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B. Krishnakumar

INVESTORS with a long-term perspective can consider scaling down exposure in Goodyear India, though the stock recorded a sharp run-up in recent months. Much of the recent positive developments pertaining to the tyre industry appear to have been factored into the share price. Investors who entered at lower levels can capitalise on the recent upswing and sell at least a portion of their holdings.

Goodyear India has a presence in the original equipment and replacement markets of the automotive tyre industry. It has an exposure to the off-the-road (OTR) segment as well. To improve profitability, Goodyear India recently shifted its focus to companies that are relatively more profitable and reduced exposure to the ones where the profitability was under stress.

Goodyear's performance has been in line with the trend reported by other industry majors. Though the company saw growth in sales volume, the profitability was under pressure owing to the surge in input costs.

For the year-ended December 2004, the turnover rose 26 per cent to Rs 703.1 crore, while the operating profit margin dropped to 3.6 per cent from 4.7 per cent. Helped by the sharp drop in the interest cost, the post-tax earnings rose to Rs 5.2 crore from Rs 0.1 crore recorded the year before.

The company repaid high-cost debt by borrowing from its parent Goodyear Tire, US. As a result, the interest cost dropped to Rs 7.5 crore from Rs 13.3 crore.

The recent revision in tyre prices and the Budget proposal to reduce the excise duty on replacement market tyres could have a positive impact on the performance. The tyre demand is likely to remain robust on account of the sustained growth in the industrial and infrastructure activities. This is also borne out in the increased tyre production recorded last month.

Goodyear India'sperformance is unlikely to improve significantly unless there is a pronounced decline in the cost of inputs such as natural rubber and carbon black. Though the tyre demand is likely to be robust, limited production facility (Goodyear operated at 96 per cent of its capacity last year) could hamper growth prospects unless the company switches to marketing outsourced tyres.

The impact of these factors is also reflected in the performance for the quarter-ended March 2005. Though the turnover rose 8 per cent, the company had to contend with a net loss of Rs 0.1 crore compared to a profit of Rs 0.5 crore in the year-ago period.

From an investment perspective, the lack of liquidity is a major limiting factor. With over 70 per cent of the equity held by the American collaborator, the limited floating stock would inhibit institutional investor interest in the stock. Taking into account these factors and the recent run-up in price, investors may book profits.

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