Motilal Oswal Financial Services

Tyres

Automobiles: Tyres

Ready to roll



Return of growth, supported by timely capacity addition | APTY is our top pick

The Indian Tyre industry is expected to recover from five years of weakness and be on

a linear growth path (~12% CAGR over FY21-25E), supported by timely capacity

expansion across companies. Improving demand, stable competitive intensity, and

peak capex (capex of INR116b over FY22-24E v/s INR135.5b over FY19-21) augurs well

for profitability.

We estimate 2W/PCR/T&B tyre volumes to clock 8%/11%/13% CAGR over FY21-25E.

This coupled with a reasonable pricing environment and operating leverage, will

enable a recovery in profitability and capital efficiency.

Against this favorable backdrop, we have built a Tyre Industry Investment (TII)

framework to evaluate the attractiveness of various tyre segments as well as

companies. Based on our analysis, 2Ws appear to be the best placed segment,

followed by PCR. APTY tops our TII framework as it offers a good blend of strong

earnings growth and cheap valuations.

We initiate coverage on three stocks – APTY (Buy), BIL (Neutral), and MRF (Neutral).

APTY is our top pick due to benefits from: a) ramp-up of new capacities, b) reduction

in capex intensity, c) EU operation turnaround, and d) debt reduction. This translates

in the best earnings growth for our Tyre sector universe, which is still available at very

attractive valuations.



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Companies covered

Apollo Tyres

Balkrishna Industries

Ceat

MRF

Recovery in volumes, stable competitive environment to support margins



Expect Tyre industry to grow at

10% CAGR over FY20-25E

India Tyre Industry (INR b)

966

600



500

250



The Indian Tyre industry is expected to recover from five years of weakness and

be on a linear growth path (~12% CAGR over FY21-25E), supported by timely

capacity expansion across companies. Sustained recovery in demand from both

replacement and OEM segment, coupled with increase in exports would drive

8%/11%/13% volume CAGR over FY21-25E for 2W/PCR/T&B tyres.

The RM basket witnessed a sharp price decrease in 1HFY21 (~620bp over FY20

average), before the trend reversal from 3QFY21 (RM basket per kg increased by

~10pp in 2H over 1HFY21; the same in 1QFY22 is ~18% higher than its FY21

average). Since Dec’20, Tyre companies have taken a price hike of ~8% till

Jun’21. We estimate gross margin for Tyre companies to decline by 80-110bp

over FY21-23E.

This coupled with operating leverage, will enable a recovery in profitability

(after impact of higher RM cost in FY22E) and capital efficiency (~190bp over

FY21E).

Capex intensity has peaked out in our view, with cumulative capex for APTY,

CEAT and MRF to reduce to ~INR116b over FY22-24E (v/s INR135.5b over FY19-

21). FY21 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.

July 2021

Tyres

TII for evaluating segments

Blended score [scale of three]

T&B

1.7

Consumer segments of 2W/PCR most preferable

Operating dynamics are different in each segment (T&B, PCR, and 2W/3W) of the

Tyre industry. It depends on factors such as end-user mix/preferences, market

share concentration, and demand-supply dynamics. For a relative analysis, we

have a built a framework with growth potential, competitive intensity,

incremental capacity, pricing power, customer stickiness, and profitability as key

pillars.



2.2

PCR

2.7



The HHI Index suggests high

consolidation in 2Ws and TBR

HHI Index

2,688

2,490

2W 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. 2Ws

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 segment ranks second.

While the segment has a good growth potential

(FY19-23E) 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 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.

APTY is our top pick among mainstream players, CEAT attractive too

1,777

We evaluate Tyre companies based on their brand ranking, revenue mix, pricing

power, headroom for growth, cost competitiveness, and financial strength. Our

framework ranks companies on their relative attractiveness on the

aforementioned operating parameters. We assign a 75% weightage to these

operating parameters (equal weight for each parameter) and 25% weightage to

the valuation score to identify potential winners.



2Ws

T&B

PCR

TII framework for companies

APTY

3.9



BIL

3.5

3.4

MRF

3.7

CEAT

APTY our top pick among mainstream players; initiate coverage with a Buy

rating:

APTY 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, APTY offers the best blend of earnings

growth and cheap valuations. The stock trades at 11.9x/9.7x FY22E/FY23E

consolidated EPS. We initiate coverage on the stock with a

Buy

rating and a TP

of INR300 (12x Sep-23 consolidated EPS v/s 16x/12x five/10 year average P/E).

BIL – superior business model fully captured in premium valuations; initiate

coverage with a Neutral rating:

BIL ranks the highest among domestic peers in

terms of cost competitiveness and financial strength. We expect BIL’s

outperformance to the industry to continue, with the focus on strengthening its

competitive positioning. With a current market share of ~6% in the USD15b

global Specialty Tyre segment, BIL aspires to increase this to 10% over the next

4-5 years. We estimate 20%/22%/22% revenue/EBITDA/PAT growth over FY21-

23E. Current valuations fairly reflect for its industry leading margin, FCF, and

July 2021

Tyres



capital efficiencies, the current valuation premium is excessive. We value BIL at

25x Sep-23 EPS (at a 25%/80% premium to its 5/10 year average P/E of 20x/14x)

with a TP of INR2,425. Initiate coverage with a

Neutral

rating.

CEAT – Highest potential for growth, maintain Buy:

CEAT’s steadfast focus on

the B2C segment continues, with a revenue target of 60-65% from the 2W, PCR,

and OHT segments. It is backing its market share aspirations in 2W, PCR, and

TBR with significant capacity additions. We expect revenue/EBITDA/PAT CAGR

of ~16%/15%/7% over FY21-23E. Valuations at 10.9x FY23E consolidated EPS

doesn’t fully capture ramp-up in new capacities in an improving demand

environment, leading to a recovery in margin. We maintain our

Buy

rating with

a TP of ~INR1,850 (~13x Sep-23 consolidated EPS).

MRF – Dilution in competitive positioning not reflected in premium valuations;

initiate coverage with a Neutral rating:

MRF has managed to create a strong

brand in major segments of T&B, 2W, and PCR over the years. However,

aggressive competition has weakened its competitive positioning, which is also

reflected in its dilution of pricing power in the PCR and TBR segments as well as

in its superior return ratios. The current valuations at 24.7x/20.7x FY22E/FY23E

EPS fairly capture the changing competitive dynamics for MRF. We initiate

coverage on MRF with a

Neutral

rating and TP of INR84,000 (20x Sep-23 EPS).

Exhibit 1: Comparative valuation table

Price

(INR)

APTY

BIL

CEAT

MRF

225

2,349

1,427

82,067

M-cap

(INR b)

143

454

348

Upside

(%)

Rating

Buy

Neutral

Buy

Neutral

CAGR (FY21-23E)

Sales EBITDA EPS

13.5

20.1

15.7

11.7

16.1

22.0

14.7

10.3

42.2

21.5

6.9

14.8

P/E

EV/EBITDA

RoE (%)

RoCE (%)

FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E

11.9

31.5

16.4

24.7

9.7

26.1

10.9

20.7

5.4

19.9

7.7

9.8

4.4

16.5

5.7

8.3

9.1

22.1

10.1

10.0

10.4

22.6

13.7

10.8

8.3

19.1

9.0

10.0

9.3

19.9

11.3

11.0

Source: Company, MOFSL

July 2021

Key thesis in charts: Ready to roll

Tyre industry overview

India Tyre Industry (INR b)

India’s Tyre sector grew

966

500

250

FY10

FY15

FY20

FY25E

9% CAGR

over

the last 10 years

600

T&B is the largest segment, with ~54%

revenue share (FY20)

Industrial & others, 2

Tractors, 8

2W/ 3W,

13%

Truck and bus,

Replacement remains the dominant

segment of the industry (FY20, %)

54%

Passenger

cars, 14

LCV, 9

Replacement

OEM

Exports

Key segments of the Indian tyre industry

T&B: INR324b FY20 revenues

TBB

MKT Share

TBR

15%

32%

30%

24%

31%

30%

22%

RANK

85%

12%

T&B

RANK

Truck & Bus (T&B)

Key thesis in charts: Ready to roll

PCR: INR84b FY20 revenues

PCR

MKT Share

Utilization

39%

22%

21%

65%

67%

61%

PCR

2Ws: INR78b FY20 revenues

20%

14%

RANK

2Ws

MKT Share

FY21 FY23E

PCR

Utilization

45%

35%

29%

24%

2Ws

RANK

TII framework for evaluating segments of tyre industry

Blended

Score

[Scale of 3]

2.2

PCR

T&B

1.7

72%

68%

55%

FY21 FY23E

2Ws

2.7

2Ws

Profitability

Pricing

power

Growth

potential

Competitive

intensity

Incremental

capacities

PCR

Growth

potential

Profitability

Customer

stickiness

T&B

Growth

potential

Competitive

intensity

Incremental

capacities

Profitability

Competitive

intensity

Customer

stickiness

Pricing power

Incremental

capacities

Customer

stickiness

Key thesis in charts: Ready to roll

Price increases in replacement has been gradual

RM Basket QoQ Chg (%)

Price hike (%)

4.8

10.8

8.4

-2.9

-2.5

-1.0

-4.2

2.5

40.8

Gross margins to decline over FY21 levels

FY20

42.3

40.4

FY21

41.5

38.2

FY22E

FY23E

42.2

40.3

38.5

39.2

43.9

41.6

43.0

-1.7

-0.9

MRF

APTY (S/A)

CEAT

Capex intensity to moderate…

Agg Capex (INR b)

18.7

10.7

6.4

12.4

13.3

10.3

7.0

10.7

% of sales

…driving improvement in FCF generation

Agg FCF (INR b)

8.1

7.1

6.6

-9

-23

-13

-7

18.2 37.1 35.0 32.6 47.0 63.8 24.6 44.5 37.0 34.5 34.5

TII FRAMEWORK FOR THE COMPANIES: APTY Ranks Highest

Financial

strength

5.0

Financial

strength

2.8

Brand ranking

4.2

Brand ranking

2.5

Pricing

power

4.1

Revenue

mix

3.6

Pricing

power

3.8

APTY

3.9

Cost

compete-

tiveness

3.0

4.0

Headroom

to grow

5.0

Cost

compete-

tiveness

3.0

Headroom

to grow

Revenue

mix

BIL

3.5

3.4

MRF

Brand ranking

3.2

3.7

CEAT

Financial

3.3

strength

Cost

3.0

compete-

tiveness

3.4

Pricing

power

4.0

5.0

Headroom

to grow

Revenue

mix

Financial

strength

3.5

Brand ranking

4.3

4.4

Pricing

power

3.9

Revenue

mix

Cost

3.5

compete-

4.0

tiveness Headroom

to grow

Tyres

Volume recovery across segments…

…supported by timely capacity additions



The Indian Tyre industry is expected to recover from five years of weakness and be on

a linear growth path (~12% CAGR over FY21-25E), supported by timely capacity

expansion across companies.

A sustained recovery in demand from both the Replacement and OEM segments,

coupled with an increase in exports, would drive 8%/11%/13% volume CAGR over

FY21-25E for 2W/PCR/T&B tyres.

Over the last three years, all relevant players had embarked on capacity additions

across segments. They began operations in the last 9-15 months, and are in varied

stages of ramp-up. As a result, current utilization across segments range from 63-72%.

Capex intensity is expected to have peaked out, with cumulative capex for APTY,

CEAT, and MRF to reduce to ~INR116b over FY22-24E (or 8.5% of sales v/s 12.9% of

sales over FY19-21). We estimate FCF generation to improve substantially over FY22-

24E, with aggregate FCF of INR47b (v/s just INR11b over FY19-21).

