BackTyre stocks jump on import restrictions, but demand improvement is key
In the first two months of FY21, auto sales have skidded. This will impact tyre volumes of companies that operate in the original equipment space. Companies that operate largely in the replacement market may still be able to withstand the slump in the auto space
PremiumMUMBAI: After the Directorate General of Foreign Trade moved some categories of tyres from the free list to the restricted one, shares of tyre companies spun up smoothly. Some of these stocks were up about 1-6% on Monday.
The restricted list has now expanded with certain categories of pneumatic tyres added to it. According to analysts at JM Financial Institutional Equities, around 75% of tyre imports (by value) was contributed by the categories included in the restricted list. This would result in limited tyre imports in the near term. However, the long-term impact on imports has yet to be determined as importers may rework their strategies.
“Near-term imports may reduce significantly as importers may take time to complete approval formalities. We await further clarity on the notification to assess long-term impact as conditions for license approval will determine future availability of imported tyres," said analysts at JM Financial Institutional Equities.
Of course, the import restrictions could improve the revenue prospects for tyre companies such as Ceat Ltd and Apollo Tyres Ltd. Overall, the domestic tyre sector revenues are likely to expand by close to about ₹2000 crore.
Nevertheless, the sector has been in a bit of a lull in the last few months. An earlier dealer-check by Reliance Securities confirms that volumes have dipped considerably during the lockdown. The first quarter usually accounts for greater demand for tyres due to high wear and tear as well as pre-monsoon checks. For now, demand for truck tyres has improved marginally according to dealers.
“April’20 volumes were impacted by 90%, while May’20 would see volumes fall 50-60%. Overall industry volumes are expected to fall by double-digits in FY21E," said analysts at Reliance Securities Ltd.
Besides, the continuing downswing in the auto sector has been weighing on tyre companies. In the first two months of FY21, auto sales have skidded. This will impact tyre volumes of companies that operate in the original equipment space. Companies that operate largely in the replacement market may still be able to withstand the slump in the auto space.
Nevertheless, even while there could be an earnings fillip due to the import restrictions, given the headwinds the auto sector is faced with, slower overall earnings growth in FY21 may cap the upside.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
