Tyre sector Q4 Result Review: Overall robust numbers, cautious outlook; what’s the road ahead

Major tyre makers reported strong results for the March quarter (Q4FY23) owing to lower raw material costs and increased demand. Analysts believe that pricing increases have also helped the company's margins grow.

The last two fiscal years have been gratifying for tyre makers and investors in these companies. Strong demand for tyres and good pricing that more than offset input costs translated into earnings momentum which was also mirrored in the recent March quarter results, said Vinit Bolinjkar Head of Research Ventura Securities.

Let's look at the major tyre manufacturers Q4FY23 performances and brokerage opinions:

Apollo Tyres Ltd

Apollo Tyres consolidated net profit for the fourth quarter of FY23 increased four-fold, from ₹113 crore to ₹427 crore. The company's revenue from operations for the three months ended in March increased 12%, from ₹5,578.3 crore to ₹6,247 crore.

The company also reported a decrease in raw material expenses in Q4FY23 to ₹3,537 crore from ₹3,875.4 crore in Q3FY23, resulting in a gross margin of 43.4%, which increased by 360 basis points YoY and 370 basis points QoQ.

According to brokerage firm Sharekhan, Apollo Tyres has reported above-estimated performance in Q4FY2023 and intends to sustain better EBITDA margin as a result of its focus on premium products and profitable volume growth.

The brokerage has kept its buy recommendation on the company and lowered its price target PT to Rs 429 per share in anticipation of a 140 bps increase in EBITDA margin over the next two years.

CEAT Ltd

CEAT posted remarkable results for the quarter ending in March, with its consolidated net profit increasing by 428% YoY to ₹132 crore from ₹25 crore in the equivalent quarter of the previous fiscal year. Lower costs for raw materials were responsible for this good result.

In comparison to the same quarter last year, total expenses were higher in Q4 at ₹2,698.88 crore versus ₹2,570.66 crore. However, compared to ₹1,768.47 crore a year ago, the cost of raw materials utilised was lower at ₹1,661.18 crore.

In Q4FY23, the revenue from operations more than doubled to ₹2,875 crore from ₹2,592 crore in the same quarter the prior fiscal year.

CEAT's target price was updated to ₹2,170 per share by Anand Rathi, who kept the stock's buy rating. The stock continues to have a Neutral rating from Phillip Capital with a target price of ₹1,800 per share.

MRF Ltd

In comparison to the net profit of ₹168.53 crore achieved in the same quarter of FY22, MRF's consolidated profit after tax (PAT) for the fourth quarter ending March 2023 increased by 86% year over year (YoY) to ₹313.53 crore.

Its consolidated revenue from operations in the fourth quarter of FY23 was ₹5,841.7 crore up 10.12% year over year from ₹5,304.8 crore in the same quarter of FY22.

The company's net expenses were ₹5,410.26 crore in Q4FY23 as opposed to ₹5,142.79 crore in Q4FY22.

We believe the worst of raw material headwinds are behind and expect MRF’s margins to 13.5% in FY24E and 14% in FY25E, going ahead. Expect a revenue CAGR of 10%, an EBITDA CAGR of 22% and a PAT CAGR of 46% in FY23-26E. Reiterate accumulate, said brokerage Elara Capital in its report. 

JK Tyre & Industries Ltd

 JK Tyre & Industries consolidated net profit for the fourth quarter of 2022–23 more than doubled to ₹112 crore, on the backdrop of strong domestic demand for both passenger and commercial vehicle radial tyres.

According to a statement from JK Tyre, total revenue increased to ₹3,645 crore in the fourth quarter from ₹3,320 crore in the same quarter last year.

JK Tyre & Industries share price has grown at around 6.5% CAGR over the past five years outperforming the Nifty Auto index. We maintain buy tracking margin expansion on the anvil and accelerated debt reduction amid controlled capex spends & healthy CFO generation said brokerage ICICI Direct Research.

Balkrishna Industries Ltd

In Q4FY23, the company reported a consolidated net profit of ₹259.8 crore, a decrease of 30.7% from ₹374.84 crore in the same quarter the previous year.

When compared to the same quarter a year prior, the company's consolidated revenue from operations declined by 2.4% to ₹2,317 crore for the month of March.

Balkrishna Industries gets a Neutral rating from Motilal Oswal. The domestic brokerage said that there has been a 6% YoY decrease in sales volume to 72.7k tonnes. Despite often being a strong quarter, the fourth quarter saw channel inventory clearance in the end markets. By June or July of 2023 this situation is expected to be rectified. The volumes coming from the end markets have improved sequentially, and there has been a partial clearance of expensive raw material.

What's the road ahead?

According to Vinit Bolinjkar, the tyre industry is anticipated to experience a decline in replacement market sales due to consumer resistance to higher prices. In the fiscal years 2022 and 2023, all tire companies implemented substantial price increases in domestic markets to offset the impact of rising input costs. However, as the pent-up demand witnessed in the post-Covid scenario returns to normal levels the effects of these price hikes are expected to gradually impact tyre sales in the replacement market.

The resistance to higher prices from consumers could be attributed to various factors, such as increased price sensitivity or the availability of alternative options. As tyre prices rise, consumers may opt to delay or limit their tyre replacements, leading to a softening in the replacement market. This trend highlights the importance of striking a balance between pricing strategies and market demand to maintain a healthy level of sales.