An Impressive Performance Of Tyre Stocks In Q3FY13

Ceat, JK Tyres and MRF announced their Q3FY13 results yesterday (February 7). All these companies have shown a robust growth in their revenues and a massive improvement in their margins. The share prices of Ceat and JK Tyres appreciated yesterday by 5.19% and 1.75% respectively, while MRF announced its results in the post market hours.

Although the Indian automobile scene has been subdued over the last few quarters, tyre stocks were expected to perform well, driven by a demand from the replacement market. The replacement market broadly represents 70% of the turnover of the tyre industry. Although sales to Original Equipment Manufacturers (OEM) have been lacklustre due to the macroeconomic situation, robust sales in the past years have been sustaining the demand for replacement.

Moreover, margins have been expected to improve drastically due to the stabilisation of rubber prices. In Q3FY13, the average price of domestic (Kottayam) rubber of grades RSS-3, 4 and 5 has been Rs 17233.67 per 100 kg, which is 14.85% lower than the average of Rs 20,238.33 per 100 kg, observed in Q3FY12. Easing down of the constituent that comprises of about 45% of the tyre manufacturers’ cost definitely eases the situation out.

In line with the above points, Ceat had a YoY volume growth of 15% in the quarter under review. Revenues grew by 13.33% to Rs 1238.50 crore, on a yearly basis. Margins saw a massive positive growth with the EBITDA margin improving by 268 basis points to 8.93% and the net profit margin going up by 107 basis points to 1.81%.

Ceat recently signed an agreement to form a joint venture with A K Khan & Company to set up a tyre manufacturing facility in Bangladesh. This move is expected to further augment the company’s performance in the near future.

Aided by deeper penetration in the market, particularly in Truck and Bus radials and an additional capacity creation in the same resulted in a revenue growth of 3.06% for JK Tyres. It saw a massive boost in margins similar to that of Ceat. JK Tyres’ EBITDA margin improved by 369 basis points to 9.18% and the net profit margin saw a turnaround rise of 326 basis points to 1.65%, on a yearly basis.

Similarly to its peers, MRF had revenues growing YoY by 5.23% to Rs 3025.75 crore in Q3FY13. At the same time, its EBITDA jumped by 55.92% to Rs 403.1 crore (margin: 13.32%) and the net profit grew by 59.64% to Rs 180.22 crore (margin: 5.96%).

There has been a stabilisation of rubber prices at current levels. Also, drastic cost cutting measures have been taken by these companies during times when rubber prices were at the peak. These factors lead to the markets expecting the margins to remain at these levels in the near-term. Moreover, although OEM sales have been low, the replacement market is expected to create a good support for volume and revenue growth. We thus continue to remain bullish on the performance of tyre manufacturers.