Volume recovery to sustain across segments

Tyre industry volumes are

estimated to grow by 12%

CAGR over FY21-25E driven

by a recovery in both

Replacement and OEM

segments



We expect the volume recovery from 2HFY21 to sustain as the Replacement and

OEM segments are expected to recover from a weak demand environment over

the last five years.

The demand environment was impacted over the last five years (~1% volume

CAGR over FY16-21), led by weak OEM volumes, a feeble economic

environment, impact of GST, and higher imports.

While OEM demand is expected to see a cyclical recovery over the next 2-3

years, Replacement demand is expected to benefit from pent-up demand,

import restrictions, and premiumization witnessed across the Automotive

segments in the last five years.

The Indian Tyre industry is expected to recover from five years of weakness and

be on a linear growth path (~12% CAGR over FY21-25E), supported by timely

capacity expansion across companies.

Sustained recovery in demand from both Replacement and OEM segments,

coupled with an increase in exports, would drive 8%/11%/13% volume CAGR

over FY21-25E for 2W/PCR/T&B tyres.

Exhibit 2: India’s Tyre sector clocks 9% CAGR over the last 10 years

Tyre sector size in India (INR b)

43.3

20.0

7.0

250

FY10

300

FY11

430

FY12

460

FY13

3.3

475

FY14

5.3

500

FY15

4.0

520

FY16

1.9

530

FY17

7.5

570

FY18

10.5

(4.8)

FY20

600

yoy growth %

630

FY19

Source: ATMA, Companies, MOFSL

July 2021

Tyres

Exhibit 3: Expect Indian domestic Tyre industry to grow by 12% CAGR over FY21-25E

'000 MT

2Ws

Growth (%)

PCR

Growth (%)

TBB

Growth (%)

TBR

Growth (%)

Total T&B

Growth (%)

Total Dom. Vols.

Growth (%)

FY15

196

21.8

307

10.8

478

-6.3

314

31.3

792

5.7

1,294

9.1

FY16

207

5.8

335

9.4

470

-1.7

353

12.3

823

3.8

1,365

5.5

FY17

235

13.7

353

5.4

435

-7.5

355

0.8

790

-3.9

1,379

1.0

FY18

254

7.8

366

3.5

426

-2.1

446

25.5

872

10.3

1,491

8.1

FY19

278

9.5

366

0.0

452

6.2

557

24.8

1,009

15.8

1,653

10.8

FY20

254

-8.5

348

-4.8

369

-18.4

473

-15.1

842

-16.6

1,444

-12.6

FY21

236

-7.4

298

-14.5

365

-1.2

493

4.2

857

1.9

1,390

-3.7

FY22E

265

12.5

370

24.2

378

3.7

652

32.4

1,030

20.2

1,665

19.7

FY23E

288

8.8

399

7.8

388

2.5

787

20.6

1,174

14.0

1,861

11.8

FY24E

305

5.8

425

6.7

395

2.0

914

16.3

1,310

11.5

2,040

9.6

FY25E

322

5.8

452

6.2

398

0.7

1,009

10.4

1,407

7.5

2,182

6.9

Source: ATMA, Industry, MOFSL

Timely capacity addition to aid recovery

With capacity utilization

across segments at 63-72%

and ramp-up of recently

added capacities, the

industry is well prepared for

expected growth



Over the last three years, all relevant players had embarked on capacity

additions across segments. They started operations in the last 9-15 months, and

are in varied stages of a ramp-up.

In the 2W Tyre segment, ~15% capacity (of FY18) was added in the last three

years. Planned capacity additions stand ~24% of current industry capacity, with

a gradual commissioning of capacity. Capacity utilization currently stands ~72%.

In the PCR segment, ~17% of FY18 capacity got added in the last three years,

and a further ~30% addition is planned over FY21 levels. Capacity utilization

currently stands ~65% and is expected to improve to 77% by FY25E.

Overall T&B tyre capacity addition is ~16%, which is the lowest among all

segments, as the TBR segment would see ~31% addition over FY21-23E (on the

back of a 24% addition over the last three years). Based on our growth forecasts

for the TBR segment, utilization would improve to ~100% by FY25 (v/s 63% in

FY21).

Exhibit 5: Utilization levels to be higher in the TBR segment

FY21

205

72%

68%

65%

FY23E

67%

63%

83%

Exhibit 4: Capacity additions highest in 2Ws (’000 MT)

Existing

Addition

205

128

333

166

507

PCR

707

TBR

1,361

T&B Total

PCR

TBR

Source: ATMA, Companies, MOFSL

July 2021

Tyres

Peak capex is behind us, expect FCF to improve



The Indian Tyre industry has added ~40% capacity over FY19-22E. This entailed

substantial capex of ~13% of sales over FY19-21 (aggregate capex of INR135.5b

for MRF, APTY, and CEAT).

Capex intensity is expected to have peaked out, with cumulative capex for APTY,

CEAT, and MRF to reduce to ~INR116b over FY22-24E (or 8.5% of sales). While

capex would be required in downstream equipment for attaining nameplate

capacity, the intensity would be much lower than the last three years.

We estimate FCF generation to improve substantially over the next three years,

with an aggregate FCF of INR47b over FY22-24E (v/s just INR11b over FY19-21).

Exhibit 6: Capex intensity to moderate…

Agg Capex (INR b)

% of sales

12.4

10.7

10.3

6.4

18.2

37.1

35.0

32.6

47.0

63.8

18.7

13.3

10.7

7.0

8.1

7.1

6.6

34.5

24.6

44.5

37.0

34.5

Source: ATMA, Companies, MOFSL

Exhibit 7: …driving an improvement in FCF generation

Agg FCF (INR b)

-9

-23

-13

-7

Source: ATMA, Companies, MOFSL

July 2021

Tyres

RM cost in an inflationary phase



Pricing actions a key monitorable as the pass through is gradual

RM costs and competitive intensity are among the key factors that drive pricing in the

Tyre industry.

Historically, the cost pass through has been gradual as against a spurt in RM prices,

resulting in wild swings in the gross margins of Tyre companies.

The RM basket witnessed a sharp price decrease in 1HFY21 (~620bp over FY20

average), before the trend reversal from 3QFY21 (RM basket per kg increased by

~10pp in 2H over 1HFY21; the same in 1QFY22 is ~18% higher than its FY21 average).

Since Dec’20, Tyre companies have taken a price hike of ~9-10% till Jun’21.

We expect gross margin for Tyre companies to decline by 80-110bp over FY21-23E.



RM cost, competitive intensity drive pricing in most segments



RM cost is largely

dependent on natural

rubber/crude derivatives

(~44%/45-50% of RM cost)



Natural rubber and crude-related derivatives (like synthetic rubber, carbon

black, and nylon tyre cord fabric) are major constituents of RM cost for a tyre.

Segment-wise dynamics differ significantly. As a result, pricing actions, too, are

taken differently across segments. While OEM pricing is linked to the RM basket

and the pass through happens with a lag, pricing in the Replacement market is

largely driven by competitive intensity in the segment.

Price hikes are usually taken with a lag and in a staggered manner, and thus,

short-term margins may be susceptible to sharp RM cost movements.



It is relatively easy to pass on price hikes in Consumer segments like PCR and

2Ws as buying decisions there are based more on brand strength.



In the Commercial segment of T&B, where consumers look for quality at a

reasonable price, the brand preference is more fungible in nature. It thus

becomes key to maintain the same level of pricing difference vis-à-vis

competitors. Therefore, taking proactive price hikes by a single

manufacturer is difficult.

Exhibit 8: RM constituents by value (%) for the Tyre industry

3 3

Natural Rubber

Carbon Black

Nylon Tyre Cord Fabric

Rubber Chemicals

Butyl Rubber

Poly-Butadiene rubber

Styrene Butadiene rubber

Source: Industry, MOFSL

July 2021

Tyres

Price actions usually lag RM price movement



Pass through of commodity

cost is linked to competitive

and import intensity, and

are usually gradual in

nature. For a 10% increase

in RM basket, a price hike of

5-6% is required



We analyzed how Tyre manufacturers reacted in the past to RM price

movement, noting how price actions lag the RM cost increase, with companies

gradually passing on both benefits and impact of cost inflation.

Interactions with channel partners suggest that price actions have been slow

due to intense competition.

Tyre companies have consistently been taking small price hikes since the price

of rubber and crude derivatives started moving up in 3QFY21. The RM basket

witnessed a sharp price decrease in 1HFY21 (~620bp over FY20 on an average).

However, the trend reversed from 3QFY21 as the RM basket (per kg) increased

by ~10pp in 2H over 1HFY21. The same in 1QFY22 is ~18% higher than its FY21

average.

Since Dec’20, Tyre companies have taken a 9-10% price hike till Jun’21, as

against the required price hike of 13-14% to pass on the entire cost inflation.

Exhibit 9: Changes in spot prices in the RM basket impacts P&L with a lag

1,000

500

-500

-1,000

RM Basket (bps QoQ)

Agg RMC (bps QoQ)

Source: Companies, Bloomberg, MOFSL

Exhibit 10: Price hikes usually occur gradually, resulting in a transitory impact on margins

15.0%

7.5%

0.0%

-7.5%

-15.0%

RM Basket QoQ Movement

APTY'v Price hike QoQ

Source: Companies, Bloomberg, MOFSL

RM cost inflation will restrict margin expansion over FY21-23E

RM basket witnesses 26%

inflation since 2QFY21,

whereas the corresponding

price increases are 9-10%,

implying a transitory

pressure on margin



RM prices have been on an up move after bottoming out in 1HFY21. Natural

rubber/crude prices are 28%/57% higher from the lows of 2QFY21 (20%/49%

higher v/s its FY21 average).

Against the ~26% increase in the RM basket since 2QFY21, the price rise in the

Replacement market has been 9-10% (v/s a requirement of 13-14%).

We expect RM cost to stay firm over the next few quarters, and hence estimate

an 80-110bp decline in the gross margins of Tyre companies over FY21-23E.

July 2021

Tyres

Exhibit 11: Natural rubber (INR/kg Kottayam RSS 4) prices

see a sharp rise since 3QFY21

190

170

150

130

110

Exhibit 12: Crude (USD/bbl) sees a sharp recovery since

3QFY21

100

Source: Bloomberg, MOFSL

Exhibit 13: Expect gross margins to improve for APTY in FY23E and remain stable

FY20

42.3

40.8

40.4

41.5

38.2

FY21

FY22E

FY23E

42.2

40.3

38.5

39.2

43.9

41.6

43.0

MRF

APTY (S/A)

CEAT

Source: Companies, MOFSL

July 2021

Tyres

TII framework to analyze segments

Prefer Consumer segments of 2W/PCR given better operating dynamics

The operating dynamics within each segment of the Tyre sector significantly vary

depending on factors such as end-user mix/preferences, market share concentration,

demand-supply dynamics, among others. Against this backdrop, we believe a relative

analysis of major segments would enable us to evaluate our preferences within the Tyre

sector. We have, therefore, built a TII framework to gauge the attractiveness of these

segments. Following are the key pillars of our framework (each equally weighed):



Growth potential:

Refers to both volume and value growth potential for the segment

over FY20-23E.



Competitive intensity:

Extent of competitive intensity for the segment, based on HHI.



Incremental capacity:

Analysis of incremental capacity over FY20-23E, based on existing

capacity expansion plans of companies.



Customer stickiness:

A function of brand relevance in the segment. Customer stickiness

varies based on the end-user mix.



