Tyre companies are expected to witness better margins in the current financial year, aided by a fall in the prices of crude oil and the declining industrial rubber, according to Mumuksh Mandlesha, research analyst at Anand Rathi Shares and Stock Brokers Ltd.
“What is happening is that crude prices have come down and industrial rubber prices have come down. So, from here onwards, you will see better margins for the tyre companies,” he told NDTV Profit in a conversation on Tuesday. “That will be a positive tailwind for them. And mostly, the reflection of the better margins should happen from Q2 onwards, as there’s more lag in the impact.”
MRF and Ceat are the most preferred stocks in the tyre sector because of both gaining market share, according to the analyst. “It’s about a 15% kind of upside, not a bigger upside. They’ve also caught up valuation-wise.”
Last few months, Ceat and MRF have done really well. So, they are very limited upside today in the names, Mandlesha said. “But we see these two to be better in the tyre space.”
The replacement market is projected to grow at 6% to 7%, while the OEM market is expected to see mid-single-digit growth, and exports should see double-digit gains, he said. “So, that will help them sustain a good top-line growth for all the tyre companies.”
Mandlesha sees established players like Ceat and MRF continuing to gain market share over competitors such as Apollo Tyres and JK Tyre and Industries.
He also predicted a “limited upside” for Balkrishna Industries Ltd. ‘s stock. “We were positive, but now the news has basically taken up with the upside and limited upside from now on.”
He also analysed Balkrishna Industries’ foray into the passenger car radial and truck and bus radial tyre segments. He agreed that the Street took it quite negatively.
The Indian tyre space is quite competitive. They generally have a huge earnings volatility because whenever the input cost changes, they generally find it difficult to pass on to the market, according to Mandlesha. “Hence, in my estimates also, my valuation multiple has seen a cut due to the dilutive nature of this new business.”
Mandlesha expressed concerns about Balkrishna Industries achieving Rs 4,600 crore in revenue from these new segments by FY30. He contrasted this with the size of the Indian PCR and TBR market, currently valued at around Rs 50,000 crore. It is projected to grow to Rs 80,000 crore by FY30.
“They are targeting quite a substantial number in just five years…PCR segment where there’s a brand importance, you need the OEM revenue first before it gets reflected in the aftermarket. So, they are quite difficult to penetrate,” he explained.
The competitive nature of these segments, coupled with potential gross margin pressure and higher marketing costs, could result in a sub-10% margin for Balkrishna Industries in the near term. This will be a significant drop from its current Ebitda margin of over 25%, he said.
Watch
Disclaimer: The views and opinions expressed by the investment advisers on NDTV Profit are of their own and not of NDTV Profit. NDTV Profit advises users to consult with their own financial or investment adviser before taking any investment decision.
. Read more on Business by NDTV Profit.Mandlesha sees established players like Ceat and MRF continuing to gain market share over competitors such as Apollo Tyres and JK Tyre & Industries. Read MoreBusiness, Notifications
NDTV Profit
