India's Tyre Industry To Regain Grip, Says CLSA Initiating Coverage

India's tyre industry is turning the corner into a sweet spot driven by rising pricing discipline, product quality and mix, believes global brokerage firm CLSA. The firm has initiated coverage on MRF Ltd. with a target of 1,28,599, Apollo Tyres Ltd. at a target price of Rs 566, and CEAT Ltd. with a target of Rs 3,493, all with 'outperform' ratings.

According to CLSA, the sector is at the bottom of its margin cycle and is poised for a rebound in two fiscals. Gross margins, currently at an eight-quarter low, are expected to improve as key raw material costs cool off by 10-20%.

One of the biggest tailwinds noted by the firm could be a shift in focus towards higher-margin passenger car radials over traditional truck & bus tyres. Passenger car radials now accounts for a rising share of industry capex, says CLSA, adding that they are likely to outperform.

Valuations, CLSA notes, are more sensitive to profitability and capex discipline than revenue growth. Replacement demand forms 70% of volumes, keeping revenue growth steady in the 6% range. But with Ebitda margins oscillating within a 400 basis points band (12–16%), even a small profitability swing can significantly boost free cash flows.

In fact, FCF in this sector has little correlation with revenue growth and is largely governed by margins and capital spending, says the brokerage. The largely domestic nature of India's tyre industry with just 8-15% export exposure also shields it from global volatility and US tariff tremors, believes CLSA. Add to that a strengthening rupee (key since 30–40% of raw materials are imported), CLSA thinks it is a good opportunity to buy.