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Tyre stocks to benefit from demand revival, low commodity prices |
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Tyre stocks are in a sweet spot right now with demand picking up, margins expanding due to the fall in commodity prices and valuations not too high compared to historical levels. Investors who wish to cash in on the upturn should evaluate the prospects of these stocks now.
Demand likely to pick up
Demand in both original equipment manufacturer (OEM) and replacement segments is expected to rise simultaneously. "We expect domestic demand for tyres to grow at the rate of 13-15% between 2014-15 and 2016-17," says Mayur Milak, Research Analyst, Anand Rathi Institutional Research.
The demand for tyres is closely linked to the growth of the automobile sector. Between financial years 2012-13 and 2014-15, sales of commercial vehicles declined (CAGR -8%), passenger vehicle sales were nearly flat (1%), while two-wheeler sales grew in single digit (8%). "Since the previous two years were weak, there is a lot of pent-up demand. The OEM segment should see good growth this year," says Milak.
As for replacement demand, sales of new commercial vehicles, passenger vehicles and two-wheelers were quite robust between 2010-11 and 2012-13. Tyres installed in vehicles sold during that period are likely to come up for replacement this year.
"OEM demand from the medium and heavy commercial vehicle (M&H CV) segment is already quite robust, but replacement demand is still sluggish. That is expected to pick up in the second half of the year," says Bharat Gianani, Auto and Auto Ancillary Sector Analyst at Angle Broking.
Improving margins
The price of natural rubber has stabilised at low levels. The chief reason for the fall in its price is that China, its biggest consumer, is witnessing a slowdown and demand there has fallen. Crude derivatives (like carbon black) are other important inputs in tyre manufacturing. The decline in the price of crude oil due to the global slowdown, the US shale gas revolution, lifting of sanctions imposed on Iran and other such factors will also aid the margins of tyre manufacturers.
The decline in the price of these two key constituents (rubber and crude derivatives), which together account for 80-85% of the raw material cost of tyres, was reflected in the good margins of tyre manufacturers in the first quarter of this financial year. "Commodity prices are expected to remain stable at lower levels in the medium term unless there is a meaningful recovery in the Chinese economy," says Gianani.
Chinese imports pose a threat
The key threat to Indian tyre manufacturers is from Chinese imports. The danger is particularly pronounced in the truck and bus radial (TBR) tyre segment, where imports increased 60% year-onyear in 2014-15. Chinese imports have captured 25% of the replacement demand in the TBR segment.
Chinese imports also flooded the Indian market because the US has imposed an anti-dumping duty on Chinese tyres, whereas India relaxed its anti-dumping duty in September 2014. Manufacturers have been making representations to the government to re-impose this duty. Let us turn to a few tyre companies that you may consider for investment.
CEAT: Ceat is gradually expanding its capacity for producing two-wheeler and passenger vehicle tyres. These tyres enjoy higher margins than commercial vehicle tyres.
"The higher proportion of passenger vehicle tyres in Ceat's product mix will enable it to improve its margins," says Gianani. By focusing on this segment, the company will also be able to circumvent competition from Chinese manufacturers who are focused on the CV radial segment. The company also has a wide distribution network and enjoys strong brand recall.
JK TYRES: The company is expanding its capacity in the commercial vehicle radial segment. The share of radial tyres in the commercial vehicle segment is currently 30% and is expected to grow to 50% in the next 3-4 years.
JK Tyres is trying to cash in on this opportunity. The stock is also trading at an attractive valuation.
MRF: It is India's largest tyre manufacturer and caters to all sub segments. MRF is expected to benefit from the revival in the auto industry, especially the commercial vehicle segment.
Its diversified product mix enables it to maintain a high utilisation level and thus weather a downturn better. Small investors may find the high price of a single stock a deterrent. Accumulate on corrections as its valuation is already quite high.
Source : economictimes.indiatimes.com
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