Demand outlook is expected to remain robust led by increasing use of personal mobility and improvement in fleet utilization, analysts said
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Shares of tyre companies have had a strong run in recent months. The latest dealer channel checks conducted by various brokerages show that demand remained strong in the September quarter. Demand outlook is expected to remain robust led by increasing use of personal mobility and improvement in fleet utilization, analysts said.
In the backdrop of the ongoing input cost inflation, this gives companies an opportunity to raise prices to protect margins. Natural rubber, carbon black and synthetic rubber are among raw materials that are used to manufacture tyres. According to the raw material tyre index compiled by JM Financial Institutional Securities Ltd, consumption costs for tyre manufacturers increased by around 7% sequentially in Q2FY22, primarily driven by an increase in the price of crude derivatives. The total increase in prices of raw materials is around 43% from the lows of Q2FY21, said JM Financial.
In a bid to tackle this, so far in 2021, tyre companies have hiked prices by about 9%.
“We believe, in order to maintain sustainable margin levels, tyre companies would have to take a further hike of 3-5% in the replacement segment. Most dealers have highlighted that they expect several rounds of price hikes in the near term, which would be absorbed by the market due to the absence of competition from imported tyres," the JM report said. Investors would reckon that in June 2020, the government had imposed import restrictions on tyres.
In the September quarter, key listed tyre manufacturers are likely to see high single-digit to double-digit sales growth.
Going by the estimates of Kotak Institutional Equities, Apollo Tyres Ltd is likely to see volume growth of 8% sequentially in Q2. This will be led by 20% quarter-on-quarter (q-o-q) growth in the PCR (passenger car radial) segment, 8% sequential growth in the TBB (truck bus bias) segment and strong growth in the two-wheeler replacement segment. Growth in the TBR (truck and bus radial) segment will be flattish.
“We expect volumes of Balkrishna Industries to grow by 8% q-o-q at 74.1k mt (million tonnes) in 2Q particularly due to strong demand in agricultural segment (60% of revenues) and strong recovery in OTR (off the road) segment (40% of revenues). Ceat is likely to post a 12% q-o-q increase in standalone segment volumes in Q2, added the Kotak report of 5 October.
Meanwhile, shares of some of the aforementioned tyre companies have risen by 65-75% over the past one year, scaling new 52-week highs. Analysts said further upside would now depend on the quantum of price hikes and outlook on operating margins. As of valuations, these stocks are trading at a one-year forward price to earnings multiple of 35-45 times, showed Bloomberg data. Analysts said that the valuations are reasonable, but could see some moderation if raw material prices continue to move higher.
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