 "Tyre stocks on a high")
A fall in the spot prices of natural of rubber has triggered a sharp rally in tyre stocks. The Business Standard Tyre Index is up 21 per cent since the beginning of October against a seven per cent rise in the Sensex during the period.
Mumbai-based CEAT is the biggest gainer with a gain of 72 per cent since the beginning of October, followed by TVS Srichakra (up 56 per cent) and J K Tyre (46 per cent). The gains have been more modest for the shareholders of MRF (up 23 per cent) and Apollo Tyres (13 per cent) but this is because the two companies have had a much better run in the past. MRF and Apollo Tyre together account for two-thirds of the industry’s combined market capitalisation.
Analysts expect the rally to continue given the downward trajectory in rubber prices and low valuation of tyre makers. CEAT and JK Tyre have been trading at just three times their earnings in the past four quarters, while MRF is available at 9x. Analysts expect a sharp rise in the industry’s FY15 earnings, thanks to gains from lower rubber prices.
Analysts expect the bearish trend to continue given the poor economic growth in North America and Europe and the commencement of rubber harvest season in Kerala. “Globally, rubber demand is down and rubber producers in south-east Asia are sitting on huge inventory. It will keep international rubber prices on a downward trajectory,” says an analyst at a local brokerage.
The gains are likely to flow to tyre makers’ bottom line. “Around two-thirds of the industry’s revenue is accounted for by replacement market where manufacturers enjoy some pricing power. Besides, they don’t like frequent price changes as it may disrupt trade and annoy customers,” says Arora, who has a ‘buy’ call on CEAT. While the stock has already met his target price of Rs 235 a share; he plans to raise it by Rs 40-45 to account for lower raw material cost in the next two quarters.
He, however, advises caution. “It is not a secular rally, but a short-term play on raw material prices. Top line growth remains flat and, with the exception of MRF, most tyre makers continue to battle high debt and weak balance sheets.”
Mumbai-based CEAT is the biggest gainer with a gain of 72 per cent since the beginning of October, followed by TVS Srichakra (up 56 per cent) and J K Tyre (46 per cent). The gains have been more modest for the shareholders of MRF (up 23 per cent) and Apollo Tyres (13 per cent) but this is because the two companies have had a much better run in the past. MRF and Apollo Tyre together account for two-thirds of the industry’s combined market capitalisation.
Analysts expect the rally to continue given the downward trajectory in rubber prices and low valuation of tyre makers. CEAT and JK Tyre have been trading at just three times their earnings in the past four quarters, while MRF is available at 9x. Analysts expect a sharp rise in the industry’s FY15 earnings, thanks to gains from lower rubber prices.
Analysts expect the bearish trend to continue given the poor economic growth in North America and Europe and the commencement of rubber harvest season in Kerala. “Globally, rubber demand is down and rubber producers in south-east Asia are sitting on huge inventory. It will keep international rubber prices on a downward trajectory,” says an analyst at a local brokerage.
The gains are likely to flow to tyre makers’ bottom line. “Around two-thirds of the industry’s revenue is accounted for by replacement market where manufacturers enjoy some pricing power. Besides, they don’t like frequent price changes as it may disrupt trade and annoy customers,” says Arora, who has a ‘buy’ call on CEAT. While the stock has already met his target price of Rs 235 a share; he plans to raise it by Rs 40-45 to account for lower raw material cost in the next two quarters.
He, however, advises caution. “It is not a secular rally, but a short-term play on raw material prices. Top line growth remains flat and, with the exception of MRF, most tyre makers continue to battle high debt and weak balance sheets.”