Pricing power:

A function of the segment’s ability to pass on price hikes/cuts to end-

customers.



Profitability and capital efficiency:

Profit margin and capital efficiency of each segment.

Exhibit 14: Prefer the Consumer segments of 2W and PCR as they enjoy brand loyalty,

pricing power, and better profitability

Based on our analysis, 2Ws

appear to be the best

placed segment, followed

by PCR, due to higher brand

salience and resultant

better profitability

Parameters [scale of three]

Growth potential

Competitive intensity

Incremental capacities

Customer stickiness

Pricing power

Profitability

Blended score [scale of three]

Note: Higher the score better it is

T&B

1.7

2.7

PCR

2.2

Source: MOFSL

Exhibit 15: 2W segment is the most consolidated as indicated by the HHI score

Segment

HHI

2,688

PCR

1,777

TBR

2,490

HHI is a measure of competitive intensity in an Industry; Source: MOFSL

Interpretation



HHI over 2,500 indicates high concentration



Moderate concentration



Moderate to high concentration

Based on this framework



We prefer 2Ws as it scores the highest on most parameters – competitive intensity

(based on HHI), customer stickiness, and profitability.

PCR segment ranks second as it scores well on growth potential (supported by the

import ban), customer stickiness, and pricing power, but lags 2Ws in terms of

incremental capacities and competitive intensity.

T&B segment ranks the lowest as its B2B nature leads to lower brand loyalty, pricing

power, and profitability. However, it scores well on growth potential.

July 2021

Tyres

2W Tyres: Least competitive, most profitable

Ranks numero uno as per our framework | Growth profile weaker than others

The 2W segment ranks first in our TII framework to evaluate our segmental preference. It

scores high in terms of profitability/capital efficiency, customer stickiness, and competitive

intensity. Our analysis suggests that the 2W segment witnesses the highest gross margin

(~49%), asset turnover, and capital efficiency across categories. It also ranks the highest

based on HHI score, indicating that the segment enjoys high concentration, with the top

three players accounting for 85-90% of the market.

Expect ~8% CAGR over FY21-25E



We expect 8% volume CAGR (on a low base) for 2W/3W Tyre players over FY21-

25E, led by both OEM and Replacement segments.

The OEM segment is likely to deliver ~10% CAGR over FY21-25E, in tandem with

the growth in 2W production. The segment is likely to outgrow the trend of the

past few years (FY15-20: ~2.6% CAGR) on a low base of FY21.

The Replacement segment is likely to clock ~7% CAGR over FY21-25E (v/s ~8%

CAGR over FY15-20). This is because 2W sales grew ~11% CAGR over FY10-15.

This implies sustained demand for replacement tyres over the next few years.

Exhibit 16: Expect 2W/3W segment CAGR of 8% over FY21-25E

Tyres (m units)

OEM sales

Replacement sales

Total domestic Consumption

YoY growth (%)

FY16

40.7

42.1

82.8

5.8

FY17

42.2

51.9

94.1

13.7

FY18

49.0

52.5

101.5

7.8

FY19

52.6

58.5

111.1

9.5

FY20

45.2

56.8

101.9

(8.3)

FY21

38.7

55.5

94.2

(7.4)

FY22E

45.1

60.9

106.0

12.5

FY23E

FY24E

FY25E

49.7

53.0

56.6

65.6

68.9

72.3

115.3

121.9

128.9

8.8

5.8

Source: ATMA, Industry, MOFSL

Most consolidated segment, but entry of new players can cause disruption



The 2W segment ranks the highest based on HHI with a score of 2,688 (a score

above 2,500 indicates a high concentration in this segment).

Top three players in this segment command 85-90% market share.

However, the entry of two new players – APTY and Maxxis Tyres – can

potentially change the segment’s competitive dynamics going forward.

Exhibit 18: Top three players command over 85% market

share (FY20, %)

2 1

MRF

CEAT

TVS

Maxxis

JKT

APTY

Others

Exhibit 17: 2W/3W segmental break-up (%, FY20)

OEM

Repl.

Source: ATMA, Industry, MOFSL

Source: Companies, Industry, MOFSL

July 2021

Tyres

Utilization improvement to be more back ended

The 2W segment would see

~24% capacity addition over

FY21-25E, resulting in a dip

in utilization



In the 2W Tyre segment, planned capacity additions stand ~125kMT over FY21-

24E. This implies an addition of ~24% to current industry capacity, with a

gradual commissioning of capacity.

Maxxis plans to increase capacity to ~60,000 tyres/day (from 20,000/day at

present) over the next 3-5 years. It already supplies to HMSI and is looking to

capture 15% market share by CY26. This could threaten the positioning of

existing players, particularly stronger players in the OEM segment.

Current capacity utilization in the 2W segment declined to ~72% due to recent

capacity additions and weaker demand. Utilization levels are expected to

decline due to capacity additions and then recover to 70% by FY25E.

Exhibit 19: Strong capacity additions from key players

Existing capacity ('000 MT p.a)

Capacity addition ('000 MT p.a)

107

CEAT

APTY

MRF

JKT

112

TVS

Maxxis

Source: Industry, Companies, MOFSL

Exhibit 20: Utilizations to start improving from FY23E with a completion in ramp-up

Ramp-up adj. capacity ('000 MT p.a.)

72%

70%

66%

68%

66%

Cap. Utilization of ramp-up adj. capacity (%)

333

FY21

402

FY22E

427

FY23E

459

FY24E

460

FY25E

Source: Industry, Companies, MOFSL

Higher customer stickiness, pricing power remains moderate



The 2W segment is seeing higher customer stickiness, a function of the brand-

building exercise of companies over the years. With increasing awareness about

tyre safety and the focus on quality, we expect brand loyalty to improve from

here on.

Relative to the PCR segment, pricing power remains moderate in the 2W

segment.

Pricing power in the 2W segment is dictated by segment leader MRF. This

segment witnessed very few price hikes over the past few years as MRF added

capacity. With major capacity addition now behind it, pricing power in this

segment is getting better.

July 2021

Tyres

PCR: Highest growth potential, pricing power, and capex

Ranks second as per our framework | Low to moderate concentration on HHI

The PCR segment ranks second within our framework to evaluate Tyre segments. While

this segment has good growth prospects (FY21-25E), aided by the recent import ban and

pricing power, it also faces the risk of a demand-supply mismatch in the future, particularly

given the higher fragmentation within this segment.

Expect ~11% volume CAGR over FY21-25E

Expect 11% volume CAGR

over FY21-25E, led by

~10%/12% CAGR in

Replacement/OEM

segments



We expect ~11% volume CAGR over FY21-25E, led by both the OEM and

Replacement segments.

The PCR segment delivered ~2.6% volume CAGR over FY15-20 due to weakness

in both the OEM and Replacement segments.

While sales growth in the OEM segment is likely to mirror PV industry CAGR of

~12% (over FY21-25E), on a low base of FY21, we expect Replacement sales

CAGR of ~10%, led by a large vehicle population, increasing share of fleet within

this segment, and import substitution.

Exhibit 21: Expect 11% CAGR for the PCR segment over FY21-25E

PCR segment (m units)

Production

OEM sales

Replacement sales

Total domestic consumption

YoY growth (%)

Imports (included in Replacement sales)

Imports (% of total domestic consumption)

FY16

38.7

17.3

24.7

41.9

9.4

5.6

13.2

FY17

41.6

19.0

25.2

44.2

5.4

12.3

FY18

42.8

20.1

25.6

45.7

3.5

6.0

13.1

FY19

42.8

20.3

25.5

45.8

0.0

5.8

12.7

FY20

40.7

17.2

26.6

43.8

(4.2)

6.2

14.2

FY21

38.9

15.6

21.6

37.2

(14.5)

1.4

3.7

FY22E

48.4

19.5

26.7

46.2

24.2

1.4

3.1

FY23E

52.5

21.1

28.8

49.8

7.8

1.5

2.9

FY24E

56.4

22.7

30.4

53.2

6.7

1.5

2.8

FY25E

60.4

24.6

31.9

56.5

6.2

1.5

2.7

Source: ATMA, Industry, MOFSL

Competitive intensity the highest in PCR



PCR ranks the lowest based on HHI score, indicating relatively high

fragmentation within this segment. The top three players account for just 60%

market share (as against over 80% in other segments).

The HHI score of 1,777 for the PCR segment indicates moderate concentration.

Exhibit 23: PCR segment is relatively more fragmented than

other segments; top three players account for ~60%

Others

12%

OEM

40%

JKT

12%

MRF

20%

APTY

21%

Source: Companies, Industry, MOFSL

Bridgestone

22%

Exhibit 22: Replacement commands ~60% share within the

PCR segment (FY20)

Repl.

60%

CEAT

14%

Source: ATMA, Industry, MOFSL

July 2021

Tyres

Top players adding good capacity over FY21-24E



We analyzed the current/future capacity expansion plans of key PCR players,

which together account for 90-95% market share.

Capacity addition remains rampant across most players (except for JKI).

Cumulative capacity of over 160kMT p.a. would be added by players like CEAT,

APTY, MRF, and Bridgestone, an increase of ~30% from current levels.

Capacity utilization in the PCR segment stands ~65%. Based on our growth

forecasts, utilization levels are estimated to improve to 77% by FY25E.

This suggests that there won’t be any major capex by industry players in the

medium term (as supply outstrips demand).

Exhibit 25: Utilizations in FY21 impacted by the COVID-19

outbreak

73%

54%

51%

60%

65%

Exhibit 24: Major capacity is being added by CEAT and APTY

(as of FY21)

Capacity addition ('000 MT p.a.)

Existing capacity ('000 MT p.a.)

112

138

105

CEAT

APTY

MRF

JKT

Bridgestone

CEAT

APTY

MRF

JKT

Bridgestone Industry

Source: Industry, Companies, MOFSL

Exhibit 26: Analysis of ramp-up adjusted capacity suggests utilizations will remain healthy

up to FY25E

Ramp-up adj. capacity ('000 MT p.a.)

Cap. Utilization of ramp-up adj. capacity (%)

77%

72%

65%

68%

67%

507

FY21

603

FY22E

665

FY23E

665

FY24E

665

FY25E

Source: Industry, Companies, MOFSL

Higher pricing power and customer stickiness



The PCR segment enjoys relatively higher pricing power v/s 2W/TBR segments.

The focus on branding and quality by major players have significantly improved

their pricing power.

Customer stickiness remains high in PCR relative to T&B as it is in the Consumer

segment. In this segment, factors like rub-off impact of OEM fitment, brand

awareness, and quality form a key part of the buying decision. The buying

decision in the Commercial segment depends largely on pricing and quality.

According to a JD Power Survey, 54% customers remain loyal to the OEM-fitted

brand while replacing tyres in the PCR segment.

July 2021

Tyres

T&B: Good growth ahead in highly competitive segment

Ranks third as per our framework | Least capacity addition across segments

Truck and Bus (T&B) rank the lowest in terms of our preference for sectors. While this

segment is expected to witness the lowest capacity addition over FY19-23E, the inherent

commercial functionality of the sector and price sensitivity in purchasing decisions restricts

customer stickiness, pricing power, and profitability.

Expect T&B segment CAGR of 13% over FY21-25E

Radialization is likely to

accelerate further. We

expect the share of radials

in the T&B segment to rise

to 66% by FY25E (from 50%

in FY21)



We expect T&B segment CAGR of 13% over FY21-25E, led by both OEM (32%

CAGR) and Replacement (9% CAGR). Replacement demand, accounting for ~85%

of volumes, steers growth in the segment, with support from the OEM segment.

