Tolins offers quality at a discount, but raw material prices weigh

ET Intelligence Group: Tolins Tyres, a manufacturer of tread rubber and tyres, is aiming to raise ₹230 crore through an initial public offering. The IPO will consist of a fresh issue of shares worth ₹200 crore, which will be used for loan repayment and to enhance working capital, while the rest will come from an offer for sale by its promoters.

The company's go-to-market strategy involves utilising dealers and distributors (B2C), focusing on fleet operators by offering quality comparable with leading tyre brands at a significant discount. In contrast, its competitors have concentrated on state transportation businesses (B2G), compressing net margins.

Tolins Tyres operates a plant in the UAE - the only tread rubber plant in the region - which gives it a broad overseas market. The company is entitled to issue recycle certificates for tyres, which would be an incremental income with no expense. Given these factors, long-term investors may find the company's IPO appealing.

Business Model: Tolins Tyres, established in 2003, is a leading manufacturer of tread rubber - a cost-effective alternative to new tyres - with approximately 1,003 stock-keeping units (SKUs). The company produces a wide range of tyres for light commercial vehicles, motorcycles, three-wheelers, and off-road vehicles. It operates three plants - two in Kerala and one in the UAE - with a combined capacity of 1.51 million tyres and 12,486 tonnes of tread rubber. About 75% of revenue comes from tread rubber and the rest from tyres.

Financials: From FY22 to FY24, Tolins' revenue grew 41% annually to touch ₹227 crore, while Ebitda rose to ₹46.4 crore from ₹6.1 crore, with an Ebitda margin of 20%. Net profit grew to ₹26 crore in FY24 from ₹4.9 crore in FY23. Tolins' return on equity of 25.87% is superior to its peers.

Risks: Raw material accounts for 96% of the company's total purchases, and natural rubber prices have been quite volatile in recent months.

Valuation: At the higher end of the price band, the company is seeking a price-earnings multiple of 34 times its FY24 earnings. In comparison, competitors such as Indag Rubber, Vamshi Rubber and GRP are trading at multiples ranging from 33 to 67 times.