The initial public offering (IPO) of Tolins Tyres Ltd. presents an intriguing opportunity for investors, aiming to raise up to ₹230 crore through a combination of fresh equity and an offer for sale. With a price band of ₹215-226 per share, the Kerala-based tyre manufacturer is seeking to capitalize on growing demand in the automotive and replacement tyre markets. However, the company's heavy reliance on distributors, lack of long-term contracts, and exposure to a competitive, cyclical industry present notable risks. Despite this, Tolins boasts industry-leading margins and recent expansion efforts, which could help drive future growth.

IPO Structure and Key Financial Metrics

The Tolins Tyres IPO consists of a fresh issue of equity shares worth ₹200 crore and an offer for sale (OFS) of ₹30 crore, with promoters Kalamparambil Varkey Tolin and Jerin Tolin each offloading ₹15 crore through the OFS route. They currently hold an 83.31% stake in the company. The price band for the IPO has been set at ₹215-226 per share, valuing the company at ₹893 crore at the upper end of the range.

Key valuation ratios post-IPO include a P/E of 34.3 and a P/B of 3, reflecting a premium valuation relative to the industry average. Over the past three years, the company has maintained a strong return on equity (ROE) of 19.1% and a return on capital employed (ROCE) of 19.6%, underscoring its operational efficiency.

Financial Performance and Growth Trends

Revenue and profit growth have been impressive, with the company's revenue increasing by 41.6% per annum and net profit surging by 542% annually over FY22-24. This rapid growth can be attributed to the robust demand for automotive tyres, particularly in the replacement market, which has benefited Tolins Tyres substantially.

Despite these encouraging numbers, the company operates in a highly competitive and cyclical industry with low entry barriers. This makes it susceptible to fluctuations in demand and pricing pressures.

Product Mix and Revenue Streams

Tread rubber is a cornerstone of Tolins' business model, accounting for 76% of its FY24 revenue. The company specializes in retreaded rubber, where worn-out tyres are refurbished with new outer layers. This focus on the B2B market has helped Tolins establish a strong foothold, though it leaves them vulnerable to client concentration risks.

Tolins operates three manufacturing facilities, two in Kerala and one in the UAE. While the majority of its revenue comes from the domestic market, exports only contributed 5.4% to FY24 revenue. Nevertheless, the company is eyeing growth in the Middle East and African markets, which could help diversify its revenue base in the future.

Anchor Investors and Grey Market Premium

Prior to the IPO, Tolins Tyres secured ₹69 crore from anchor investors at the upper price band of ₹226 per share. Key investors include BofA Securities Europe SA, NAV Capital VCC, and several domestic institutional players. This allocation to anchor investors underscores the strong market confidence in the company’s prospects.

Meanwhile, shares of Tolins Tyres are trading at an 11.06% grey market premium (GMP) of ₹251, signaling bullish sentiment from retail investors. The ₹25 premium over the upper price band suggests a potentially strong listing performance for the IPO.

Risks from Client Concentration and Distribution Channels

Client concentration presents a key risk for Tolins, as over 70% of its revenue comes from auto dealers and distributors. The company does not maintain long-term contracts with these distributors, leaving it vulnerable to sudden shifts in vendor preferences. This lack of contractual security could lead to fluctuations in sales and profitability.

Additionally, sales through distributors generally involve lower gross profit margins, and the lack of direct contact with end customers further exacerbates the company's dependence on intermediaries.

Industry-Leading Margins and Expansion Plans

Despite the challenges, Tolins boasts the highest operating margins in its industry, averaging 10.5% over FY22-24. The company plans to prepay some of its outstanding loans, which could further enhance its margins by reducing interest expenses.

In terms of expansion, Tolins has been actively increasing its production capacity to 1.51 million tyres annually, up from 0.3 million previously. Current capacity utilization stands at 33.4%, but the company is targeting 75%, which would generate significant operating leverage and boost profitability.