Strong revival in Replacement demand is likely to be driven by an uptick in

freight utilization on the back of a pick-up in Infrastructural activity, economic

recovery, and the proliferation of the hub and spoke model.

We expect OEM sales CAGR of 32% over FY21-25E, in line with our M&HCV

industry growth estimate.

Radialization is likely to accelerate further over FY21-25E, with the share of

radials in the T&B segment touching ~66% by FY25E (from 50% in FY21). We

expect 20% sales CAGR in T&B radials over FY21-25E and T&B bias (TBB) CAGR

of 2% (on a low base).

We expect the share of imports within the T&B segment to remain below 1%, as

the allotment of current licenses for tyre imports is restricted to those

categories that are not manufactured in India. Most imported tyres in the T&B

segment are cheaper substitutes of Indian tyres.

FY17

16.3

1.6

3.3

12.3

15.6

(4.5)

10.4

790.2

-3.9

FY18

18.0

1.2

3.6

13.2

16.9

8.4

6.8

871.6

10.3

FY19

20.8

0.8

4.2

15.2

19.3

14.4

4.4

1008.9

15.8

FY20

18.0

0.6

2.4

13.7

16.1

(16.8)

3.7

841.5

-16.6

FY21

18.4

0.2

1.7

14.6

16.3

1.5

1.1

857.2

1.9

FY22E

21.6

0.0

2.6

16.6

19.3

18.2

0.2

1030.3

20.2

FY23E

24.1

0.0

3.4

18.3

21.7

12.7

0.2

FY24E

26.5

0.0

4.4

19.6

24.0

10.6

0.1

FY25E

28.3

0.0

5.1

20.6

25.7

6.8

0.1

Exhibit 27: Expect T&B segment CAGR of 13% over FY20-25E

T&B segment (m units)

Production

Imports

OEM sales

Replacement sales

Total domestic consumption

YoY growth (%)

Imports (% of domestic consumption)

Total dom. consumption ('000 MT)

Gr (%)

FY16

16.8

1.5

3.2

13.1

16.3

2.9

9.2

822.6

3.8

1174.1 1309.7 1407.4

14.0

11.5

7.5

Source: ATMA, Industry, MOFSL

Exhibit 28: Expect TBR segment CAGR of 20% (FY21-25E), with the share of radial tyres rising to 66% by FY25E

m units

TBR

YoY growth (%)

OEM

Replacement

FY16

5.9

12.3

2.3

3.6

FY17

5.9

0.8

2.2

3.7

FY18

7.4

25.5

2.6

4.9

FY19

9.3

24.8

3.0

6.3

FY20

7.9

(15.1)

1.8

6.1

FY21

8.2

4.2

1.3

6.9

FY22E

10.9

32.4

2.1

8.8

FY23E

13.1

20.6

2.8

10.3

FY24E

15.2

16.3

3.9

11.4

FY25E

16.8

10.4

4.5

12.4

Source: ATMA, Industry, MOFSL

July 2021

Tyres

Exhibit 29: Expect TBB segment to grow at 2% CAGR over FY21-25E

m units

TBB

YoY growth (%)

OEM

Replacement

FY16

10.4

(1.7)

0.9

9.5

FY17

9.7

(7.5)

1.1

8.6

FY18

9.5

(2.1)

1.1

8.4

FY19

10.1

6.2

1.2

8.9

FY20

8.2

(18.4)

0.6

7.6

FY21

8.2

2.0

0.4

7.8

FY22E

8.5

4.0

0.5

8.0

FY23E

8.7

2.5

0.6

8.1

FY24E

8.9

2.0

0.6

8.3

FY25E

9.0

0.7

8.3

Source: ATMA, Industry, MOFSL

Exhibit 30: T&B imports turn insignificant after the ban in Jun’20

T&B imports

13%

11%

10%

1,497

FY16

1,615

FY17

1,153

FY18

846

FY19

591

171

FY20

FY21

FY22E

% of dom. consumption

% of replacement sales

Source: ATMA, Industry, MOFSL

Radialization to accelerate further, expect ~66% share by FY25E



With a contribution of ~50% in FY21, radial is now at par with bias tyres in the

T&B segment in the Replacement market. While radialization in OEMs is ~78%,

it is much lower (at 47%) in the Replacement segment.

We expect radialization to gather pace further, led by increased industry

capacity and higher awareness in the Replacement market. We expect

radialization in the T&B segment to rise to ~66% by FY25E.

The share of radial tyres in the Replacement T&B segment is likely to touch

~60% by FY25E, led by higher radialization at OEMs gradually reflecting in the

Replacement market and increasing awareness among fleet operators about

lower total cost of ownership of radial tyres. This would be supported by

increased industry capacity of TBR tyres.

The share of radial tyres in OEM T&B sales is likely to touch ~87% by FY24E and

plateau at ~87% as bias tyres will remain more suitable for certain applications.

Exhibit 31: Radial tyres set to attain ~66% share in the T&B segment by FY25E

Radialization at Industry level

72%

61%

33%

28%

FY15

36%

72%

48%

41%

OEMs

76%

49%

44%

78%

50%

47%

Repl.

80%

56%

53%

83%

60%

56%

87%

63%

87%

66%

60%

68%

70%

44%

38%

58%

27%

FY16

30%

FY17

37%

FY18

FY19

FY20

FY21

FY22E

FY23E

FY24E

FY25E

Source: Industry, ATMA, MOFSL

July 2021

Tyres

Moderate competitive intensity based on HHI



T&B ranks second in terms of competitive intensity, indicating that the segment

is moderately concentrated. The top three players account for over 80% market

share in the TBR/TBB segment.

T&B’s HHI score is 2,490, which indicates moderate to high concentration.

Exhibit 32: Both TBR (left) and TBB (right) segments are moderately concentrated, with the top three players accounting for

over 80% market share

TBR

31%

APTY

MRF

30%

22%

CEAT

Others

32%

24%

12%

30%

APTY

MRF

CEAT

Others

TBB

Source: Industry, Companies, MOFSL

Higher capacity addition in TBR to meet radialization trend

Capacity addition is

reflecting a radialization

trend, with 27% TBR

capacity addition, which

implies an overall T&B

capacity addition of 16%



An analysis of existing TBR capacities of the top four players, accounting for

~90% market share (APTY, JKI, MRF, and CEAT), suggests that they are

cumulatively adding ~27% additional capacity over FY21-25E.

On an overall T&B tyre basis, capacity addition is ~16%, which is the lowest

among all segments.

Based on our growth forecasts for the TBR segment, assuming a cumulative

market share for these key players is maintained, utilization would improve to

~100% by FY25 (v/s 63% in FY21).

This suggests that the incremental capacity would barely meet incremental

demand, auguring well for pricing power.

We do not anticipate any capacity addition in the TBB segment.

Exhibit 34: TBR capacity utilizations are relatively higher

91%

60%

FY21

73%

70%

Exhibit 33: Except CEAT, capacity addition is limited in TBR

Capacity addition ('000 MT p.a.)

Existing capacity ('000 MT p.a.)

118

CEAT

APTY

MRF

JKT

275

162

219

63%

CEAT

APTY

MRF

JKT

Industry

Source: Companies, MOFSL

Source: Industry, Companies, MOFSL

July 2021

Tyres

Exhibit 35: Analysis of a ramp-up in adjusted capacity suggests growth capex may be

required from FY23E onwards

Ramp-up adj. capacity ('000 MT p.a.)

Cap. Utilization of ramp-up adj. capacity (%)

101%

63%

72%

83%

95%

707

FY21

813

FY22E

855

FY23E

867

FY24E

895

FY25E

Source: Industry, Companies, MOFSL

B2B customer profile results in weak pricing power and margins



In the T&B segment, the preference is for quality at a reasonable price, and the

choice is driven largely by the total cost of ownership. This, in turn, dilutes

customer stickiness for any particular brand.

Over the past few years, the TBR segment witnessed the highest price hikes. In

the current environment, despite a sharp increase in RM cost and higher

capacity utilization, we see resistance across players in the T&B segment (v/s

PCR and 2Ws) in hiking prices, so as to gain market share. The TBB segment is

the last to witness pricing action due to oversupply within the industry. Hence,

pricing power would be the lowest for the T&B segment.

T&B is the least profitable segment for Tyre companies. Our analysis suggests

that margins for the TBR and TBB segment is lower than those of PCR and 2W,

with TBB faring worse than TBR.

We expect TBB margins to remain under pressure as the industry faces excess

capacity, given the pace of radialization.

Imports remain a key risk



In Sep’17, the Government of India re-imposed anti-dumping duty (ADD) on the

import of new Chinese T&B radials for a period of five years. ADD ranges

between USD245.35/t and USD452.33/t, depending on the producer and

exporter.

This led to Chinese TBR imports, which were as high as ~30% of total domestic

TBR consumption, becoming costlier, providing a level playing field with Indian

T&B Tyre manufacturers.

While ADD is applicable up to Sep’22, non-extension or revocation any time

before that would severely impact the competitiveness of domestic players,

especially during current times, when capacity addition remains high.

July 2021

Tyres

Framework to evaluate Tyre companies

Prefer APTY and CEAT over BIL and MRF



We evaluate Tyre companies based on brand ranking, pricing power, revenue mix,

headroom for growth, cost competitiveness, and financial strength.

Our framework ranks companies on their relative attractiveness on operating

parameters.

We assign a 75% weightage to these operating parameters (equal weight for each

parameter) and 25% weightage to the valuation score to identify stocks poised for

outperformance.

APTY and CEAT offer a favorable trade-off of growth and attractive valuations.

MRF

4.3

4.4

3.9

4.0

3.5

3.9

2.0

3.4

APTY

4.2

3.6

3.8

4.0

3.0

2.8

3.6

5.0

3.9

CEAT

3.2

3.4

4.0

5.0

3.0

3.3

3.6

4.0

3.7

BIL

2.5

4.1

3.0

5.0

3.7

3.0

3.5

Exhibit 36: APTY emerges as our top pick in the sector

Rating scale [five]

Brand ranking

Pricing power

Revenue mix

Headroom to grow

Cost competitiveness

Financial strength

Operating parameters [75% weightage]

Valuation score [25% weightage]

Blended score

Source: Company, MOFSL

Brand ranking



We evaluate companies based on their brand ranking in individual segments of PCR,

2W, TBR, TBB, LCV, and others.

We weight their brand ranking within each of these segments with their revenue mix

to arrive at a final score.

Based on this parameter, MRF occupies the top spot due to its strong brand image

across segments. APTY ranks second due to its negligible presence in the 2W segment.

BIL ranks the lowest due to its positioning as a Tier II player in the global OHT

segment.

MRF

4.3

APTY*

4.2

CEAT

3.2

BIL

2.5

Exhibit 37: MRF ranks numero uno, APTY a close second

Rating scale [five]

Brand ranking

*APTY including EU operations; Source: Company, MOFSL

Exhibit 38: MRF best placed on brand rankings across segments

Brand rankings

MRF

APTY

CEAT

JKI

Bridgestone

TVST

TBR

3.0

5.0

2.0

4.0

TBB

5.0

4.5

3.0

4.0

PCR

4.5

3.5

3.0

5.0

2Ws/3Ws

5.0

2.0

4.0

3.0

3.5

LCV

4.0

3.0

Source: Company, MOFSL

July 2021

Tyres

MRF’s ZLX ad with Virat Kohli as brand ambassador

APTY’s campaign with Mr. Sachin Tendulkar

Click on the images for the video

CEAT’s SecuraDrive campaign with Mr. Aamir Khan

CEAT’s puncture safe tyres campaign

Click on the images for the video

July 2021

Tyres

Pricing power



We evaluate companies based on their pricing power and ability to pass on

price hikes within each segment. This is then weighted against revenue

contribution from that particular segment to arrive at a blended score.

