scorecardresearchKotak Securities downgrades 3 Major tyre stocks, citing high crude prices
Due to high input cost pressure, the profits of all major tyre companies fell by 60-80% in the March quarter.

Kotak Securities downgrades 3 Major tyre stocks, citing high crude prices

Updated: 17 Jun 2022, 07:58 AM IST
TL;DR.
Kotak Institutional Equities reduced its target price for some tyre stocks and stated that now is not the time to bottom-fish. The brokerage firm expects tyre companies' profitability to remain under pressure in FY23 due to a surge in crude oil prices.

The year 2022 was not a favourable start for the majority of industries due to high commodity prices, low demand, high inflation, and high-interest rates, and all of this had impacted the companies' gross margins in the March quarter. The tyre industry is one such industry that is heavily reliant on crude oil; oil prices have doubled since the Russian-Ukraine war, and with rising RM costs, tyre companies have raised prices multiple times in 2022. And, with no sign of a drop in oil prices, the industry will suffer in the next quarters.

Kotak Institutional Equities reduced its target price for some major tyre stocks and stated that now is not the time to bottom-fish. The brokerage firm expects tyre companies' profitability to remain under pressure in FY23 due to a surge in crude oil prices. Adding to this, it said the competitive intensity has increased with the market leader adopting an aggressive pricing strategy in select segments, which has made it difficult to recover the raw material price inflation.

Kotak cut its target on Apollo Tyres, MRF, and CEAT mainly on account of lower EBITDA (earnings before interest, tax, depreciation, and amortisation) margin assumptions and higher finance cost assumptions as interest rates head north.

Overall, it believes that the gross margins of domestic tire companies will continue to remain under pressure given the multiple headwinds.

The brokerage firm downgraded Apollo Tyres to "reduce" from "add", with a revised target of 175, down from 225. This equates to a potential 6% drop from the current level.

It also downgraded Ceat to "sell" from "reduce", with a revised target of 850, a potential downside of 10 per cent.

It has maintained a "sell" rating on MRF with a revised target of 55,000, translating into a potential downside of more than 20 per cent.

High crude oil prices

Crude oil derivatives such as carbon black, synthetic rubber and nylon tyre cord fabric together make up nearly half the cost of producing a tyre. Over the past 2 quarters, Brent crude prices have almost doubled, which has had a chain effect on these prices.

Kotak expects global natural rubber (NR) inventory to decline soon, resulting in higher prices. NR accounts for around 38% of the cost of raw materials for domestic tyre companies.

A 10% increase in NR prices would require a 2% price hike by the tyre companies. The firm has projected post-tax return ratios for CEAT, MRF and Apollo to remain below 10% in FY24.

RM cost Pressure

Due to high input cost pressure, the profits of all major tyre companies fell by 60-80% in the March quarter.

MRF: MRF Ltd reported a 50.26 per cent drop in consolidated net profit at 165.23 crore in Q4 FY22 despite a 10% increase in net sales to 5,370.8 crore in Q4 FY21.

On a full-year basis, the tyre maker reported a 45% decline in consolidated net profit to 681.67 crore in the financial year ended 2022 over the financial year ended 2021. Net sales rose 19.5% to Rs. 19,316 crore in FY22 over FY21.

Total expenses during the period under review were higher at 5,142.79 crore compared to 4,425.21 crore in the year-ago quarter.

On a consolidated basis, the tyre maker's net profit fell 47% to 168.53 crore.

Ceat: For the fourth quarter ended March 2022, Ceat reported an 84 per cent drop in consolidated net profit to 25 crore.

The company had posted a net profit of 153 crore in the January-March quarter of 2020-21.

For the year ended March 2022, the company reported a consolidated net profit of 71 crore, compared to 432 crore in 2020–21.

Consolidated Financials ( in Cr)MRFCeatJK TyreGood Year Apollo Tyres
 Mar-22Mar-21Mar-22Mar-21Mar-22 Mar-21Mar-22Mar-21Mar-22 Mar-21
Total Revenue5,370.84,874.22,595.32,292.93,319.62,944.6602.8574.55,615.55,087.6
Operating Expenses4,764.64,0502,404.52,028.93,083.92,268.9564.7501.94,9524,211
Operating Profit540.2766.4187.5260.8 227.9500.433.567.5626.4814.7
Operating Profit Margin(%)10.18%15.91%7.23%11.39%6.88%18.07%5.60%11.85%11.23%16.21%
Interest67.476.856.639.9100.7105.31.40.8127.9104.2
Profit Before Tax22844918.7134.244.4280.623.358.4160.2423.4
Tax62.8116.81-115.984.55.915.246.7136.1
Profit After Tax165.2332.125.2152.840.2189.117.443.2113.5287.3

JK Tyre: JK Tyre & Industries reported an 80 per cent decline in consolidated net profit at 40.2 crore for the fourth quarter ended March 31, 2022.

Revenue from operations in the quarter stood at 3,319.6 crore as against 2,944.6 crore in the year-ago period.

Total expenses were higher at 3,280.78 crore as compared to 2,673.58 crore in the corresponding period a year ago, with the cost of materials consumed rising to 2,219.63 crore from 1,839.4 crore in the same quarter the previous year.

For the fiscal year ended March 31, 2022, consolidated net profit was at 201.24 crore as compared to 330.93 crore, down 39.2 per cent.

Apollo Tyres: Apollo Tyres reported a 61 per cent drop in consolidated net profit to 113 crore for the fourth quarter ended March. The company reported a consolidated net profit of 287 crore in the January-March quarter of 2020–21 fiscal.

Revenue from operations increased by 11% to 5,615 crore, compared to 5,087 crore in the fourth quarter of FY21.

For the year ended March 31, 2022, the tyre major reported an increase in net profit by 82 per cent to 639 crore, as compared to 350 crore in 2020-21.

Good Year: For the fourth quarter, the company reported revenue of 602 crore, a 5% increase year on year and it reported a profit after tax (PAT) of 17 crore, a 60% decrease from 43 crore in the same period last year.

In FY2022, the company’s revenue came in at 2,459 crore, an increase of 36 per cent YoY, while PAT was 103 crore (-24%) compared to 136 crore for the same period last year.

New 52-week Lows

The majority of tyre companies' stocks are trading near 52-week lows. Apollo Tyres is down 27%, Ceat is down 36%, JK Tyre is down 40%, and MRF is down 22% from their 52-week highs and has given negative returns to investors since the start of the year as well.

 Scrip NameLTP (16 June Closing)52 week Low Previous 52 week low date % Distance from 52 week Low
MRF Ltd.67,324.85 63,000.0022 Feb 226.86%
Jk Tyre &Industries 100.50 98.0007 Mar 222.55%
Apollo Tyres176.95 165.2507 Mar 227.08%
Ceat925.00 919.0030 Mar 220.65%

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

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