Top tyre firms a lot more than commodity play now.

MUMBAI: Tyre companies over the past few years have shown the attributes of consumer companies -double-digit margins, consistent earnings growth, dividend payments and over 20% return on equity.

This has led investors to gradually realise that tyre companies are not just commodity companies and can continue to report a consistent performance in the coming years. The stocks of top 4 tyre companies -MRF , JK Tyre, Apollo and Ceat -have already run up 20-30% in the past one month, but they still continue to trade at around 8-11 times trailing earnings which can get substantially re-rated.

According to CRISIL, these top 4 companies constitute 73% market share of the `50,000-crore tyre market, which has grown at 15% compounded growth from FY11-FY16. Within this, the tyre industry derives demand from mainly three markets -replace ment, other equipment manufacturers and exports. Of this, replacement market, which is business to consumer (B2C), is 60% value-wise and this is where the brand becomes important.

Through getting several celebrity endorsements and advertisements, these companies have created a space in the consumers' mind who is now willing to pay extra for a branded reliable tyre. Increasing sales of passenger vehicles is also making consum ers to pay extra for the branded tyres."Customers have highest preference for MRF , followed by JK tyres amongst the Indian tyre brands," said Subhash Krishnan, a tyre dealer who has been in this business for the last 30 years."Chinese tyres are mostly preferred by tourist vehicles but there is no warranty on their products except for a handful Chinese manufacturers."

The brand strength can also be verified by the company's financials margins and return on equity . MRF and JK score higher than Apollo and Ceat. Apollo also has overseas business which contributes around twothird of the company's total revenues.

Tyre stocks corrected sharply in the first six months of 2016 due to a rise in rubber prices post February and increasing dumping by Chinese manufacturers. According to analysts, increase in the rubber price is a risk but according to JK Tyre management, the real dent may not be more than 10% on the margins since the industry has never benefitted from the low price.

Also, last year due to dumping of Chinese tyres in India, domestic players faced a stiff competition but despite that, most companies delivered decent earnings growth. Chinese tyres sell 25-40% cheaper than local ones. The industry has been pursuing a case of anti-dumping on Chinese tyres and investigation by DGFT is going on. Tyre imports constitute nearly 10% of the market.

Source : economictimes.indiatimes.com