The research and development spends of global tyre companies are more than double that of domestic firms. Here's how the largest tyre companies have executed business in India so far, and what to expect from those stocks in the future.
According to Equirus Equity Research, over the last 4 years, tyre companies have made huge capital expenditures (capex) in expectation of growth, but due to a decline in OEM volumes as well as lower gross domestic product (GDP) growth, industry volume growth was tepid over the last few years. Further, due to the COVID-19 impact this year, FY21 sales are likely to be lower than FY18 and hence no further capex may be coming at the current rate of sales growth till FY24 or FY25.
The Indian tyre industry can expect sales growth to revive from FY22. With FY21 industry sales likely to be lower than FY18, capex intensity is set to drop significantly from FY22. Hence, free cash flows and return matrix will improve.
Smaller players have lost market share over the last 10 years with further consolidation likely ahead. Also, research and development (R&D) will be critical for growth, and Apollo Tyre, MRF, CEAT, and global players are set to do well in this regard. Global players (Bridgestone, Michelin, Goodyear, Continental, Yokohama) command a 15 percent market share currently.
Data shows that over the 10-year period (FY11-FY20), there has been substantial export growth which is over 170 percent. Imports have remained stable over the period.
Data shows more than half of revenue was contributed by the medium and heavy commercial vehicle (MHCV) segment.
The top 6 players – MRF, Apollo, Ceat, JK Tyre, Goodyear and TVS Srichakra – focused on the domestic market and commanding around 71 percent share, incurred a capex of around Rs 197 billion over FY17-FY20 as against Rs 87 billion over FY13-FY16.
Over the last five years, R&D spends of the top 4 Indian players (as a percentage of sales) was 1.3 percent vs 3 percent for global companies like Michelin, Bridgestone, Pirelli, and Yokohama. There might be an element of higher people cost in the R&D centres of global tyre companies which are located in developed economies; nevertheless, their R&D spends are definitely higher.
Apollo Tyres | Best play in tyres on OEM recovery. Retain LONG with a March 22 target price of Rs 159 at 16x March 22 EPS. The stock is trading at 12 percent FCF yield on FY22. CEAT | R&D focus will help do better in the future. Upgrade to LONG (from ADD) with a March 22 target price of Rs 1,090 at 15x March 21 EPS. MRF | Distribution is the biggest strength, best balance sheet, and return matrix among peers. Maintain LONG with a March 22 target price of Rs 71,066 at 22x March 22 EPS.
First Published on Oct 1, 2020 03:54 pm