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Balkrishna Industries

Auto and auto ancillaries have been under pressure for quite some time now.

Potential structural changes on account of EV adoption, rising raw material prices, rising cost of vehicle ownership, production cuts owing to semiconductor shortages— the challenges have been plenty.   

But please keep in mind, not all’s lost. And markets too tend to overreact just like we all do sometimes. 

For instance, tyre stocks are down 20%-50% from their all-time highs.

Situation at the ground zero level…

Not all tyre companies are facing the same storm.

For instance, off highway speciality tyre manufacturer, Balkrishna Industries, has seen milder stock price corrections and it’s trading above its 2018 highs. It enjoys high margins and the demand trends are extremely strong in the Off Highway Tyre (OHT) category.

Similarly, Apollo Tyres, which caters mainly to Truck & Bus (T&B) and Passenger Vehicles (PV) segments, has also shown a steady performance on Dalal Street.  

 On the other hand, companies such as CEAT have taken a huge knock despite having a more diverse portfolio.


Rising costs and fragile demand recovery seem to have affected the Two-Wheeler (2W) and 3-Wheeler (3W) segment badly. Not surprisingly then, the performance of TVS Srichakra has been lacklustre.

Apollo Tyres

Tyre companies are capex bound…

If the OHT segment is lucrative and has a huge export potential in Europe and the US, why aren’t other companies expanding?

They are! In fact, all leading tyre manufacturers have been expanding capacities depending on their product mix.  

TVS Srichakra which already has a presence in the OHT announced a capex of Rs 1,000 crore last December for expanding its 2W and 3W capacity by 25%-30% and that of OHT by nearly 100%.

Apollo Tyres has incurred a capital expenditure of Rs 1,200 crore in FY21 and has guided for a capex of Rs 1,100 crore in FY22.

CEAT has also been in an expansion mode.

For the period FY19-FY24, the company has planned a capital expenditure of Rs 4,000 crore, excluding maintenance and modernization. The company has already incurred a capital expenditure of ~ Rs 2,500 crore between FY19 and FY21.

It has guided for a capital expenditure of Rs 1,000 crore in FY22, of which it has already spent a little over Rs 300 crore. CEAT is expected to do another Rs 700-Rs 800 crore of capex next fiscal as well.

Why is CEAT grossly underperforming its peers then?

The company has been facing margin pressures. Moreover, in the quarter gone by, the company took up a debt of Rs 220 crore which it intends to utilize partially towards capacity additions and partially for meeting working capital requirements. 

The remarks of the management that the company’s overall debt is likely to go up by “a few hundred crore” in H2FY22 seem to have dampened the sentiment of investors. The management expects a 10%-12% rise in the interest cost due to higher borrowing.

Should that be a big concern?

Well, it depends on the future profitability trends. It’s noteworthy that CEAT’s net debt/EBITDA ratio fell to 1.36 times in FY21 as compared to 2.57 times in FY20.


On December 16, 2021, CARE Ratings has reaffirmed CEAT’s ratings of “AA” and “A1+” on long term and short term debt, respectively. The credit rating agency expects the outlook for the company to remain steady despite the credit limit being enhanced by Rs 210 crore.

Typically, any new capacity takes approximately 18-24 months to see a significant ramp up. In other words, the capex done so far and planned for the next couple of years will take time to reflect fully in the sales.

The company’s net free cash flows might start showing a significant improvement once the company comes out of a capex phase.

At the end of Q2FY22, the company had utilized around 80% of its existing capacities. Utilization in the off-highway tyres was near its peak and that in the 2W and 3W segment was around 85%.

How big an opportunity is EV for CEAT?

Did you know EVs require heavier tyres and unlike the vehicles running on Internal Combustion Engines (ICEs), EVs don’t make noise and hence need tyres too that are noiseless, right? This calls for adoption of new technologies. The company is gearing up for such tectonic shifts.   

CEAT has a 50% market share already in 2W EVs and has been working on expanding its EV portfolio as the market advances.


The company is expecting EV revenue as a percentage of total revenue to remain under 10% over the next couple of years. But on a slightly longer time horizon, say 5 years, the management of CEAT is expecting EVs to make up 30%-40% of the company’s revenue.

The management has hinted at improving the company’s ESG score over the next couple of years. CEAT meets 25% of its energy requirements through solar power and it aims to increase the share of renewables to 50% over the next 2 years.

Does it have a presence in the OHT segment?

Yes, it does. But so far, the company hasn’t aggressively expanded its capacities under this segment. However, the on-going multi-year capex will help CEAT grow the revenue contribution of OHT and other speciality tyres segment to 20% over the next 5-7 years.

Is a big replacement demand coming?

This could be a joker in the pack. If capacity additions of tyre companies come on stream as planned, capex bound tyre companies might make moolah going forward!

The Indian tyre market can be divided broadly in three market categories—OEM (Original Equipment Manufacturers), replacement and exports. The replacement market accounts for nearly 60% of the industry’s sales by volume, OEMs account for 25%-30% and the rest comes from exports.

Besides broader economic factors, industry specific factors such as OEM sales, i.e., new vehicle registrations, replacement cycle and exports affect this composition.

According to Cardekho, tyres should be replaced every 5-6 years irrespective of the number of kilometers driven. Going by this thumb rule, it looks like a potential demand upsurge in the replacement market is coming.

You may remember that domestic auto sales in India were extremely strong between FY16 and FY19. According to SIAM (Society of Indian Automobile Manufacturers), the domestic auto sales volume was 2.04 crore in FY16, which rose to 2.62 crore vehicles in FY19.

And yes, please don’t get fed up with the Fed

Investors have started deserting markets as the tap of unlimited liquidity seems to be drying up fast.

Someday the Federal Reserve (Fed) was going to end the bond-buying programme anyway. Someday the yields were going to go up anyway. So, what’s been a surprise?

The Fed has taken a 360 degree turn in its inflation assessment in quick time, which is likely to cause a faster than expected tightening. Perhaps, that’s why markets are feeling betrayed. 

But under such a tricky scenario, you shouldn’t throw in the towel. Enduring tyres often make your rides smoother even on a rocky road. What say?

Food for thought…

Balkrishna Industries posted a net profit of Rs 1,155 crore in FY21 and its current market cap is ~ Rs 40, 600 crore. Whereas, CEAT which earned a net profit of Rs 432 crore in FY21 has a market cap of ~ Rs 4,400 crore.

Of course, a difference in profit margins, debt levels and the health of addressable markets of these companies plays a crucial role. But is there any scope for the re-rating of tyre stocks that are expanding and growing their presence in high margin segments?

You should ask this question to yourself before you take any decision on tyre stocks.

You may also like to read: How’s the year 2022 likely to be for markets? Atrangi re…

Disclaimer: The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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