Tyre stocks in focus, rally up to 8%; Apollo, Ceat register 52-week highs

Shares of tyre companies rallied up to 8 per cent on the BSE in Tuesday’s intra-day trade in an otherwise weak market on expectation of strong demand and margin expansion ahead.

Apollo Tyres (up 7 per cent at Rs 272.35) and Ceat (up 5 per cent at Rs 1,458.40) hit their respective 52-week highs. JK Tyre & Industries surged 8 per cent to Rs 159.50, while, MRF, TVS Srichakra and Goodyear India gained up to 4 per cent in intra-day trade on the BSE. In comparison, the S&P BSE Sensex was down 0.38 per cent at 59,018 at 10:34 am.

After two years of contraction, the Indian tyre industry has recovered in FY22. The growth in FY22 is driven by increase in volumes. While the demand is favourable, higher input prices of key raw materials such as natural rubber; crude derivatives etc. will keep industry margins and earnings under pressure. On an overall basis, the tyre industry is expected to perform well mainly due to easing out of pandemic, increasing demand from OEMs and replacement segment.

Meanwhile, in past one month, the stock price of Apollo Tyres appreciated by 17 per cent after the company recorded a strong operating performance in June quarter (Q1FY23) with EBITDA margin coming at 11.6 per cent (down 75 bps YoY and up 38 bps QoQ). In comparison, the benchmark Sensex was up 1.3 per cent.

Apollo Tyres said operating performance impacted by steep increase in raw material and other costs (energy and freight). Both India and Europe reported strong double-digit growth in top line (YoY) helped by volume growth and price increases.

The company remains optimistic about the demand outlook over the medium to long term specially in passenger vehicle (PV) space in European region whereas, demand in Indian commercial vehicle (CV) space remained sluggish due to muted OEM sales. The management expects demand in Q2FY22 to be sluggish given the seasonality with monsoon effecting demand in the replacement segment. However, pickup is expected from CV OEMs in H2FY23 amid greater infra spend by government.

Meanwhile, analysts at Reliance Securities expect Apollo Tyres’ consolidated revenue to grow in double-digit in FY23E, due to regular price hikes and higher volumes. “We expect strong volume traction in FY23-FY24 on the back of production ease for OEMs and a likely revival in replacement demand in CVs. We expect the higher export contribution at favourable exchange rate and price hikes to benefit the company on the revenue front,” the brokerage firm said.

In view of the strong volume growth ahead, regular price hikes, healthy export potential, structural positives in European operations and comfortable valuation, the brokerage firm maintain BUY on Apollo Tyre with a revised target price of Rs 290.

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