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    Margins will go back to double digit territory for tyre companies: Mitul Shah

    Synopsis

    In terms of demand side, there is a strong order book for OEM PV but semiconductor issue is restricting the production. But still demand remains reasonably strong on that side.

    MitulETMarkets.com
    But Ceat would witness a much better growth and profitability compared to others and we can see 20% upside from current level for Ceat.
    These companies will go back to their double digit margin territory very soon and we expect this price hike to continue even for next one or two rounds because tyre prices of commercial vehicles are still below the required level says Mitul Shah, Reliance Securities.

    Given that these tyre companies have close to 35% of their input cost coming in from crude derivatives, how much of a thrust or a positive is it that crude is clearly seeing one of its worst starts to the year?
    These companies have been taking price hikes regularly but somehow due to a sharp run up in the commodity prices, these companies haven't passed on entire burden to end customer and they are passing it in a phased manner which is why it resulted into under recovery for tyre companies.

    But now what is happening is that the prices of the crude and other raw materials are already coming down since past few months though it suddenly came down very sharply in last few days. But earlier also it was declining from the peak level.

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    On the other hand all these tyre companies have been encouraging the prices despite price correction in the raw material so that is why we believe that this under recovery will completely go away.

    These companies will go back to their double digit margin territory very soon and we expect this price hike to continue even for next one or two rounds because tyre prices of commercial vehicles are still below the required level. Also, CV segment buses and trucks are still recovering very well compared to two wheeler or other segment. So we believe that this positive traction will continue and margins will go back to their double digit territory.

    Just wanted to understand whether it is only the pricing push or you think there is headroom for further demand push as well?
    In terms of demand side, there is a strong order book for OEM PV but semiconductor issue is restricting the production. But still demand remains reasonably strong on that side.

    On the other hand, commercial vehicle segment has started picking up since last one year and it continues its positive traction. Even these numbers for month of December were very strong. But on a positive note bus segment which was not doing great has also started giving more than 100%, 150% kind of growth since past few months. In value terms, the value of the tyres of trucks and buses is much higher so despite two wheelers not doing great we believe that OEM production for this passenger vehicle and commercial vehicle will continue to remain strong.
    On the other hand, replacement demand was subdued since last one, one-and-a-half years which will also improve now and which has already started improving since last one or two months.

    Also on the demand side we are not much worried and on the raw material side as well we are now witnessing these prices coming down. So there will be definitely dual push for these companies profitability going forward.

    So for every 10% change in the RM cost, how much of an EBITDA gain does it translate to?
    Overall raw material basket for these companies were roughly in the range of around 60-70%. So every 10% change is certainly a big number but this cannot be calculated in that way because part of this cost benefit will definitely be passed on.

    Part of the cost also comes with the lag effect as they have to give compensation to the vendors. But broadly we believe that this can result into 100 to 150 basis improvement every quarter now onwards probably for next one to two quarters at least.

    So overall margin can be at least 200 to 300 basis higher in next six months for these companies from the current levels provided they would retain all the sizable part of the benefits with them rather than passing on or there would not be any competitive pricing pressure between these tyre manufacturers then margin can certainly expand.

    So tell us which are your top buys from within the tyre sector and what are the price target revisions that you have undertaken?
    Ceat and Apollo Tyres are our preferred picks within tyre companies and within these two also we believe that Ceat will do much better because its entire business is India centric and Indian market is doing really phenomenally good.
    Apollo Tyre has a sizable presence in Europe region and Europe is witnessing slowdown in last few months so there could be some near-term pressure for Apollo Tyre in terms of the growth.

    But Ceat would witness a much better growth and profitability compared to others and we can see 20% upside from current level for Ceat.

    (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)





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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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