raise external funds to meet its high working capital requirements.
  
• Is Tolins Tyres free from meaningful contingent liabilities?
  No. Its contingent liabilities as a percentage of total equity was around 15 per cent as of FY24.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. After listing, the stock will offer an operating earnings yield of 4.4 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The company is valued at a P/E of 34.3 times compared to its peers' median of 36.9 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The company is valued at a P/B of 3 times compared to its peers' average of 6.3 times.

Disclaimer: This is not a stock recommendation. Investors should do their due diligence before investing.

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