Investor's Eye: Sector Report - Tyres (Get a grip on it)

 

Investor's Eye [June 25, 2014]  Sharekhan www.sharekhan.com

Summary of Contents SECTOR REPORT   Tyres       Get a grip on it    Key points The Indian tyre manufacturers have been riding the twin benefits of soft raw material prices (especially rubber prices and the largely stable prices of crude derivatives like nylon cord) and expectations of an improvement in the demand environment. Consequently, their reported gross profit margin (GPM) at close to 35% is much higher than the historic trend. This has resulted in a strong growth in their earnings coupled with a jump in the free cash and the deleveraging of their balance sheet which is reflected in the significant re-rating of the valuation multiples of their stocks. Though the prices of rubber remain soft (down 40% from peak of Q1FY2012), but the recent geopolitical disturbances globally are threatening to push up the prices of some of the other critical raw materials like synthetic rubber and carbon black. However, the impact of the same would take a couple of quarters to reflect on the GPMs of these companies. In terms of demand, we remain positive. The demand from the truck & bus segment, which contributes half of the revenues for the domestic tyre industry, is expected to revive as the segment gains from the expected pick-up in the economy. Also, the major tyre companies witnessing an improving trend in their overseas operations (exports) would add to the overall growth in the earnings.  Going ahead, we believe that the OPMs are unlikely to sustain at the current levels of 12% and we expect a correction of 50-100BPS due to a gradual recovery in the natural rubber prices and the lag impact of the prices of the other raw materials that are a derivative of crude oil. Thus, the bulk of re-rating is behind us. However, we still see scope for reasonably handsome gains in market leader, Apollo Tyres, while we would advise accumulating Ceat and Balkrishna Industries only on declines for 10-12% gains from the current levels. We are more positive on JK Tyres & Industries purely because of its valuation and relatively higher exposure to the commercial vehicle segment. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards,  The Sharekhan Research Team

 

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