Advisory Desk

April 24, 2012

Tyre Industry
Laggards to outperform
The Indian tyre industry is expected to report a strong set of numbers in the coming quarters, considering the falling rubber prices, which were soaring a few months back, and recovering domestic auto sales volumes. On the back of these favorable factors, the short-term outlook of the tyre industry seems positive. Among tyre companies under our coverage, Apollo Tyre and MRF have witnessed 42.0% and 58.8% returns, respectively, in the past three months. CEAT and JK Tyre, on the other hand, are lagging behind with 32.0% and 29.3% returns, respectively, during the same period. We expect these stocks outperform from a two to three-month perspective.

BUY

Decreasing rubber prices Boon for the tyre industry

Prices of rubber, the key raw material used for manufacturing tyres, were soaring since 2010 due to supply shortage and increasing demand. However, rubber prices started a downward trend after their all-time high of `258/kg in April 2011. In March 2012, rubber prices witnessed a 15.9% yoy decrease to `205/kg. Stable rubber prices have helped in curtailing inventory losses, so margins of tyre companies are likely to expand during the quarter.

Exhibit 1: Lower rubber prices to help companies in margin expansion

300 250 200
(`/kg)

150 100 50 0 Apr-10

Aug-10

Jan-11

May-11

Oct-11

Mar-12

Source: Rubber board, Angel Research

Increasing tyre exports and OE sales to drive tyre demand

The cumulative exports of tyres from April 2011 to February 2012, in all categories, recorded 20% growth, with a 29% increase in the passenger car segment and a 340% jump in the scooter (two-wheeler and moped) segment. According to Automotive Tyre Manufacturers Association (ATMA), total exports across all categories of tyres increased to 7.2mn, against 5.8mn during the same period last year. The INR has depreciated by 6.5% against USD from January-April 2012 to the current level of `52.76. We expect depreciating INR to further drive export revenue of tyre manufacturing companies.
Please refer to important disclosures at the end of this report Tejashwini Kumari
022-39357800 Ext: 6856 tejashwini.kumari@angelbroking.com

Advisory Desk Tyre Industry

Also, domestic sales of automobiles, which overall witnessed 14% qoq growth with 41% qoq growth in passenger vehicle (PV), 25% qoq growth in commercial vehicle (CV) and 8% qoq growth in the two-wheeler segment, offer a boon to tyre companies as OE demand is picking up.

Exhibit 2: QoQ growth of domestic sales

50 40

Exhibit 3: YoY growth of domestic sales

40 30

(QoQgrowth %)

20 10 0 (10) (20) Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

Two Wheelers Passenger Vehicles Commercial Vehicles Three Wheelers

(Y0Y growth %)

30

20 10 0 (10) (20) (30) Dec-10

Passenger Vehicles

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12
Two Wheelers

Commercial Vehicles

Three Wheelers

Source: SIAM, Angel Research

Source: SIAM, Angel Research

Automobile sales fell in FY2012 mainly due to 1) 13 rate hikes taken by the RBI since March 2010, which led to a substantial increase in the cost of credit, and 2) increasing fuel prices. However, the RBI has recently reduced the repo rate by 50bp, which is a positive indicator. Further rate cuts by the RBI will be a trigger for automobile demand going forward.

Stock performance
Among tyre companies under our coverage, Apollo Tyre and MRF have witnessed 42.0% and 58.8% returns, respectively, in the last three months. CEAT and JK Tyre, on the other hand, are lagging behind with 32.0% and 29.3% returns, respectively, during the same period.

Exhibit 4: Return on stocks in the past three months

70 60 50

(%)

40 30 20 10 0 Jan-12 Feb-12 Apollo Tyres MRF Mar-12 CEAT JK Tyres Apr-12

Source: Bloomberg, Angel Research

Going forward the earnings momentum of CEAT and JK Tyre is likely to improve. Thus, we expect these stocks to outperform from a two to three-month perspective.

April 24, 2012

Advisory Desk Tyre Industry

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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April 24, 2012