As explained last week, 16,000 will act as immediate resistance because it is a round number and therefore, is a psychological level. There are also other resistance points close to 16,000, like 16,040, based on other technical parameters. Large number of call option writing at 16,000 is another reason for this. “While declines are being bought into, follow up buying is missing at higher levels. Bulls would need a lot of strength to take the market above 16,000 mark,” says Siddhartha Khemka, Head – Retail Research, Motilal Oswal Financial Services.
Market participants believe that the 16,000 mark will be met in coming months because of several factors. First, the hope of US economic recovery kept the global equity market sentiments upbeat and the same is getting reflected here. Being in a results season, more action is happening at the stocks level. However, the result season has so far not seen any major disappointment and this is keeping market sentiments firm. Since companies with better results want to showcase it, disappointments may come only later. Moderation in commodity prices is another positive trigger. Blockbuster listing by Zomato, which opened at Rs 115 (51% above issue price) and closed at Rs 125.85 (66% above issue price), also buoyed market sentiments.
(Narendra Nathan/ET Bureau)
Sector update: Tyres
Tyre cos looking towards recovery in profitability
The Indian tyre industry is expected to recover from five years of weakness and be on a linear growth path (12% CAGR over 2021-25), supported by timely capacity expansion across companies. Improving demand, stable competitive intensity, and peak capex augurs well for profitability. This coupled with a reasonable pricing environment and operating leverage, will enable a recovery in profitability and capital efficiency.
The replacement market basket witnessed a sharp price decrease in the first half of 2020-21, before the trend reversal from October-December 2020. Since December 2020, tyre companies have taken a price hike of around 8% till June 2021. We estimate gross margin for tyre companies to decline by 80-110bps over 2021-23.
This coupled with operating leverage, will enable a recovery in profitability and capital efficiency. Capex intensity has peaked out in our view, with cumulative capex for Apollo Tyres, CEAT and MRF to reduce to Rs 116 billion over 2022-24 (v/s Rs 135.5 billion over 2019-21). The 2020-21 utilization across segments has been 63%-72% as large part of capacities are in ramp-up mode after start of operations over last 12-18 months Against this favourable backdrop, we have built a Tyre Industry Investment (TII) framework to evaluate the attractiveness of various tyre segments as well as companies.
Two wheeler segment ranks first, scoring high in terms of profitability/capital efficiency, customer stickiness, and competitive intensity. Though it enjoys the highest asset turnover and capital efficiency, it has the greatest capacity addition. Two wheelers are at the forefront in terms of the Herfindahl-Hirschman index (HHI) score, indicating this segment enjoys high concentration, with the top three players accounting for 85-90% of the market.
PCR (passenger car radial) segment ranks second. While the segment has a good growth potential (2019-23) and pricing power, it is witnessing a good amount of capacity addition in a fragmented segment (the lowest rank in the HHI Index).
T&B (truck and bus) segment ranks the lowest. While the T&B segment is likely to witness the highest growth and the lowest capacity addition, the inherent commercial functionality of the sector and the relevance of ‘total cost of ownership’ in purchasing decisions restrict customer stickiness, pricing power, and profitability. Also, the risk of imports is the highest in this segment.
Apollo Tyres is our top pick among mainstream players, It is geared for the next leg of growth, with sufficient capacity to cater to domestic/European demand. It would benefit from: a) ramp-up of new capacities, b) reduction in capex intensity, c) EU operation turnaround, and d) debt reduction. As compared to its peers, Apollo Tyres offers the best blend of earnings growth and cheap valuations.
(Motilal Oswal)
