Stocks for 2022: Apollo Tyres, Balkrishna Industries top bets from USD 9bn tyre industry of India

Indian tyre industry valued currently at USD 9 bn has been growing at a CAGR of 11 per cent over the last 27 years and investors must not ignore it as we head to the new year of 2022, Centrum Broking said in a note.  

FY21 (April-March) has been an unusual year for the auto industry, as the pandemic pushed vehicle sales further down after the FY20 downturn. Despite the volatility, Nifty Auto index rose over 18 per cent as per the data collated till 24 December.

Both Apollo Tyres (up 17%) and Balkrishna Industries (up 33%) outperformed the Nifty Auto index so far in 2021, data showed.

Though production witnessed degrowth by 14 per cent on a YoY basis, tyre companies had one of the best years in history, as players like Apollo Tyres, Balkrishna Industries, and Ceat reported growth in both revenue and margins, highlighted the Centrum Broking note.  

This was largely on the back of strong replacement demand. 

The brokerage firm is of the view that the tyre demand is expected to show healthy growth in FY22, FY23, and FY24 on the back of a recovery in OEM sales across all segments, aided by economy-led replacement demand.

It prefers names with global exposure and higher TBR (truck/bus radial tyre) share. Centrum Broking likes Apollo Tyres and Balkrishna Industries over Ceat.

A big boost for these companies will come from the CAPEX plans which they have outlined for the near future. All three companies have announced CAPEX plans for the coming years, which reinforces the confidence in expected demand.

Ceat has announced a CAPEX of Rs 10bn for FY22 towards increasing TBR and PCR capacity. Apollo Tyres plans Rs 20bn CAPEX mainly towards Andhra plant for TBR and PCR capacities. Balkrishna Industries has announced Rs 23bn for the next two years for capacity expansion, modernization, and backward integration, said the note.

The strong operating performance resulted in positive free cash flow generation for all three companies in FY21. The companies used this opportunity to reduce debt.

“Net Debt to Equity declined from 0.7x to 0.4x for both Apollo and Ceat, whereas Balkrishna became long-term debt free. This makes it easier for future CAPEX plans. The companies intend to fund their capex through internal accruals and debt,” added the note.

Centrum prefers Apollo Tyre given its diversified revenues, i.e., 30% from Europe, and favorable mix towards TBR, which is expected to grow faster than other segments.

Balkrishna Industries would witness strong growth on the back of a healthy outlook for underlying industry demand in both Europe and the US (overseas sales at 83% in H1FY22).

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