MRF ranks higher on this parameter as it has pricing power across most

segments, particularly in Consumer segments.

APTY has relatively strong pricing power in the TBR segment and is improving

its positioning in PCR as well.

BIL ranks lower on this parameter as it is generally a price taker in the global

OHT market.

Exhibit 39: MRF enjoys strong pricing power across most segments

Rating scale [five]

Pricing power

MRF

4.4

APTY *

3.6

CEAT

3.4

BIL

2.5

*APTY including EU operations; Source: Company, MOFSL

Exhibit 40: Overview of pricing power of key players across segments

Pricing power

MRF

APTY

CEAT

JKI

Bridgestone

Michelin

TVST

TBR

4.0

5.0

2.0

3.5

TBB

5.0

4.0

3.0

3.5

PCR

4.0

3.5

3.0

5.0

2W/3W

5.0

2.0

4.0

2.0

3.0

Source: Company, MOFSL

Exhibit 41: MRF enjoys a strong brand ranking and pricing power across most segments

MRF

Brand ranking

Rating

Revenue mix

Blended score

Pricing power

Rating

Revenue mix

Blended score

TBR

3.0

23%

0.7

4.0

23%

0.9

TBB

5.0

22%

1.1

5.0

22%

1.1

PCR

4.5

19%

0.9

4.0

19%

0.8

2W/3W

5.0

22%

1.1

5.0

22%

1.1

Farm

4.0

0.3

3.5

0.3

Blended

ranking

4.3

4.4

Source: Company, MOFSL

Exhibit 42: APTY enjoys a dominant brand image and pricing power in TBR and PCR, but EU operations weighs on the score

APTY

Brand ranking

Rating

Revenue mix

Blended score

Pricing power

Rating

Revenue mix

Blended score

TBR

5.0

26%

1.3

5.0

26%

1.3

TBB

4.5

16%

0.7

4.0

16%

0.6

PCR

4.5

12%

0.5

3.5

12%

0.4

2W/ 3W

2.0

Farm

3.5

0.3

3.5

0.3

Vredestein Vredestein

PCR

Agri

3.5

26%

0.9

2.5

26%

0.6

3.0

0.2

2.0

0.1

Blended

ranking

4.2

3.6

Source: Company, MOFSL

July 2021

Tyres

Exhibit 43: CEAT strongest in the 2W/3W segment, relatively weak positioning elsewhere

CEAT

Brand ranking

Rating

Revenue mix

Blended score

Pricing power

Rating

Revenue mix

Blended score

TBR

2.0

14%

0.3

2.0

14%

0.3

TBB

3.0

17%

0.5

3.5

17%

0.6

PCR

3.5

15%

0.5

3.5

15%

0.5

2W/3W

4.0

31%

1.2

4.0

31%

1.2

Farm

2.0

12%

0.2

3.0

12%

0.4

Blended

Ranking

3.2

3.4

Source: Company, MOFSL

Revenue mix



We evaluate companies on their revenue mix within:



OEM, Replacement, and exports:

We assign a ranking of two/five to

OEMs/Replacement, which is weighted against their revenue contribution from

each of these segments.



Inter-segment, i.e. Consumer segments (2W, PCR), v/s Commercial segment

(T&B):

Score of each segment is weighted against their revenue contribution from

each of these segments.

We prefer companies with a lower concentration of the T&B segment and higher

share from Consumer segments of 2W and PCR. We also prefer companies with a

higher share from Replacement.

Based on this analysis, CEAT fares slightly better than others.

Exhibit 44: BIL ranks marginally higher than CEAT in terms of the revenue mix

MRF

Based on end-user segment

Based on vehicle segments

Average ranking based on revenue mix

APTY*

CEAT

BIL

4.3

4.2

4.1

3.5

3.4

3.8

4.0

3.9

3.8

4.0

4.1

*APTY including EU operations; Source: Company, MOFSL

Exhibit 45: Ranking based on end-user segmentation is similar across companies

OEM [two]

Replacement [five]

Blended score [five]

MRF

0.5

3.8

4.3

APTY

0.5

3.8

4.3

CEAT

0.5

3.7

4.2

BIL

0.6

3.5

4.1

Source: Company, MOFSL

Exhibit 46: Revenue mix is broadly similar across companies (%)

Revenue mix

OEM

Replacement

MRF

APTY

CEAT

BIL

Source: Company, MOFSL

July 2021

Tyres

Exhibit 47: Segmental score is assigned based on our preference for segments, which is

then weighed with the revenue mix of each company

TBR [three]

TBB [two]

LCV [3.5]

PCR [four]

2W [five]

Farm and others [four]

Blended score

MRF

0.7

0.4

0.3

0.8

1.1

0.3

3.5

APTY

0.8

0.3

0.2

1.5

0.1

0.5

3.4

CEAT

BIL

0.4

0.3

0.4

0.6

1.6

0.5

4.0

3.8

4.0

Source: Company, MOFSL

CEAT

BIL

100

Exhibit 48: Revenue mix of companies across segments (%)

TBR

TBB

LCV

PCR

Farm and others

MRF

APTY

Source: Company, MOFSL

Headroom to grow



Companies are evaluated based on their headroom to grow and preparedness in this

aspect over the next few years.

To evaluate this, we look at capex spends over the past three years and planned capex

over the next three years, along with capacity utilization based on current production

on fully expanded capacity.

Our analysis suggests that CEAT, MRF, and APTY have higher headroom to grow over

the next few years.

CEAT’s aggressive capacity addition would set the path for growth in all segments.

Major capex undertaken over the past three years, along with planned future

capacity, gives APTY headroom to grow, both in its Indian and European operations.

BIL’s lower score is due to the primary nature of its capex. The entire capex would only

translate to 20% addition in capacity.

Exhibit 49: CEAT has the highest headroom to grow based on recent and upcoming capacity additions

Capex

(FY21-23E),

INR b

38.5

27.9

46.0

27.7

Revenue

(FY21),

INR b

162

173

Cumulative capex

as a percentage

of revenue (%)

Addition to

gross block

(%)

Capacity

utilization*

(%)

Ranking

MRF

CEAT

APTY *

BIL

*FY21 production divided by fully expanded capacity; Source: Company, MOFSL

July 2021

Tyres

Cost competitiveness



We evaluate companies based on their cost structure, for which we compare their

gross and EBITDA margins.

BIL ranks highest on this parameter due to its significantly superior gross margin of

59.9% (FY21). On EBITDA margin too, it ranks higher than peers. Backward integration

into carbon black further increases its cost advantage v/s peers. The company enjoys a

natural hedge against a depreciating INR due to a higher proportion of exports.

CEAT fares poorly on the basis of cost competitiveness, with the lowest EBITDA margin

among Tyre manufacturers.

Despite enjoying a superior gross margin (due to EU operations), APTY scores low on

cost competitiveness due to lower utilization in India/EU and higher fixed cost

structure in EU operations.

Exhibit 50: BIL has the most competitive structure, with a superior gross/EBITDA/EBIT

margin (FY21)

MRF

CEAT

APTY*

BIL

Gross margin (%)

42.3

43.9

45.6

59.9

EBITDA margin (%) EBIT margin (%)

Ranking

18.2

11.1

3.5

12.9

8.5

3.0

15.5

7.9

3.0

31.1

23.9

5.0

*APTY including EU operations; Source: Company, MOFSL

Financial strength



We evaluate companies on the basis of their current and projected (FY23E) return

ratios: asset turnover, net debt, and cash flow ratios.

We then rank the companies for both years, with equal weightage for each year.

Based on this analysis, we prefer BIL due to its consistently higher return ratios, low

leverage, and higher cash conversion ratios.

The financial strength of CEAT and APTY is expected to improve by FY23E, but it would

still be sub-par compared to BIL and MRF.

MRF

3.5

APTY*

2.8

CEAT

3.3

BIL

5.0

Exhibit 51: BIL ranks the highest on financial strength due to its superior return ratios

Rating scale [five]

Financial strength

*APTY including EU operations; Source: Company, MOFSL

Exhibit 52: Currently, BIL is best placed in terms of financial strength (FY21)

Financial strength

MRF

CEAT

APTY

BIL

RoE

(%)

10.0

14.9

6.2

21.4

RoCE

(%)

10.0

12.2

5.7

18.3

RoIC

(%)

14.1

14.6

5.9

22.5

Asset

turnover

ratio (x)

1.0

1.5

1.0

0.8

Asset

turnover

ratio (x)

1.1

1.6

1.2

0.9

CFO

Net debt-to-

conversion,

FCF/PAT,

equity

Avg. FY19-21 Avg. FY19-21

(x)

(%)

(0.3)

121

0.4

128

0.3

100

-10

(0.1)

Net debt-to-

equity

ratio (x)

(0.3)

0.4

0.1

(0.2)

CFO

conversion

(%)

122

105

FY21

ranking

[five]

3.5

3.0

2.5

5.0

Exhibit 53: BIL tops in terms of FY23E ranking due to likely improvement in return ratios as capacity utilization improves

Financial strength

MRF

CEAT

APTY

BIL

RoE

(%)

10.8

13.7

10.4

22.6

RoCE

(%)

11.0

11.3

9.3

19.9

RoIC

(%)

15.7

11.7

10.5

27.6

FCF/

FY23E

PAT

ranking

(%)

[five]

3.5

145

3.0

5.0

Source: Company, MOFSL

July 2021

Tyres

Valuations



APTY stands out due to its attractive valuations. It is the cheapest stock, despite its

superior earnings growth and improving return ratio profile.

CEAT enjoys superior revenue and EBITDA growth among its domestic focused peers.

However, recent capacity additions (in the ramp-up phase) are acting as a drag on

earnings. Despite this, valuations are quite reasonable.

