Nomura India in its latest note on tyre sector said there has been a second round of cut in tyre prices, with dealer indicating that the prices of a few high-selling SKUs (Stock Keeping Units) of TBR tyres getting a Rs 500-800 per pair price cuts. Considering an average selling price of Rs 40,000 per pair, it suggested a price reduction of 1.5-2 per cent by leading tyre players like Apollo Tyres and JK Tyre.
If the natural rubber prices keep rising, the brokerage sees a 100 basis points hit on margin for Apollo Tyres by the first quarter of FY25, i.e. June quarter. The fresh development is seen in response to a similar price-cut action taken by the truck segment leader MRF Ltd.
“Overall, we note that this is the second instance of price cuts, which has happened only in the TBR segment, while during July-Sep 2023, there were 1 per cent price-cuts across the TBR and TBB (Truck Bus bias) segments,” it said.
Nomura India said Apollo Tyres has the highest exposure to the truck & bus segment (60 per cent) in its universe.
“Our analysis indicates that Apollo Tyres has taken a 1.5 per cent price cut only for two SKUs, which form 40-50 per cent of TBR sales for Apollo Tyres. The TBR segment accounts for around 35 per cent of standalone revenue for APTY. Hence, the overall impact of the price cut is only 20 bps. However, commodity prices like those of natural rubber have jumped 11 per cent QoQ to Rs 168 per kg currently. Hence, if current commodity prices sustain, our Commodity Cost Index indicates a 100 bps impact which could be visible by Q1FY25,” it saidz
Besides, Nomura said its checks indicate that demand remains weak in the truck replacement segment. Apollo Tyres FY24F standalone Ebitda margin is estimated at 18.1 per cent, which is likely to be 22-23 per cent in the replacement segment and is well above the historical mean margin of 12-13 per cent (15-16 per cent for the replacement segment).
“Hence, we expected a high probability of price-cuts to support demand. Also, Apollo Tyres strategy to hold on to high margins (at the expense of market share) is unlikely to drive meaningful earnings growth over FY25F/26F, in our view. Hence, we expect only 5-6 per cent revenue/EBITDA CAGRs over FY24F-26F, and factor in standalone EBITDA margin to normalise from 18.1 per cent in 3QFY24 to 17.5 per cent in FY25 and 17.3 per cent over FY26,” it said.
Nomura India said the prevailing valuation at 6.8 times FY26F EV-Ebitda , 15 times PE seems expensive. It has ‘Reduce’ rating on the stock.