Tyre stocks managed to zoom ahead in a largely volatile market on September 6. Apollo Tyres and JK Tyres gained over 7 percent each in trade, CEAT advanced 3.5 percent, while MRF and Balkrishna Industries gained around 1.5 percent.
In 2022 so far, tyre stocks have revved up significantly. MRF, CEAT and JK Tyres have surged between 15-18 percent. But, analysts believe there’s more upside in store.
According to them, the sector was under pressure for a long time due to subdued demand in the auto industry and high input costs. This situation is likely to improve, going forward.
“A steep fall in crude prices and easing of the semi-conductor issue at the OEM level augur well for the industry,” said Vinod Nair, Head of Research at Geojit Financial Services.
Initiating coverage on Apollo Tyres with an overweight rating, Morgan Stanley believes the company’s India business is set for a turnaround. While its Europe business might face inflationary pressures, the Indian industry’s pricing discipline has improved and the brokerage expects the consolidated return on equity (RoE) to rise from 6 percent in FY22 to 11 percent in FY25. Morgan Stanley has a target price of Rs 329 on the stock.
Nair, too, is bullish on the stock.
“Cyclical upswing in the commercial vehicle industry, high radialisation, uptick in passenger vehicle space, and network expansion will be major topline drivers for the company on a medium to long-term basis,” he said.
Apollo Tyres has gained over 23 percent in 2022 so far, hitting a 52-week high of Rs 274.25 on September 6.
To offset margin pressure from high natural rubber prices, tyre companies are looking at continuing their price hikes.
JK Tyres has upped prices by 6-7 percent this fiscal and is evaluating more rounds as the company has not been able to pass on commodity cost inflation entirely.
After an 8 percent price hike in Q1FY23, Apollo Tyres is considering another 3-4 percent increase in the ongoing quarter. This can result in margin expansion, say experts.
The boom in electric vehicles (EVs) is another positive for the sector.
As India slowly but steadily embraces EVs, tyre companies have started launching new products to cater to the rising demand.
CEAT has recently introduced the Winenergy X3-R tyres, specifically designed for electric buses. According to the company’s official data, the new range delivers 30 percent higher mileage, 30 percent better rolling resistance and 50 percent reduction in the tyre noise compared to regular tyres.
Riding on this wave, Apollo Tyres has also launched two new sub-brands, Amperion for EV passenger vehicles and WAV for two-wheelers.
Analysts seem divided on Balkrishna Industries. Morgan Stanley has initiated an Underweight rating on the stock, with a target price of Rs 1,649 on the back of a slowdown in volume growth and rich valuations. The stock has re-rated from 12x 1-year forward P/E in FY18 to 24x now, it noted.
On the other hand, Hem Securities has a Buy rating on the stock, valuing it at 22.5x FY24E earnings to arrive at the target of Rs 2,293.
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