Mumbai: Kotak Securities has downgraded the shares of tyre companies and said it is not the right time to bottom-fish as the brokerage expects their profitability will remain under pressure in FY23 due to a surge in crude oil prices and elevated competitive intensity. Over the past two quarters, Brent crude has almost doubled amid the Russia-Ukraine crisis.
“Competitive intensity has increased with the market leader adopting an aggressive pricing strategy in select segments, which has made it difficult … to recover the raw material price inflation,” Kotak said in a note. “We believe escalating raw material prices along with subdued demand in the replacement segment will continue to pressure profitability.”
Tyre stocks such as
, , and have corrected over 25% from their yearly highs, and and JK Tyres fell nearly 37%.
Kotak has cut target prices for Apollo, CEAT, and MRF. The decision is driven by a cut in Ebitda margin assumptions due to a further increase in the raw material basket and inadequate price hikes due to elevated competitive intensity and finance cost assumptions as interest rates head north.
Synthetic rubber, carbon black, and chemicals for which prices are derived from crude form around 40% of the raw material basket. Kotak expects global natural rubber (NR) inventory to decline soon, resulting in higher prices. NR accounts for around 38% of the raw material cost of domestic tyre companies. A 10% increase in NR prices would require a 2% price hike by the tyre companies. The firm has projected post-tax return ratios for CEAT, MRF and Apollo to remain below 10% in FY24.
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