Tyres - Profitability Recovering Briskly, Set To Improve Further: ICICI Securities

ICICI Securities Report

Indian automotive tyre companies, on an average, witnessed 10% increase in gross profit/kg QoQ in Q3 FY23 to long term mean plus one standard deviation levels of ~Rs 84/kg. This was the first quarter post a gap of four quarters in which there was a combination of blended price hikes and reduction in raw material basket costing.

We believe Q4 FY23 would be another quarter with trickling effects of Q3 price hikes combining with ~5% decline in raw material basket/kg cost, pushing gross profit/kg by ~Rs 5-6 up, thus, adding ~200 basis points to gross margin.

With this, we expect manufacturers in the space to go back to their long-term average Ebitdam levels. We believe disciplined pricing by Apollo Tyres Ltd. has helped it go back to desirable Ebitdam levels, fastest amongst peers.

We believe with replacement market being subdued across FY23, original equipment manufacturer based revenue mix has been higher than normal by ~500 bps at ~35%, giving scope for Ebitdam to improve through mix reversal.

We are building ~14.5% and ~11.5% as mean Ebitdam for Apollo Tyres standalone and Ceat Ltd. over FY24-25E.

Controlled capex, steady profitability, recovering return on capital employed and consistency in free cash flow generation make us prefer Apollo Tyres in this space as our top pick.

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