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Research
India Auto: Tyre Segment - Revving up: AnandRathi Research
Posted On : 2015-07-28 19:31:57( TIMEZONE : IST )
We are positive on the tyre segment given that this is one of the rare occasions when OEM and replacement demand are expected to rise in unison. With rubber prices low, we expect tyre companies to register higher margins. We reckon that the threat from Chinese manufacturers would be mitigated by government action as was done a few years ago. Our top picks are Ceat, Apollo and MRF.
Robust demand driven by the OEM and replacement segments. This is one of the rare occasions when we expect both OEM and replacement demand to rise in unison. Following flattish to negative growth during 2013-15, we expect domestic tyre demand through 2015-17 to grow 13-15%, driven by strong replacement growth and OEM demand. M&H CVs, two-wheelers and passenger vehicles are likely to support the growth, while we expect negative to flattish growth from tractors and LCVs.
Low rubber prices to assist margins. Rubber constitutes ~70% of the raw-material costs of a typical tyre company. The global outlook and soft off-take of Chinese manufacturers on account of weak demand and the shift to "greener" tyres could result in lower demand for natural rubber, thereby keeping prices low. Thus, we expect tyre companies to benefit from lower raw-material costs.
Competition-Chinese threat. Imports of truck and bus radial tyres (TBR) in 2014-15 rose 60% yoy, from 490,000 to 780,000 units. In the replacement segment, the market share of manufacturers in China has risen from 15% in FY14 to 25% in FY15. The risk to Indian companies is real. However, we are reasonably confident that the government would impose anti-dumping duties (as was done by the US in Jun'15).
Top picks. We initiate coverage on Ceat (Buy, TP: Rs 1,020), MRF (Buy, TP: Rs 43,500), Apollo (Buy, TP: Rs 244) and JK Tyres (Buy, TP: Rs 115). We prefer Ceat given its higher revenue growth (13% CAGR over FY15-17e) and margin expansion (120bps) resulting in high earnings growth (25% CAGR over FY15-17e). We also like MRF and Apollo given their high revenue from replacement demand (~70%). We maintain our Buy rating on Balkrishna.
