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Flat Tyres to Full Wallets 🚛




Tyre stocks have been “on a roll” lately, with 4 out of the top 5 stocks (by market cap) outperforming the Nifty 50 by a LOT - why is this happening and has this race just begun?


Rolling in the Dough

Domestic Car Sales

  • Car sales in the 2W, 3W and Passenger Vehicle segments have been crushing YoY numbers, fuelling the tyre industry by default

  • With growth rates of 51%, 66% and 41% YoY in the 2W, 3W and Passenger Vehicle segments respectively in October, tyre stocks had a ball of a time

Tyre Replacement

  • The average tyre is said to last no more than 5 years, and that number shortens as you inch towards your dream of becoming Michael Schumacher

  • This creates a steady flow of demand for tyres that need to be replaced, creating a constant sales funnel (who doesn’t need tyres!)

  • Fun Fact: This segment can make up 50-80% of tyre company revenues!

Exports surge

  • Tyre exports have increased by 31% YoY, providing a boost to the revenues of tyre manufacturers

  • This increase in exports has contributed to the outperformance of tyre stock prices

Cost Softening

  • Rubber and Crude Oil prices - two of the major inputs required in making a tyre - have seen cost reductions of 15% and 37% in the past 6 months, softening from the rise of 11% and 47% seen in the first half of the calendar year respectively

  • The margin reductions seen in 1QFY23 will bounce back as these raw material price cuts provide relief to the tyre manufacturers

The Tyre-rific Performers

Most of the outperformance for tyre stocks was driven by strong growth in passenger vehicles and heavy commercial vehicles. Companies with high exposure to these segments exhibited superior growth, and returns.


However, despite strong growth, BKT was down 10% in 2022. 83% of revenue for BKT is derived from exports. With a deteriorating economic scenario in the US and in Europe, the outlook for BKT because questionable, making it the only stock amongst the top 5 to decline in 2022.


​Company

Segments

Revenue Composition (%)

Revenue Growth in 2QFY23 (YoY)

Ceat

2 Wheeler + 3 Wheeler

28%

14%

​

Passenger Vehicles

18%

52%

​

Light Commercial Vehicles

9%

18%

​

Truck and Bus

30%

4%

​

Off-Highway

15%

27%

​

Total

100%

18%

JK Tyres

2 Wheeler + 3 Wheeler

4%

26%

​

Passenger Vehicles

28%

30%

​

Truck and Bus

54%

30%

​

Others

14%

10%

​

Total

100%

26%

Apollo Tyres

Passenger Vehicles

36%

24%

​

Light Commercial Vehicles

7%

37%

​

Truck and Bus

43%

17%

​

Off-Highway

10%

-2%

​

Others

4%

-22%

​

Total

100%

17%

MRF

Total

100%

19%

BKT

Agriculture

64%

31%

​

Off-Highway

33%

44%

​

Others

3%

37%

​

Total

100%

35%

In Closing 🚪

The strong bounce-back of vehicle sales post-COVID has supported the high growth in tyre sales. Additionally, replacement demand keeps the sector pretty steady as roughly half the revenue for tyre companies naturally gains higher visibility.


While raw material prices were expected to be a drag, with inflation, supply chain disruptions and geopolitical issues resulting in a steep rise in the price of key commodities; the trend has started reversing rapidly in the second half of 2022, as central banks’ efforts to slow economies down gained speed.


With continued strength in auto sales, and softening raw material prices, the near/medium-term outlook for tyre stocks looks pretty promising.

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