The Great Indian Tyre Stocks Rally. Will the Good Run Continue in 2024?

In 2023, the "wheels of fortune" turned briskly for tyre stocks. As the challenges of the previous financial year settled, Indian tyre manufacturers are now navigating in a fast lane.

The tyre industry witnessed a significant rebound after grappling with substantial hurdles in FY22, marked by escalating raw material costs and dwindling profitability.

Experiencing a robust revival, most tyre stocks have surged by double-digit percentages, ranging from 20% to an impressive 94% in 2023.

Take a closer look at the table below.

Company	YTD Performance (%)
JK Tyres	93
TVS Srichakra	53
Ceat	29
Apollo Tyres	26
MRF	22
Balkrishna Industries	22

Data Source: Ace Equity

Now, let's explore the key drivers behind this smooth ride.

#1 Robust Q2 Results

The recent surge in tyre stocks can be attributed to robust second-quarter results for FY24.

For the quarter ending September 2023, industry giant Ceat delivered stellar earnings. Ceat's revenue from operations witnessed a 5.5% year-on-year (YoY) growth, reaching Rs 30.5 billion (bn).

The performance was exemplified by a remarkable 32-fold increase in net profit. This surge was fuelled by a decline in expenses due to softening raw material prices and a surge in revenues driven by a more favourable product mix.

Ceat reported a Q2FY24 net profit of Rs 2.1 bn, compared to Rs 64 million (m) in the corresponding quarter of the previous year.

Following suit, other industry leaders, namely MRF, JK Tyres, and Apollo Tyres, also reported substantial gains.

MRF and JK Tyres both posted strong financial performances, with MRF's revenue from operations witnessing a 6.5% YoY increase, reaching Rs 60.9 bn, while revenue for JK Tyres grew by 3.7%.

Notably, MRF and JK Tyres reported a 5x jump in net profit, due to improved operating efficiency.

Similarly, Apollo Tyres experienced 5% growth in revenue. Its net profits skyrocketed 2x buoyed by strong operating performance and reduced input costs.

Company	Revenue Growth (%)	Net Profit Growth (%)
Ceat	5.5	3,134
JK Tyres	3.7	371
MRF	6.5	351
Apollo Tyres	5	164

Data Source: Equitymaster

This collective performance across industry giants fuelled the recent rally in tyre stocks, propelling them to new heights.

#2 Improved Demand

This heightened demand is underscored by robust growth patterns, particularly in the replacement market, which constitutes over two-thirds of total sales.

Over the past two years, the industry has witnessed a significant 20% increase in revenue, reflecting the sustained momentum.

Increased replacement sales, coupled with consistent demand from commercial vehicles (CVs) and passenger vehicles (PVs), have further contributed to this positive trend.

Furthermore, the strategic production and sale of diverse tyre products tailored to different vehicle requirements have also been instrumental in boosting profit margins, especially in the passenger vehicle segment.

The escalating demand for SUVs, reaching its zenith in FY23, has notably benefited the tyre industry, solidifying its position as a driving force behind the stock rally.

#3 Lower Raw Material Prices

Lower raw material prices have emerged as a crucial catalyst, mitigating the adverse impact faced by companies in the preceding fiscal year.

The key materials for tyre production, including rubber, carbon black, and petrochemicals, experienced a significant cost increase between H1FY22 and H1FY23, negatively affecting profit margins.

However, as input prices began to stabilise, a marked improvement in the supply and prices of raw materials ensued.

This, in turn, resulted in expanded gross margins by 3.6% to 9.4% year-on-year in the April-June quarter (Q1), reaching multi-quarter highs. The trend continued with a 7.5% to 8% expansion in the January-March quarter.

Notably, operating profit per tonne also reached multi-year highs, reflecting the sector's adeptness in navigating and capitalising on the evolving landscape of raw material costs.

The combination of increased demand and improved cost dynamics has contributed significantly to the rally in tyre stocks, providing investors with a compelling reason to be optimistic about the sector's prospects.

The Road Ahead

Looking ahead, the domestic tyre market anticipates sustained strength in demand, propelled by the ongoing surge in the automobile industry within a favourable economic landscape.

The buoyancy in Gross Domestic Product (GDP) growth, coupled with the government's emphasis on infrastructure development, is poised to further bolster both the automotive and tyre sectors.

Riding on this positive outlook, CEAT has earmarked a substantial capital expenditure of approximately Rs 7.5 bn for the current financial year.

This investment primarily focuses on augmenting the production capacity of agri-radial tyres at its Ambernath plant in Maharashtra, aligning with the escalating demand.

In a similar vein, MRF aims to capitalise on emerging opportunities by expanding its footprint in international markets.

With plans to invest between Rs 10-15 bn, the company intends to fund this initiative entirely through internal accruals.

This strategic move reflects MRF's commitment to diversify its market presence and leverage new avenues for growth.

Meanwhile, JK Tyres is set to channel Rs 10 bn into capital expenditure, specifically targeting the expansion of its capacities in truck bus radial and passenger vehicles radial segments.

This investment underscores the industry's proactive stance in meeting the rising demand and enhancing production capabilities.

Conclusion

Going forward, the management of these companies expect growth to continue in the current financial year based on strong market demand and moderating input prices.

To add to this, the government's massive Product Linked Incentive (PLI) boost towards the automotive sector and the global trend of China Plus One also work in favour of the industry.

Besides, a huge export opportunity is knocking at the doors of the Indian tyre industry. Several factors are at play in its favour.

Nevertheless, given the inherent nature of the industry, it is crucial to acknowledge that any disruptions in the supply chain or an increase in raw material prices could significantly impact profit margins.

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