Apollo Tyres- Do not understand the valuation

Hi,

May I request you to also consider the following points in your analysis :

1. Tyre imports in India grew 22% to Rs 2360 cr in FY2015. Imported tyres now constitute 10% of replacement market for motorcycles and 20% of passenger car radials (PCR)

2. Truck and Bus Radials (TBR) imports grew 60% in FY2015 to 0.78 mn tyres. Recent data points to 2.5 mn TB tyres imported per month.

3. Imported tyres are sold at a steep discount compared to locally manufactured tyres. For eg: Chinese TBR’s are available at 14 to 15000 per set vs locally produced tyres at 21 – 22000 per set. Locally produced bias tyres (TBB) are sold at 17 – 18000 per set.

As a result, capacity utilisation of domestic players is declining as imports garner higher market share.

Anti dumping duty (ADD) process takes 1.5 to 2 years and requires evidence of impact on profitability. Currently Tyre companies are enjoying cycle peak margins and hence ADD may not be applicable

Domestic companies have started passing on benefits of raw material prices to customers. Price reduction rounds have been led by MRF and so far realisations have declined by ~8 – 10% over the past 6 – 8 months.

A bunching up of replacement demand was experienced in FY2015 when the replacement market grew by 17%. ICRA now expects volume growth in replacement market to be 4 to 5% p.a. for the next 2 to 3 years.

Replacement cycle is 3 to 4 years for two wheelers and passenger cars. Currently subdued volumes do not point towards higher replacement demand for the next 2 -3 years.

The only positive factor is softer raw material prices which can allow margins to remain healthy. But lower utilisation and market share losses will cap margins from here on.

Given this, I surmise that the margin cycle for the industry has turned.

Valuations : These sectors typically look cheap at peak of the cycle as profits are high and expensive near bottoms when profits are very low.

Hope this is of help.

Data is from ATMA’s publication for FY2015 and could have changed. FY2016 publication is expected in Aug 2016.