Tyre stocks in focus: Ceat, JK Tyre surge up to 11% on healthy margin hopes

Shares of tyre companies were in focus as they rallied up to 11 per cent in Friday’s intra-day trade, on expectation of margin improvement due to softening of raw material prices.

Individually, shares of Apollo Tyres surged 3.5 per cent to hit a 52-week high of Rs 353.25 in Friday's intra-day trade. Ceat, on the other hand, zoomed 11 per cent to Rs 1,555, followed by JK Tyre & Industries (6 per cent to Rs 181), TVS Srichakra (4 per cent to Rs 2,895), Goodyear India (3 per cent to Rs 1,113) and MRF (2 per cent to Rs 89,219).

Balkrishna Industries, however, declined 0.5 per cent at Rs 2,073. In comparison, the S&P BSE Sensex was up 0.33 per cent at 60,848 at 02:34 pm.

Inherent to the tyre industry, raw material costs forms the largest cost head, accounting up to 65 per cent of the total cost, said analysts. Therefore, higher input prices of natural rubber, carbon black etc. have kept margins under pressure.

Other raw materials such as carbon black, which is a derivative of crude also increased in-line with increase in crude prices.

However, in the recent past, the prices of key raw materials have softened, and the effect of the same has been visible in the December quarter (Q3FY23).

According to JK Tyre, the automobile industry is witnessing huge tailwinds on the back of the government’s push towards infrastructure development, higher GDP growth, and large allocation of funds towards capital expenditure in India.

"Improved vehicle utilisation, due to last mile connectivity and vehicle scrappage policy, is leading to a cyclical uptrend in the automobile and tyre industry. The automotive industry accounts for almost 49 percent of India’s manufacturing GDP, with tyre manufacturers contributing to 2 percent, and demand is expected to grow further," the company said.

Among individual stocks, shares of Ceat surged 11 per cent to Rs 1,555 apiece, amid heavy volumes. The company caters to various user segments, which include trucks and buses (T&B), light commercial vehicles, tractors, two-wheelers (2W), three-wheelers (3W), passenger vehicles, and off-road tyres.

According to analysts at CARE Ratings, Ceat has been undertaking increase in realisation at periodic intervals across categories to counter commodity inflation. Although these were not enough to completely offset the cost pressures, partial hikes in realisations will limit the contraction in operating margin to a certain extent, they added.

Furthermore, softening of input prices is likely to result in improvement of margins going forward, which will remain key monitorable.

The ‘stable’ outlook reflects that Ceat is expected to sustain the growth in its operating performance with gradual completion of the ongoing expansionary capex along with an expected improvement in profitability with moderation in input costs.

Meanwhile, analysts at Prabhudas Lilladher expect Ceat’s revenue to grow at 10 per cent due to increase in demand of high price products.

"The decline in commodity basket may lead to better margins, Thus, EBITDA margin is expected at 10 per cent (+156bps QoQ). Overall price hike was under 1-1.5 per cent giving some benefits in margin and also due to better operating leverage. CEAT expected commodity basket is expected to decline by 2-3 per cent which should aid margins," the brokerage firm added.

As regards to Apollo Tyres, analysts at ICICI Securities expect the company to report a robust performance in Q4FY23 amid QoQ decline in realised raw material prices.

"We expect gross margin expansion to largely peak for the company in the current quarter. Standalone sales in Q4FY23 are seen at Rs 4,336 crore, up 2.1 per cent QoQ with EBITDA margins at 14.5 per cent (up 160 bps QoQ). Analysts expect the company to benefit from 20 per cent plus volume growth in the domestic CV space (Q4FY23)," the brokerage firm added.