G Chokkalingam, Founder & Managing Director of Equinomics Research & Advisory expects MRF to hit Rs 1 lakh in the next 3 years while advises selling Apollo Tyres.
G Chokkalingam, Founder & Managing Director of Equinomics Research & Advisory told CNBC-TV18, "The rerating happens. 2013 September was the bottom for the tyre stocks. That was the time JK Tyre was trading at below 4 price to earnings ratio (P/E) even stock like Ceat and MRF, they were trading in a single digit P/E and substantial rerating happened because the input prices crashed."
"Very peculiarly, tyre industry is one sector which uses synthetic rubber and natural rubber and both have crashed since 2014 peak. All of us know, the oil price crashed almost 50 percent and the synthetic rubber is the derivative of oil. Similarly, natural rubber after touching Rs 240 per kilogram (kg), last year it fell as low as Rs 91 per kg, so this gave a phenomenal opportunity for the tyre stocks to get rerated because they have led to margin expansions. That is why despite all demonetisation, index of industrial production (IIP) number being zero, the cumulative growth, the tyre stocks have done phenomenally well in the market," he said.
"As far as going ahead, I have come out of stocks like JK Tyre and Ceat but we are suggesting hold on MRF for long-term because this is a leader in the industry and strong balance sheet – if you look at it, the debt is almost zero and also recently that has gone for very aggressive expansion to the tune of Rs 4,000 crore. Therefore, I have given my aggressive target of Rs 1 lakh on stock for MRF in the next three years."
"So those who are lucky to hold, can continue to hold because last few weeks again the oil prices have corrected. Now the brent oil is close to USD 50 which is again positive."
"In the last one month, the natural rubber prices started correcting. Both are positive. So people may hold now but if at all somebody wants to buy, I would prefer only MRF. There is a lot of scope for further rerating of MRF because it is a leader and massive expansions are in place and also tactical opportunities are there because number of shares is just 42 lakh shares and if at all any regulator forces MRF to split the share and give bonus then overnight it can shoot up. Therefore, I would suggest buy on MRF for long-term," added.
"One can start booking profit in stocks like JK Tyre and Ceat. Now the valuations have improved a lot and particularly for JK Tyre, they have taken over Kesoram Industries business. Of course, JK Tyre, according to the management, has invested only around Rs 500 crore but according to me, that is going to surplus the margin in the short-term and therefore, I would book profits in JK Tyre and also in Ceat but I would sit on MRF."
"We have already seen one tyre company posting relatively poor results. That is because the rubber prices have gone up in the month of December to February. They shot up very sharply from the bottom of Rs 91 to as much as Rs 145 per kg. Therefore, one tyre company has come out with poor results for March quarter. Even for Apollo Tyres and the JK Tyre, the results may not be great because there will be some pressure on margin due to the sharp rise in the rubber prices."
He further added, "I do not prefer Apollo Tyres because the share of foreign business is substantial as compared to other tyre stocks but in India company like MRF and Ceat, anywhere from 60-75 percent of the total sales come from the replacement market, which remain quite robust irrespective of the industrial economic conditions. Therefore, I always prefer these domestically driven names rather than Apollo.""Therefore, I would suggest sell on Apollo also because I do believe that the results may not be great for March quarter for both Apollo and JK Tyre."Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.