Exhibit 54: APTY is the cheapest stock within the Tyre pack on an FY23E basis

Valuation

P/E

P/B

EV/EBITDA

RoE (%)

RoCE (%)

Revenue CAGR over FY21-23E (%)

EBITDA CAGR over FY21-23E (%)

PAT CAGR over FY21-23E (%)

PEG

APTY

9.7

1.0

4.0

10.4

9.3

13.5

16.1

42.2

0.2

BIL

26.1

5.5

17.0

22.6

19.9

20.1

22.0

21.5

1.2

CEAT

MRF

10.9

20.7

1.4

2.1

5.7

8.3

13.7

10.8

11.3

11.0

15.7

11.7

14.7

10.3

6.9

14.8

1.6

1.4

Source: Company, MOFSL

Exhibit 55: Comparative valuation table

APTY

BIL

CEAT

MRF

Price M-cap Upside

(INR) (INR b)

(%)

225

143

2,349

454

1,427

82,067

348

Rating

Buy

Neutral

Buy

Neutral

CAGR (FY21-23E)

P/E

EV/EBITDA

RoE (%)

RoCE (%)

Sales EBITDA EPS FY22E FY23E FY22E FY23E FY22E FY23E FY22E FY23E

13.5

16.1

42.2 11.9

9.7

5.4

4.4

9.1

10.4

8.3

9.3

20.1

22.0

21.5 31.5 26.1 19.9 16.5

22.1

22.6

19.1

19.9

15.7

14.7

6.9

16.4 10.9

7.7

5.7

10.1

13.7

9.0

11.3

11.7

10.3

14.8 24.7 20.7

9.8

8.3

10.0

10.8

10.0

11.0

Source: Company, MOFSL

Exhibit 56: Comparative valuation of global peers

Company (USD b)

Bridgestone Corp

Sumitomo Rubber Industries

Toyo Tire Corp

Yokohama Rubber Co Ltd

Kumho Tire Co Inc

Nexen Tire Corp

Michelin (Cgde)

Hankook Tire & Technology Co

Cheng Shin Rubber Ind Co Ltd

Goodyear Tire & Rubber Co

Nokian Renkaat Oyj

Continental Ag

Trelleborg AB

Pirelli

CY20-22E CAGR

M-cap Sales

EPS

30.5

4.1

LTP

3.5

7.4

23.3

2.9

8.6

83.4

3.4

6.4

21.9

1.7

17.6

LTP

0.8

14.1

LTP

28.6

9.7

80.3

5.5

9.6

33.1

5.2

12.1

16.6

4.5

19.7

LTP

5.8

13.4

73.0

27.6

8.2

LTP

6.6

5.9

25.7

5.7

12.1

286.7

CY20

-1.0

4.9

5.3

6.3

-6.7

-1.0

4.9

5.1

7.6

-33.8

5.2

-7.0

9.3

0.6

RoE (%)

CY21E CY22E

12.3

11.2

7.0

7.4

15.5

15.1

11.5

8.4

-0.8

8.8

4.7

5.8

12.2

13.2

7.9

9.0

9.3

8.9

14.9

13.4

15.3

11.1

15.0

11.9

12.2

5.9

8.4

CY20

10.3

20.7

9.3

29.8

13.0

23.8

46.5

18.3

147.8

P/E (x)

CY21E CY22E

11.1

12.5

11.8

10.9

8.8

8.1

6.6

8.7

17.7

12.7

9.8

14.7

12.1

10.4

9.8

19.4

18.9

13.3

8.1

23.1

19.8

15.7

10.2

15.0

13.7

14.6

10.6

EV/EBITDA (x)

CY20 CY21E CY22E

8.0

5.6

5.0

4.2

5.3

5.0

5.5

5.0

5.3

4.8

5.3

11.3

12.7

9.1

6.8

6.2

5.6

7.0

6.2

5.7

3.9

4.4

4.3

8.4

7.6

7.7

18.4

5.5

4.5

14.4

11.8

10.6

12.9

5.4

4.5

9.7

9.0

11.0

8.8

7.7

Source: Bloomberg

July 2021

Tyres

Key risks



Imports from China:

In Sep’17, the Government of India re-imposed ADD on

imports of new Chinese T&B radial tyres for a five-year period. This led to

Chinese TBR imports, which were as high as ~30% of total domestic TBR

consumption, becoming costlier, providing a level-playing field with Indian T&B

Tyre manufacturers. Non-extension of ADD, or its revocation, would severely

impact domestic players, especially in the current scenario of considerable

capacity addition.

Competitive intensity:

The Tyre sector is witnessing intense competition, with

almost all players undertaking huge capacity additions in pursuit of market

share. Under the circumstance, where demand remains subdued, we might see

heightened competitive intensity, impacting profitability for the sector.

July 2021

Tyres

Tyres: Ready to roll

Ready to roll

Pg51

Pg33

Pg65

Pg75

July 2021

Tyres

Initiating Coverage | Sector: Automobiles

Apollo Tyres

BSE Sensex

52,553

S&P CNX

15,752

CMP: INR225

TP: INR300 (+33%)

Buy

Improved competitive positioning in both India and EU

Strong EPS growth and Balance Sheet deleveraging to drive re-rating

Stock Info

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

12M Avg Val (INR M)

Free float (%)

APTY IN

635

143.1 / 1.9

261 / 106

-1/13/64

1849

62.4

Ranks highest in our TII framework



APTY offers a favorable balance of strong earnings growth and attractive

valuations. It ranks the highest in our TII framework of evaluating Tyre

companies, with a score of 3.9 (scale of five).



While APTY doesn’t rank on top in any of the operational parameters, it is a

close second in brand ranking and headroom to grow. Moreover, its

valuations are the most attractive relative to MRF, CEAT, and BIL.

Financial Snapshot (INR b)

Y/E March

FY21 FY22E FY23E

Sales

172.8 204.8 222.8

EBITDA

26.8 32.3 36.2

Adj. PAT

6.6 10.8 13.3

EPS (Rs)

11.5 18.9 23.3

EPS Growth (%)

38.1 64.5 23.0

BV/Share (INR) 200.0 214.9 233.7

Ratios

RoE (%)

6.2

9.1 10.4

RoCE (%)

5.7

8.3

9.3

Payout (%)

57.2 21.2 19.3

Valuations

P/E (x)

19.6 11.9

9.7

P/BV (x)

1.1

1.0

Div. Yield (%)

1.6

1.8

2.0

FCF Yield (%)

10.0

3.1 15.0

Shareholding pattern (%)

As On

Jun-21 Mar-21 Jun-20

Promoter

37.6

37.3

41.7

DII

17.2

13.1

19.9

FII

22.9

24.3

19.7

Others

22.3

25.3

18.7

FII Includes depository receipts

Stock Performance (1-year)

India – Strong competitive positioning; good headroom for growth



Over the last five years, APTY has considerably strengthened its competitive

positioning in the Indian market in the T&B/PCR segment (5pp/6pp market

share gain over FY17 to 30%/21% in FY21). As a result, it has achieved

market leadership in T&B and is a close second in PCR.



On a fully expanded capacity by FY22-end, APTY’s utilization in PCR/TBR is

estimated at 71%/65%. This, coupled with the recently commissioned AP

plant, has scope to replicate capacity at lower cost.



India revenue is estimated to grow by ~14% CAGR over FY21-23E, with

FY23E EBITDA margin estimated to decline 70bp (to 15.8%) over FY21 levels.

However, operating leverage and Balance Sheet deleveraging would drive

24% PAT CAGR in the India business.

European operations turnaround to support margin



PCR capacity at the Hungary plant is undergoing a ramp up to 5.5m by FY22-

end from 5.1m p.a at present. It was operating at 75% utilization in 4QFY21.



The planned PCR capacity transfer from the Netherlands to the Hungary

plant would further leverage its low-cost structure, with the revenue

contribution of the Hungary plant likely to rise materially.



Restructuring/specialization of the Netherlands plant, coupled with a ramp-

up (75% utilization) in the more efficient Hungary plant (conversion at less

than 0.2x that of the Netherlands plant and minimum wages less than 0.3x),

would drive ~300bp EBITDA margin expansion (over FY21) to 15.5% in FY23E

and be positive at the PAT level.

Valuation and view



APTY is geared up for the next leg of growth, with sufficient capacity to

cater to domestic/European demand. With capex for Phase I of the AP plant

concluding in FY22E, the increase in capacity utilization will generate higher

cash flows and further deleverage the Balance Sheet.



Compared to its peers, APTY offers the best blend of earnings growth and

cheap valuations. The stock trades at 11.9x/9.7x FY22E/FY23E consolidated

EPS. We initiate coverage on the stock with a Buy rating and a TP of INR300

(12x Sep-23E consolidated EPS v/s 16x/12x its 5/10 year average P/E).

July 2021

Tyres

Ranks highest within our TII framework

Blend of strong earnings growth and attractive valuations



APTY offers a favorable balance of strong earnings growth and attractive valuations. It

ranks highest in our TII framework of evaluating Tyre companies, with a score of 3.9

(scale of five).

While APTY doesn’t rank on top in any of the operational parameters, it is a close

second in brand ranking and headroom to grow. Moreover, valuations are attractive

relative to MRF, CEAT, and BIL.

It ranks a distant second in pricing behind MRF, largely due to its EU operations. For its

India operations, APTY is close second on pricing power.

Exhibit 57: APTY scores high in terms of brand ranking and headroom to grow

Brand Ranking

4.2

Financial Strength

2.8

3.6

Pricing power

Cost competitiveness

3.0

4.0

Headroom to grow

3.8

Revenue mix

Source: MOFSL

Exhibit 58: APTY ranks low based on

operating parameters, partly due to its

EU operations

MRF

3.9

Exhibit 59: However, it ranks numero

uno based on current valuations

MRF

2.0

Exhibit 60: APTY ranks topmost on

good operating metrics at attractive

valuations

MRF

3.4

BIL 3.7

3.6

APTY

BIL

3.0

APTY

5.0

BIL

3.5

3.9

APTY

3.6

CEAT

Source: MOFSL

4.0

CEAT

Source: MOFSL

3.7

CEAT

Source: MOFSL

July 2021

Tyres

APTY

4.2

BIL

2.5

4.3

3.2

CEAT

APTY

3.6

BIL

2.5

3.4

CEAT

APTY

3.8

4.1

BIL

4.0

CEAT

3.9

MRF

#1: Brand ranking



APTY closely competes with MRF in terms of brand ranking, owing to its strong identity in the T&B

and PCR segments.

It is among the top two players in the T&B segment, with ~31% market share, owing to its delivery of

quality products at a good price point.

Within PCR, APTY has improved its brand ranking significantly over the past few years, led by its focus

on product innovation, improving quality, and increasing penetration with key OEMs.

#2: Pricing power



MRF

4.4



APTY enjoys pricing power in the TBR segment due to its leadership position and superior quality

product offerings. Pricing power in the TBB segment is fairly decent, but MRF dictates pricing here.

In the PCR segment, its pricing power remains stronger than CEAT and JKI, but is weaker than MRF

and Bridgestone.

It doesn’t enjoy pricing power in the EU due to its relatively small presence there and is a price taker.

On an overall basis, APTY lags behind MRF in terms of pricing power due to its relatively weak

positioning in the PCR segment.

#3: Revenue mix



MRF



APTY ranks third in terms of revenue mix to BIL and CEAT.

Of the four Tyre companies, APTY has the highest (~75%) contribution from the Replacement

segment.

It also has a higher concentration in the CV segment (~61%) vis-à-vis its peers.

Negligible presence in 2Ws is also weighing down on its overall score.

APTY

4.0

BIL 3.0

MRF

#4: Headroom to grow



4.0



5.0

CEAT

APTY has undertaken significant steps over the last three years towards its Hungary operations, and

expansion in Andhra Pradesh (AP) and Chennai.

Ramp-up in Hungary PCR and TBR capacity would ensure that APTY has significant room to grow in its

EU operations, without the requirement of any major capex up to FY23.

In India, PCR capacity will increase to 52k tyres/day (v/s 38k currently), post completion of the ramp

up in capacity in AP by FY22-end.

Ongoing ramp-up in TBR capacity would further boost capacity to 15k tyres/day (v/s current capacity

of 13k). This provides ample opportunity for APTY to grow organically over FY21-23E.

APTY

3.0

BIL

5.0

3.0

CEAT

3.5MRF

#5: Cost competitiveness



APTY ranks lower on this parameter as EBIT margin remains lower than MRF and BIL.

Among domestic peers, MRF beats APTY in terms of EBITDA and EBIT margin due to its relatively

strong pricing power across segments.

Gross margin (consolidated) is the highest for APTY as compared to MRF and CEAT, but consolidated

EBIT margin is much lower.

APTY

2.8

5.0

BIL

3.3

CEAT

July 2021

3.5

MRF

#6: Financial strength



APTY ranks the lowest v/s MRF, BIL, and CEAT in terms of financial strength due to its sub-par return

ratios.

Net debt is higher for APTY at 0.3x currently (0.1x by FY23E) as compared to MRF and BIL, which are

both net cash.

