Tyre Companies Gather Momentum

We are positive in tyre sector as the demand for passenger vehicles in the Indian market have gathered momentum on the backdrop of above average monsoons, significant improvements have been observed in the current market sentiment. A wide range of new and affordable models have triggered the onset good times in the Passenger Vehicle segment. Renault has been the pick of the lot as it declared the highest August sales growth of 749% YoY amongst its peers. Isuzu Motors declared 433% while Nissan Motors and Maruti Suzuki declared 110% and 12.2% sales growth respectively. The impressive success story has resulted in an overall growth of 16.29% in the passenger vehicle segment, while growth in the two wheelers segment jumped 26.32% and the commercial vehicles climbed 1.53%. The jaw-dropping progress in the vehicle segment, backed by an over average demand scenario, comes as a boost for the Indian Tyre Industry as well. The chain of events has lead to the growth in revenue of Tyre Manufacturing Companies across the nation.

Following are our Top picks: INSTRUMENTPriceMarket Cap (Rs. in Cr)% FII HoldingP/E Ratio (X)Debt Equity Ratio (X)PAT JUN’ 16PAT MAR’ 16Earnings Growth QoQPrice performance since BudgetJK TYRE14133688.857.551.53100.2115.64-13.35%81%TVS SRICHAKRA367128480.6714.720.2946.5151.44-9.58%77%BALKRISHNA INDUSTRIES914861918.8315.220.47149.05154.99-3.83%54%MRF4860021101012.290.35490.93375.830.64%51%Ceat1229508026.1411.820.3193.07103.94-10.46%40%Apollo Tyres2101122132.489.990.22314.69249.9125.92%37%

Below are a set of reasons behind the Sector’s impressive performance post Budget:

• Strong demand in vehicles (passenger, commercial and two wheelers): Strong demand in vehicles(passenger, commercial and two wheelers): This will lead to growth in demand for tyres by 6-7% in the next three years as expected by ICRA, the premier rating agency
• Strong export growth.
• Above normal monsoon: This has lead to increase in demand of Original Equipment(OEM’s) in the rural market for two-wheelers and tractor segment.
• With festive seasons around, we expect the sales numbers to get better in the coming months.
• With softening Rubber prices, margins are expected to improve: Rubber constitutes 70% of the raw material price of tyre companies, which will benefit tyre companies due to low raw material cost.
• If Anti-dumping laws are pressed into action in the days ahead, it will act as a catalyst for growth in the Tyre Manufacturing Companies.
• Fall in Crude Oil Prices brings down price of Rubber chemicals and synthetic rubber

Jk Tyre: JK Tyre could be the next success story in the Small Cap space. The company’s operation business segment consists of tyres, tube, and flaps. On the basis of price performance, JK Tyre has given maximum return compared to its peers. Since the 1st of August, when the share was trading at 87, the script has jumped up 75% even as it registered its 52 weeks high of 153.2 today. The impressive growth story in less than two months is an achievement par excellence. A quick look at JK Tyre’s fundamentals reveals that the stock is still trading at a PE of 7.55 which surprisingly is the lowest in the small cap space.

MRF: Among large Cap companies MRF is the best bet, trading at a PE of 12.29 the lowest PE amongst Large Cap stocks. The company’s products are Tyres, conveyor belts, pre treads, paints & coats and sports goods. The company is dealing only in rubber segment. MRF has reported best quarterly numbers as revenue has gone up 30% QoQ. The company is the largest beneficiary of good monsoon. MRF is an almost zero debt company with huge expansion plans. The price of MRF has gone up from 30000 to 51000, more than 51 % in less than three months.

TVS Srichakra: The company manufactures a range of Two and Three Wheeler Tyres and Tubes for the domestic market and Industrial Pneumatic tyres, Farm & Implements Tyres, Skid steer tyres, Multipurpose tyres, Floatation tyres, etc. for the export market. TVS has given 77% return from its recent low. Trading in a PE of 14.7, in small cap space it has the lowest Debt which will act as a catalyst to the performance of the company.

Management of Tyre manufacturing companies has said that there will be a slight impact on the margins of the company even if rubber prices increases, As any fall or rise of rubber prices is passed to OEM’s. Rubber prices are trading at 118-120 per kg as against 140 recently. So in spite of prices going up by more than 50%, it is still time to invest in quality stocks as further buying can be seen in this sector. We maintain our Buy rating on Jk tyre, MRF and Tvs Srichakra.

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