Shares of Indian tyremakers have outpaced the benchmarks, growing in double digits in the past year.
JK Tyre and Industries Ltd. surged the most at 76.18% during the period, followed by TVS Srichakra Ltd. and Apollo Tyres Ltd. at 54.31% and 32.89%, respectively. That compares with 7% rise in Nifty 50 and 34% gains in Nifty Auto Index.
Margin Expansion
The industry has been booming on the back of a better macro outlook as sectoral tailwinds and favourable raw material prices have made tyre stocks attractive. These factors have led to the companies experiencing margin expansion and rise in profitability.
The aggregate year-on-year Ebitda growth of all the major tyre players in the second quarter stood at 80.95%.
MRF Ltd. saw the highest margin improvement of 1,035 basis points, followed by Ceat Ltd. and Balkrishna Industries Ltd. at 792 basis points and 761 basis points, respectively.
Declining Input Costs
The rally is largely fuelled by the drop in prices of crucial raw materials, namely crude oil and natural rubber.
On an average, crude oil derivatives make up approximately 30% of the total raw material cost in tyre manufacturing. Rubber, produced by crude derivatives, is a significant cost component for the industry. Crude waste carbon black acts as a key catalyst for improved performance.
Amid a weak demand outlook, Brent crude prices have fallen by 7% in the past month and almost 5% on a year-to-date basis. As of September, carbon black prices have seen a substantial decline of 22.2% since July.
All tyre industry-related raw materials can be freely imported under the Open General Licence.
Auto Sector Tailwinds
The tyre industry's trajectory is closely linked to automotive sector performance, making the anticipated demand recovery, supply chain and operational cost improvements key to driving growth.
A shift in demand patterns, especially in the two-wheeler segment, is propelled by new model launches and improved supplies. The medium-to-heavy commercial vehicle segment is also strategically positioned on enhanced fleet utilisation levels, driven by infra-led activities and increased demand from ports, Motilal Oswal Financial Services Ltd. said in a note last week.
It projects a 9–11% and a 5–7% compound annual growth rate for the two-wheeler and MHCV (medium and heavy commercial vehicle) segments, respectively, over financial year 2023 to 2026.
While the management commentary did indicate that exports faced challenges in the first quarter of the current fiscal, a gradual recovery is expected from the second half. The policy environment also supports tyre exports to happen freely. The replacement segment is steadily growing, supported by improving economic activities, increased freight movement, infrastructure spending and stable material prices.
The rising demand for electric vehicles in India is poised to drive increased demand in the tyre industry, marking a shift in the automotive landscape.
Quarterly Performance
Most of the tyre companies posted healthy revenue and profit growth in the second quarter.
Ceat had the highest year-on-year profit growth of 31.35 times at Rs 207.7 crore, while Balkrishna Industries was the only company that had a 9.1% fall in net profit at Rs 347.4 crore.
MRF had the highest revenue growth of 6.7% at Rs 6,217.1 crore, followed by Ceat at 5.48%.
Balkrishna Industries had the steepest revenue decline of 15.2%, while TVS Srichakra had an 11.3% fall.
What Valuations Suggest
MRF is the most expensive stock, trading at 61.52 times its earnings and at a premium to its five-year average.
Apollo Tyres is the cheapest among peers at 24.42 compared with its historical average of 21.01. All others are pricier than five-year valuations.
What Analysts Say
According to Bloomberg, Ceat Ltd. has the highest 12 month return potential consensus of 16.8%.
Apollo Tyres Ltd has the maximum 'buy' calls at 17, while Balkrishna Industries has the highest sell calls at 11. TVS Srichakra has the highest downside at 58.4%.
Continued demand from automakers and replacement market would help tyre companies. While higher crude prices hurt margins a few months ago, the pressure has stabilised as oil prices have cooled.
All the tyre companies are expected to register a single- to double-digit revenue growth in the quarter ending December, 2023, according to Bloomberg estimates.
Balkrishna Industries' Ebitda is estimated grow 2.1 times, while MRF is expected to report 97.3% growth.
Balkrishna Industries, MRF and Ceat are forecasted to report the best growth in net profit.
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