IPO Size: Rs. 230 cr

• Rs. 200 cr is Fresh Issue for (i) debt repayment Rs. 93 cr, to become debt-free (ii) working capital Rs. 75 cr
• Rs. 30 cr is Offer For Sale (OFS) by the promoter (93% stake to drop to 69%)

Price band: Rs. 215-226 per share

M cap: Rs.893 cr, implying 26% dilution

IPO Date: Mon 9^th Sep to Wed 11^th Sep 2024, Listing Mon 16^th Sep 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Tread Rubber Manufacturer

Tolins Tyres is a 40 year old Kerala based manufacturer of precured tread rubber and new tyres for two-wheelers, three-wheelers, light commercial vehicle, agricultural use. Tread rubber accounts for 75% of Rs. 227 cr revenue and balance comes from tyre manufacturing.

Under-Utilized Capacity

Company has 3 manufacturing facilities (2 in Kerala, 1 in UAE), with a consolidated capacity of 1.51 million tyres, 12,486 tons tread rubber and 17,160 tons rubber compound. Current capacity utilisation is only at 33% and it plans scale up gradually over the next 5 years. As of 31.3.24, Rs.10 cr is for capital work-in-progress, despite current capacity heavily underutilized. Ramp up of capacity remains to be monitored.

Margin Growth in FY24

Between FY22 and FY23, company’s topline remained flat on flat volumes, with 4% net margin. With effect from 1.4.23, increased production volume of new tyres and consolidation of 2 group companies (a rubber compound maker in India and a tax-free tread rubber maker in UAE) resulted in FY24 revenue, doubling YoY to Rs. 227 cr. FY24 EBITDA of Rs. 48 cr lead to 21% EBITDA margin and PAT of Rs. 26 cr translated into 11% net margin. Tolins operates in a highly cyclical industry, driven by multiple external factors (crude oil prices, rubber prices, end-use automobile segments of 2W, CV, agri) all of which are presently favourable, leading to strong margins. EPS for FY24 was at Rs. 9.52, with RoE of 26%. However, post dilution, RoE will contract to mid-teens.  

Poor Working Capital Management

As of 31.3.24, inventory stands at Rs. 84 cr and debtors Rs. 64 cr, representing 4.4 months and 3.4 months of sales respectively. ~8 months of sales blocked in working capital (likely to continue) indicates poor working capital management. No wonder the need for high debt - Rs. 85 cr, as of Aug 2024, resulting in a debt-to-equity ratio of 0.8:1. Fresh issue proceeds though will repay debt entirely in addition to funding incremental working capital.

Fully Valued for now

Based on FY25E EPS of about Rs. 10.5, shares are being offered at a PE multiple of 21x, on a current year basis. Peer Indag Rubber manufactures tread rubber with Rs. 250 cr topline, but has interests in battery storage and EV battery swapping, not making it an apple-to-apple comparison. Likewise other listed peers are either bigger or more focussed on tyre manufacturing.

In Nov-Dec 2023, Rs. 53 cr was raised at Rs. 118 per share, and current IPO price is 92% higher. As financials prior to FY24 were flat, both growth and margins need to be monitored post listing.