Brokerage firm Motilal Oswal Financial Services believes that moderation in raw material (RM) prices will boost the margin recovery of tyre manufacturers.
"After witnessing hyperinflation in its key input cost over the last 15-18 months, the tyre industry is seeing a moderation in natural rubber as well as crude prices (with a lag in synthetic rubber and carbon black prices). This augurs well for a margin recovery from the second half of the current financial year (H2FY23)," the brokerage firm said.
"Coupled with asset sweating and controlled capex, it will drive an improvement in FCF, financial gearing, and RoCE."
Key input prices saw an increase (over 50%) since H1FY21, with the average RM basket costing nearly ₹180/kg, resulting in an over 10pp fall in gross margin.
Motilal Oswal highlighted that natural rubber prices appear to have peaked out in mid-Jun’22. Spot prices for natural rubber (Thailand spot/RSS4 Kottayam) fell 34%/12.5% from its Q1FY23 average.
Synthetic rubber and carbon black prices are 6-7% higher over their Q1FY23 average – a reflection of the delayed impact of crude oil price inflation in H1CY22. Since underlying crude oil prices have corrected by 22% from their Q1FY23 average, it should reflect with a lag in both synthetic rubber and carbon black prices.
"We expect the margin to recover from H2FY23, with a softening in underlying RM prices. As per our estimates, for every 10% change in natural rubber/synthetic rubber/carbon black prices (over its FY22 average), EBITDA margin will change by 160bp/80bp/100bp," Motilal Oswal said.
"We are building in a margin expansion from Q3FY23, with the full benefit seen in FY24. On an FY22 base, we expect the blended gross margin to expand by nearly 190bp in FY24 (+300bp over FY23E). Our gross margin estimate implies a mean reversion to about 36.8% (its 10-year average) by FY25," the brokerage firm said.
Motilal Oswal has upgraded its FY24E earnings per share (EPS) for Apollo Tyres (+4%), CEAT (+12%), and MRF (+3.5%) to partly reflect the correction in RM costs.
Apollo Tyres offers the best blend of earnings growth and cheap valuations versus its peers, Motilal Oswal said.
"The stock trades at 17.4 times/11.7 times FY23E/FY24E consolidated EPS. We maintain our buy rating with a target price of ₹325 (nearly 12 times Sep’24E consolidated EPS)," Motilal Oswal said.
For CEAT, the brokerage said that the deferment of TBR capacity will ease pressure on its P&L and balance sheet. Valuations, at 40.6 times/13.1 times FY23E/FY24E consolidated EPS, do not fully capture the ramp-up in new capacities and stabilization in RM cost.
The brokerage firm maintained a buy rating with a target price of ₹1,630 (based on nearly 13 times Sep’24E EPS).
Dilution in MRF's competitive positioning, particularly in the T&B and PCR segment, is resulting in a substantial narrowing of the gap in profitability with peers, said the brokerage.
"Current valuations at 46.2 times/23.1 times FY23E/FY24E EPS fairly capture the changing competitive dynamics for MRF. We maintain our neutral rating with a target price of ₹82,000 (nearly 20 times Sep’24E EPS)," said Motilal Oswal.
Motilal Oswal expects Balkrishna Industries’ outperformance in the Specialty Tyre industry to continue, driven by the expansion of its product portfolio and ramp-up in the OTR segment.
"Near-term headwinds notwithstanding, valuations at 26.1 times/20.3 times FY23E/FY24E EPS fairly reflect its industry-leading margin, FCF, and capital efficiencies. We maintain our neutral rating with a target price of ₹2,300 (22 times Sep’24E EPS)," said the brokerage firm.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
