Tyre stocks face selling pressure on lower FY25 volume growth forecast; MRF, Apollo Tyres, CEAT down 3-4%

Majority of the tyre stocks faced selling pressure during Thursday's session on lower FY25 domestic tyre volume growth forecast. According to leading rating agency ICRA, India's domestic tyre volume growth is expected to moderate to 4-6 per cent in FY2025 from an estimated 6-8 per cent in FY2024 on the back of elevated base and subdued growth in the commercial vehicle (CV) segment.

Leading tyre stocks including MRF, Apollo Tyres, JK Tyres Industries, CEAT, Balkrishna Industries, among others witnessed a continuing decline in their share prices in the range of 3-4 per cent on the subdued market outlook. The benchmark Sensex crashed over 1,000 points while the Nifty dived below the 22,000 level due to across-the-board selloff amid general election uncertainties.

Domestic tyre volume to grow by 4-6% for FY2025

ICRA anticipates domestic demand from original equipment manufacturers (OEMs) in certain consumer segments like passenger vehicles (PV) and two-wheeler as well as replacement to remain healthy, supporting overall tyre volume expansion in FY2025. While revenues would expand by 5-7 per cent in FY2025, high natural rubber prices and increasing crude prices are likely to moderate the tyre industry’s margins by 200-300 basis points (bps) in FY2025. 

Also Read: MRF Q4 results: Net profit drops 7.6% YoY to ₹379.6 crore; declares dividend of ₹194 per share

The industry’s operating margins is estimated to have expanded to 15-17 per cent in FY2024, primarily on the back of softening in prices of key raw materials such as rubber, and crude derivates, including synthetic rubber, carbon black, and caprolactam for a large part of the year. 

However, input costs have been on an upward trend since January 2024. International rubber prices have increased by 25-30 per cent in the past four months, trading currently at ~Rs. 185-186 per kg owing to global supply shortage amid adverse weather conditions in key rubber-producing nations in South-east Asia. 

Given India’s reliance on imported natural rubber, domestic rubber prices have also increased significantly in the past few months, trading at ~Rs. 180 per kg. High natural rubber prices and increasing crude prices are likely to moderate the tyre industry’s margins by 200-300 bps in FY2025.

Investments in supply addition are expected to be moderate as adequate headroom is available in the existing capacities (i.e., industry’s capacity utilisation levels is estimated at 75–85 per cent in FY2024) and demand growth is forecast to remain modest for the near term.

Also Read: Share market today: Sensex cracks over 1,000 points as indices at 2-month low; investors lose ₹7.35 lakh crore

The tyre export volumes, which contribute approximately 25 per cent of industry’s sales (by value), are estimated to have recorded a low single digit growth in FY2024 after contracting by seven per cent in FY2023 due to demand shrinkage in key markets amid inflationary pressure and higher interest rates. 

On the capex front, the tyre industry is expected to continue to invest 6-9 per cent of its revenues in FY2025. The credit metrics are expected to be comfortable on the back of healthy earnings, despite the expected moderation, and moderate capital expenditure plans, according to the rating agency.

MRF, CEAT target prices reduced on cost pressure

Domestic brokerage firm Elara Securities had reduced its target prices on leading tyre majors including MRF and CEAT over the current underlying weakness in the sector and moderation in the March quarter volumes.

‘’We believe the tyre sector may have reached its peak margin (from raw material-related benefit). Historically, the stock price peaks closer to an earnings upgrade cycle, which happens closer to margin peaks; Q4 may be the start of earnings downgrade cycle,'' said Elara Securities.

Also Read: Ceat Q4 results: Net profit dips 23% to ₹102 crore, revenue at ₹2,992 crore

On CEAT's outlook, analysts said that strong catalysts for a sustained upmove are limited, barring any sharp reduction in raw material (RM) basket, which is unlikely in the medium term. Price increases in an environment of softening demand will be monitored, according to analysts at Elara Securities.

‘’With capex intensity behind, FY24-26E cumulative FCF generation may be ₹20.4 billion. We maintain reduce and lower our target price to ₹2,632 from ₹2,850 on 14x (previously 15x) FY26E P/E,'' said the brokerage.

MRF's RM cost basket grew in Q4, leading to gross margin declining by120 bps QoQ. The industry expects RM cost to surge 3-4 per cent sequentially, led by a rise in crude prices. ‘’We believe, there are limited positive triggers for the tyre industry in the current environment,'' said Elara Securities. The brokerage has reiterate a sell on MRF, with TP pared to ₹110,000 from ₹123,484.

Meanwhile, Centrum Broking has also given a ‘sell’ rating on SRF, as the capacity additions across geographies has been putting up pressure while the company has been witnessing competition from Chinese players in South-East Asian markets. 

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.