Nitesh Sharma , an Analyst with PhillipCapital India talks to ET Now about why the Indian Tyre Industry can be bullish right now and why Chinese imports are declining
Edited excerpts:
The premise what you are making for tyre Industry is that the China dumping fear is behind us, why are you making that case?
What we understand through our industry checks is that import from China has been reducing drastically for quite some time.
In October 2016, 450 containers of TBR tyres were imported in India. In Feb 2017, the number declined to 150 containers, more so in Feb. Department of Commerce decided not to withdraw the antidumping duties on Chinese TBR tyres.
Chinese are not much interested in the Indian market and they are totally focussing on the US market as of now post the withdrawal of antidumping duties by the US. The key reason for same is US market is much more profitable than the Indian market and secondly it is almost 8x to 10x bigger market compared to the Indian market
Indian importers are finding it difficult to source tyres from China now because all the plants in China have allocated their output to the US market. And not only they are not able to source tyres from China but also the Chinese players have raised TBR tyre prices for the Indian market by 10 per cent to 15 per cent. This has rendered them unattractive for the fleet operators who used to buy Chinese tyres for the hefty discount compared to the domestic players.
So we believe this is a very big positive move for the domestic players as importers are now unlikely to bounce back any time soon, plus given that rubber prices have been declining after the seasonal spin that we saw, will provide will alley the concerns on margins that the investors had.
What is it that you are highlighting in your note, is it a basket buy on all the Indian tyre manufacturer or does one have to be selective within the sector as well?
Yes it is largely a basket buy for the tyre sector as a whole but in terms of our formal coverage, we like CeatBSE 2.85 % more than the other tyre companies primarily because it is focussed towards structural growth led by focus on new capacities in two-wheeler and passenger vehicle segments which are consumer facing businesses and provide higher margins not only in India but globally this is a trend that consumer-facing businesses of two-wheeler and passenger vehicle tyres have much higher margins compared to a price sensitive truck segment.
So although the Chinese imports decreasing provides a relief to all the tyre players, we are more bullish on Ceat because we see gross cycle margins resilience in the company going ahead led by as I said the consumer-facing business contribution increasing.
The second pick that we have under our coverage from over coverage is Apollo TyresBSE 4.58 % which will be a big beneficiary due to lower imports from China because almost 48 per cent of domestic revenues for Apollo comes from the M&HCV segments where we are seeing an easing of competition and pricing power coming back. So these two are the picks which we prefer in the sector although I would say it is more of basket buy.