We expect a significant improvement in APTY’s financial positioning over the next few years, led by

higher capacity utilization, increased cash flow, deleveraging, higher profitability as the Hungary plant

ramps up, and restructuring in the Netherlands.

Tyres

India: Strengthened competitive position in PCR and TBR

Good headroom for growth and low cost expansion at the AP plant



Over the last five years, APTY has considerably strengthened its competitive

positioning in the Indian market. In the T&B segment, it has emerged as the market

leader, with a market share gain of 5pp over FY17 to 30% in FY21, benefitting from

radialization (TBR market share gain of ~11pp to 32%).

In PCR, it has considerably narrowed down the gap v/s the market leader by gaining

6pp. Its share stood at 21% in FY21, which is 100-200bp lower than the market leader.

In Agri Tyres (rear Tractor tyre), its market share improved by ~2pp over FY17 to 21%.

On a fully expanded capacity by FY22-end, APTY’s utilization in PCR/TBR is estimated

at 71%/65%. Considering 4QFY21 utilization level for all India plants (excluding AP)

stands at 85-90%, APTY has adequate capacity for the next 2-2.5 years of growth. The

AP plant, spread over 256 acres, has a modular layout and capacity can be replicated

at relatively low cost.

After a strong performance in FY21, we expect standalone EBITDA margin to decline

by ~70bp over FY21 to ~15.8% in FY23E. This is on account of higher commodity cost.

Our estimates are yet to factor in supplies of PCR from India to the EU. However,

operating leverage would result in a 50bp decline in EBIT margin, whereas the Balance

Sheet deleveraging is driving 120bp expansion in EBT margin over FY21-23E.

Improving competitive positioning in PCR and TBR



Over the last five years, APTY has considerably strengthened its competitive

positioning in the Indian market through focus on product development,

enabling market share gains in both the OEM and Replacement segment.

It has consolidated its position in T&B tyres, with a market share gain of 5pp

over FY17 to 30% in FY21, benefitting from radialization. In TBR, APTY witnessed

a very high (~11pp) market share gain to 32%. By leveraging the radialization

trend, APTY has gained market leadership in the TBR and T&B segment.

In PCR, it has considerably narrowed down the gap vis-à-vis the market leader

over the last four years. Its market share in PCR has increased to 21% in FY21

from 15% in FY17, which is 100-200bp lower than the market leader.

In Agri Tyres (rear Tractor tyre), APTY’s market share has improved by ~2pp over

FY17 to 21%.

APTY’s market share gain continued in FY21, benefitting from import ban,

resulting in market share gains of 150bp/350bp/350bp in TBR/PCR/Agri.

FY17

30.5

17.5

FY20

FY21

17.5

Exhibit 61: Market share: APTY gains leadership in TBR and is a close second in PCR

PCR

TBR

T&B

Tractor (Rear)

Source: Company, MOFSL

July 2021

Tyres

Good headroom for growth and low cost expansion at the AP plant



APTY has invested ~INR63b in India since FY18, including INR22b for the AP plant

till FY21. While commercial production at the AP plant began from Sep’20, full

ramp-up of Phase I is expected over the next 12-18 months.

PCR/TBR capacities would be ramped up to 15k/3k tyres per day (from ~5k/1.2k

per day at present) by FY22-end.

This will increase

overall

PCR/TBR capacity by 25-30%/14-16% (from 4QFY21

levels) to ~50k/~15k tyres per day.

On a fully expanded capacity by FY22-end, APTY’s utilization in PCR/TBR is

estimated at 71%/65%. Considering 4QFY21 utilization levels for all India plants

(excluding AP) is at 85-90%, APTY has adequate capacity for the next 2-2.5 years

of growth. The AP plant, spread over 256 acres, has a modular layout and the

capacity can be replicated at a relatively lower cost.

We estimate 10% volume CAGR over FY21-23E, led by strong growth in the TBR

and PCR segment, coupled with an improvement in price realization of 3%CAGR.

We estimate ~14% revenue CAGR over FY21-23E.

Exhibit 62: To complete ramp-up its PCR capacity by FY22-end Exhibit 63: …which provides enough headroom to grow over

(tyres per day), with full benefit in FY23…

the next 2-3 years from current capacity levels

PCR capacity

45,000

52,000

72%

Ramp-up adj. capacity ('000 MT p.a.)

Cap. Utilization of ramp-up adj. capacity (%)

79%

73%

71%

67%

108

FY19

FY20

FY21E

FY22E

FY23E

FY20

112

FY21

134

FY22E

155

FY23E

155

FY24E

155

FY25E

72%

36,000

38,000

Source: Company, MOFSL

Exhibit 64: Capacity addition in TBR to see full ramp-up of

the AP plant by FY22-end…

TBR capacity (tyres per day)

14,738

15,000

Exhibit 65: …offering reasonable headroom to grow over the

next 2-3 years in the TBR segment

Ramp-up adj. capacity ('000 MT p.a.)

Cap. Utilization of ramp-up adj. capacity (%)

93%

82%

73%

65%

8,546

10,300

11,597

13,116

60%

275

FY18

FY19

FY20

FY21

FY22E

FY23E

FY21

309

FY22E

315

FY23E

315

FY24E

315

FY25E

Source: Company, MOFSL

July 2021

Tyres

APTY is the biggest beneficiary of radialization



APTY has been one of the key beneficiaries of radialization in India’s CV Tyre

industry. Through significant investments in R&D over the past years, APTY has

commanded leadership in this segment, thereby enjoying strong brand equity

and pricing power.



APTY has consistently improved its market share in the TBR segment. The same

currently stands ~31%.



We expect the radialization trend to touch new highs, particularly in the

Replacement segment, of 60% by FY25E (from 47% in FY21).



Radialization is likely to accelerate further over FY21-25E, with the share of

radials in the T&B segment touching ~66% by FY25E (from 50% in FY21). We

expect 20% T&B radial sales CAGR over FY21-25E and TBB CAGR of 2% (on a low

base).

Exhibit 66: Radial tyres set to attain ~66% share by FY25E in

the T&B segment

Radialization at Industry level

48% 49% 50%

44%

47%

56%

53%

Repl.

60% 63%

66%

Exhibit 67: APTY, being the market leader, benefits the most

from this trend, particularly in the Replacement market

TBR

31%

APTY

MRF

30%

22%

CEAT

Others

33%

28%

36% 38%

44%

60%

56% 58%

27%

30%

37%

41%

FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22EFY23EFY24EFY25E

Source: Company, MOFSL

Price increases and operating leverage to dilute the impact of cost inflation



APTY’s India business has several levers for supporting margin and diluting the

impact of RM cost inflation. These include: a) operating leverage, b) increasing

share of the most efficient AP plant, and c) likely benefit from PCR exports to

the EU with PLI benefits.



In 2HFY21, APTY witnessed the impact of commissioning of the AP plant, as

fixed cost got apportioned on lower volumes. Over the next two years, as the AP

plant gets fully utilized, we expect it to drive material operating leverage as well

as benefit from higher efficiencies (with the highest automation in its India

operations).



APTY is planning to supply over 3m PCR tyres to its EU business from Hungary

and India operations as it has decreased (~90%) the plant capacity in the

Netherlands. A part of this 3m PCR tyres which would be exported from India,

would potentially benefit from the PLI scheme for exports.



After a strong performance in FY21, we estimate standalone EBITDA margin to

decline by ~70bp over FY21 to ~15.8% in FY23E. This is primarily on account of

higher commodity cost. Our estimates are yet to factor in supplies of PCR from

India to the EU.

July 2021

Tyres



Operating leverage would result in a 50bp decline in EBIT margin, whereas

Balance Sheet deleveraging is driving 120bp expansion in EBT margin over FY21-

23E.

Exhibit 68: Expect gross margin for APTY’s India business to decline 110bp over FY21 to

39.2% in FY23E…

43.0

Gross Margins (%)

41.6

38.2

34.8

40.3

38.5

36.5

39.2

FY16

FY17

FY18

FY19

FY20

FY21

FY22E

FY23E

Source: Company, MOFSL

Exhibit 69: … however positive operating leverage to decline the impact to 70bp/50bp in

EBITDA/EBIT margin

FY16

FY17

FY18

FY19

FY20

FY21

FY22E

FY23E

EBITDA Margins

EBIT Margins

EBT Margins

Source: Company, MOFSL

July 2021

Tyres

Turnaround in its European operations to support margin…

…driven by a ramp-up in Hungary and restructuring in the Netherlands



APTY (through Vredestein) has been continually improving its product mix in favor of

UHP/UUHP tyres. The share of UHP tyres (17”) within PCR stands at 36% v/s 20% five

years back. It is gaining traction in targeted premium OEMs, which would further

support brand building and its journey towards premiumization.

PCR capacity at its Hungary plant would be further ramped up to 5.5m by FY22-end

from 5.1m p.a at present. It was operating at 75% utilization in 4QFY21.

The planned PCR capacity transfer from the Netherlands to the Hungary plant would

further leverage its low-cost structure, with the revenue contribution of the Hungary

plant likely to rise materially.

Restructuring/specialization of the Netherlands plant, coupled with a ramp-up (75%

utilization) in the more efficient Hungary plant (conversion at less than 0.2x that of the

Netherlands plant and minimum wages less than 0.3x), would drive ~300bp EBITDA

margin expansion (over FY21) to 15.5% in FY23E and be positive at the PAT level.

Premiumization to remain a focus area



APTY (through Vredestein) has been continually improving its product mix in

favor of UHP/UUHP tyres. The share of UHP tyres (17”) within PCR now stands

at 36% v/s 20% five years back.



It is also extending its premium segment portfolio by introducing UHP tyres

across summer/winter and all season segments.



APTY’s UHP products have been well received by the market as reflected in its

market share gains. This is also reflected in consistent podium finishes at various

test agencies. These podium positions are key drivers of improvement in market

share, price positioning, and profitability.



It is gaining traction in targeted premium OEMs, which would further support

brand building and journey towards premiumization.

Exhibit 70: Vredestein has been consistently achieving podium positions in Europe

Source: Company

July 2021

Tyres

Exhibit 71: Share of premium tyres increases over the years

Share of UHP within PCR

27%

20%

36%

FY12/13

FY18

FY21

Source: Company, MOFSL

Efficient Hungary plant to drive revenue growth



PCR capacity at its Hungary plant would be ramped up further to 5.5m by FY22-

end from 5.1m p.a at present. It was operating at 75% utilization in 4QFY21.



TBR capacity (450k p.a) at this plant is running at lower utilization levels and

could surprise positively. It has been seeding the European market with its TBR

tyres. With new capacity in place, it expects to make healthy inroads in this

segment.



The planned PCR capacity transfer to Hungary from the Netherlands plant would

further leverage its low-cost structure, with revenue contribution from the

Hungary plant likely to rise to 65% by FY23E from 55% in FY21 (without factoring

in benefits of a shift in production from the Netherlands plant).

Exhibit 72: Capacity ramp-up at the Hungary plant

underway…

TBR (tyres/day)

PCR (tyres/day)

15,000

17,000

18500

Exhibit 73: …resulting in increasing share within EU

operations

Share of Hungary plant to EU revenue %

55%

45%

29%

61%

65%

12,000

13,000

4,400

FY18

1,200

FY19

1,200

FY20

1,200

FY21E

1,200

FY22E

1,200

FY23E

1,200

FY24E

15%

FY18

FY19

FY20

FY21

FY22E

FY23E

Source: Company, MOFSL

Ramp-up in Hungary, restructuring in the Netherlands to drive margin



APTY’s margin in the European business has been on a downtrend over the past

five years, impacted by startup/ramp-up costs at the Hungary plant, cost related

to compliance with label requirements and R&D, streamlining of operations for

OEM homologations, and in general slowdown in the PCR Tyre industry. As a

result, margin shrank to 8% in FY20 from 16.8% in FY15.



It recently completed restructuring of its 100-year old plant in the Netherlands

by converting it into a specialized plant focusing on Agri and high-end PCR

(suitable for a smaller batch and higher manual work). This would result in a

July 2021

Tyres

90% reduction in capacity at the Netherlands plant to 0.5m tyres p.a, which

would be largely (over 3m tyres) catered by its Hungary and India plants.



This, coupled with a ramp-up (75% utilization) in the more efficient Hungary

plant (conversion at less than 0.2x that of the Netherlands plant and minimum

wages less than 0.3x), has resulted in a sharp margin improvement in its EU

operations in 2HFY21 (~15.4% EBITDA margin).



This margin improvement in 2HFY21 is without the full saving benefits of

EUR50m due to reduction in headcount at its plant in the Netherlands.



We expect EBITDA margin to expand by ~300bp to 15.5% for its EU operations in

FY23E (after factoring in cost inflation in 1HFY22E). This will result in EU

operations turning PAT positive from FY22E onwards.

Exhibit 74: Minimum wages in Hungary less than 0.3x that

of the Netherlands plant

EUR/Month

1,685

Exhibit 75: Conversion cost at the Hungary plant is less than

0.2x that of the Netherlands plant

EUR/Kg

6.26

470

Netherlands

Source: Industry, MOFSL

Hungary

Netherlands

Source: Company, MOFSL

Hungary

Limited capex needs in the near term



With capex for its Hungary plant completed, EU operations have good

headroom to grow from current capacities. The next leg of capacity expansion at

its Hungary plant would be brownfield to expand its PCR and TBR capacity, but

we do not foresee any need for this until FY24.



Its current capacity at Hungary is 5.1m tyres p.a, which would be expanded to

5.5m tyres by FY22-end. With a small capex for debottlenecking, annual capacity

at the Hungary plant can be increased by 0.5m units to 6m units. This, coupled

with the Netherlands plant capacity of 0.5m p.a, gives it a total capacity of 6.5m

p.a. Its EU operations will be supported by exports from India to the EU.



We are factoring in an annual capex of EUR25m for FY22E/FY23E.

July 2021

Tyres

Exhibit 76: Accelerated revenue growth aided by market

recovery and available capacity…

Revenue (EUR m)

7.9

-4%

472

FY18

506

FY19

520

FY20

497

FY21

556

FY22E

612

FY23E

FY19

FY20

FY21

FY22E

FY23E

7.9

Growth YoY %

12%

10%

12.5

Exhibit 77: …with margin expanding by 300bp over FY21 due

to ramp-up in Hungary and restructuring in the Netherlands

EBITDA (EUR m)

EBITDA margin %

15.5

15.4

Source: Company, MOFSL

Exhibit 78: Capex intensity to remain low

Capex (EUR m)

51%

37%

28%

FY15

118

FY16

232

FY17

175

FY18

14%

FY19

FY20

% of sales

Exhibit 79: Expect operations to turn profitable by FY22E

PAT (EUR m)

-9

-66

FY18

FY19

FY20

FY21

FY22E

FY23E

FY21 FY22E FY23E

Source: Company, MOFSL

July 2021

Tyres

Valuations and view

Strong growth, with an improvement in capital efficiency



India well placed for growth:

APTY is well placed, with strong competitive

positioning as well as ready capacities to benefit from a strong recovery in TBR

and PCR in both the OEM and Replacement segment. On a fully expanded

capacity by FY22-end, its PCR/TBR utilization is estimated at 71%/65%. We

estimate 10% volume CAGR over FY21-23E, led by strong growth in the TBR and

PCR segment and 3% CAGR improvement in price realizations. We estimate

~14% revenue CAGR over FY21-23E. APTY’s India business has several levers for

supporting margin and diluting the impact of RM cost inflation. These include: a)

operating leverage, b) increasing share of the most efficient AP plant (not

factored in), and c) likely benefit from PCR exports to the EU, with PLI benefits

(not factored in). While we expect a 70bp decline in FY23E EBITDA margin (to

15.8%) over FY21 levels, operating leverage and Balance Sheet deleveraging

would drive 24% PAT CAGR in the India business.

EU – worst behind it:

Its EU operations are all set for a turnaround, led by

strategic initiatives at both the front (product side) and back end (Hungary plant

and restructuring in the Netherlands). With improved competitiveness, APTY

has gained market share in the Replacement segment and made inroads with

OEMs. With a further ramp-up at the low-cost Hungary plant and specialization

at the Netherlands plant, we estimate 11% revenue CAGR over FY21-23E (on a

low base) and ~300bp EBITDA margin expansion to 15.5% by FY23E. We

estimate EU operations to turn profitable by FY22E. Our estimates do not factor

in benefits from the transfer of over 3m tyres to the Hungary and India plant.

Leaner Balance Sheet augurs well for future growth capex:

APTY raised funds

through a preferential placement to an arm of Warburg Pincus. In Feb’20, it

issued compulsory convertible preference shares (already converted to equity),

equivalent to 9.93% stake in the company for INR10.8b, at INR1,713/share. Post

this fund infusion as well as FY21 FCF (post interest) of ~INR9.5b, consolidated

net debt stood at INR28.8b as of Mar’21 (from INR58b as of Mar’20). Even after

factoring in a negative FCF in FY22E, net debt would be comfortable at 0.3x/0.1x

equity for FY22E/FY23E and 1x/0.5x EBITDA.

Expect ~40% consolidated PAT CAGR over FY21-23E:

Driven by strong growth

across its Indian and European operations, APTY is likely to deliver 14% revenue

CAGR over FY21-23E. We estimate gross margin to trend downward by ~130bp

over FY21-23E (44.4% in FY20). Benefit from the restructuring of its EU

operations and operating leverage in India and EU would drive a 50bp

consolidated EBITDA margin expansion to 16%. This implies a 15% EBITDA CAGR

over FY21-23E. With a reduction in interest cost due to the debt reduction, we

estimate an adjusted PAT CAGR of ~40% over FY21-23E. As a result, we estimate

a 380bp improvement in RoE over FY21 to ~10% in FY23E.

Initiate coverage with a Buy rating and a TP of INR300/share:

APTY is geared

for the next leg of growth, with sufficient capacity to cater to demand from India

and Europe. With capex for Phase I of the AP plant concluding in FY22E, increase

in capacity utilization will generate higher cash flows and further deleverage its

Balance Sheet. As compared to its peers, APTY offers the best blend of earnings

July 2021

Tyres

growth and cheap valuations. The stock trades at 11.9x/9.7x FY22E/FY23E

consolidated EPS. We value APTY at 12x Sep-23E EPS (v/s a 5/10 year average

P/E multiple of ~16x/12x). We initiate coverage on the stock with a Buy rating

and a TP of INR300.

Exhibit 80: APTY is currently trading near is LPA

P/E (x)

32.0

24.0

17.5

16.0

8.0

0.0

11.8

6.1

3.2

11.4

Min (x)

Avg (x)

+1SD

26.6

Max (x)

-1SD

3.0

2.3

1.5

0.8

0.0

0.4

1.2

0.9

P/B (x)

Min (x)

Avg (x)

+1SD

Max (x)

-1SD

2.2

1.6

1.0

Source: MOFSL

July 2021

Tyres

SWOT analysis



Highest

dependence on

the CV segment



Negligible

presence in 2W

tyres



To gain leadership

in PCR



Leverage India

cost for serving

the EU market



Strong positioning

in TBR and PCR



Improved cost

base for EU

operations



Increase

competitive

pressure in TBR

Bulls and Bear Case

Exhibit 81: APTY: Scenario Analysis

Consolidated

INR m

India revenue

Growth (%)

EU revenue

Growth (%)

Revenue

Growth (%)

India EBITDA margin (%)

EU EBITDA margin (%)

EBITDA

EPS (INR)

Growth (%)

RoE (%)

Target P/E (x)

Upside CAGR (%)

Remarks

FY22E

1,40,502

64,276

2,04,778

15.1

17.2

32,349

18.9

9.1

Base

FY23E

1,51,448

71,343

2,22,791

15.8

17.2

36,158

23.3

10.4

281

Bull

FY22E

FY23E

FY24E

1,45,230

1,59,753

1,75,728

65,131

72,296

78,079

2,10,361

2,32,049

2,53,808

15.5

16.5

17.5

17.4

33,909

38,859

42,493

21.0

26.8

31.1

10.1

11.7

12.3

375

436

Strong Replacement demand in PCR

and T&B in India; the EU is benefitting

from full Hungary ramp-up and

supplies from India

Moderation in RM prices and lower

competitive intensity

Bear

FY22E

FY23E

FY24E

1,37,097

1,45,323

1,52,589

62,300

67,284

70,648

1,99,397

2,12,607

2,23,237

14.5

15.0

16.5

30,159

32,900

34,545

16.0

19.0

20.7

7.8

8.7

8.8

190

207

-16

-4

Weak Replacement demand in PCR

and T&B; Key risk: PCR demand

doesn't pick-up in EU

Higher RM prices and competitive

intensity

Source: MOFSL

FY24E

1,61,888

75,533

2,37,421

15.9

17.2

38,712

26.2

10.7

318

July 2021

Tyres

Operating metrics

Exhibit 82: Snapshot of the revenue model

Particulars (INR m)

Standalone

TBR

YoY growth

TBB

YoY growth

LCV

YoY growth

PCR

YoY growth

Farm and others

YoY growth

Revenue from sales of tyres

YoY growth

Total other operating income

Standalone revenue

YoY growth

Passenger Cars

Agri + others

TBR

EU Revenue

YoY growth

Others

Consolidated Revenue

YoY growth

FY17

25,203

-7%

27,560

-4%

7,934

19%

17,609

13%

9,861

19%

88,167

2.3%

1,171

89,338

2.0%

28,215

5,374

33,589

9.7%

8,874

1,31,800

11.2%

FY18

33,761

34%

27,529

9,349

18%

20,776

18%

12,466

26%

1,03,881

17.8%

1,688

1,05,569

18.2%

29,527

6,048

35,574

5.9%

7,285

1,48,429

12.6%

FY19

45,699

35%

30,466

11%

8,463

-9%

21,761

14,507

16%

1,20,896

16.4%

2,642

1,23,538

17.0%

32,422

6,404

1,201

40,027

12.5%

11,924

1,75,488

18.2%

FY20

42,313

-7%

25,933

-15%

8,666

19,499

-10%

11,916

-18%

1,08,327

-10.4%

2,293

1,10,620

-10.5%

32,859

6,655

2,080

41,594

3.9%

11,288

1,63,502

-6.8%

FY21

40,865

-3%

28,398

10%

7,948

-8%

19,303

-1%

17,032

43%

1,13,545

4.8%

2,639

1,16,184

5.0%

34,291

5,326

3,253

42,870

3.1%

13,766

1,72,820

5.7%

FY22E

53,089

30%

31,306

10%

9,840

24%

23,939

24%

19,137

12%

1,37,311

20.9%

3,191

1,40,502

20.9%

FY23E

59,842

13%

31,306

10,913

11%

25,854

20,094

1,48,009

7.8%

3,440

1,51,448

7.8%

40,222

44,720

5,542

6,573

3,384

3,884

49,148

55,176

14.6%

12.3%

15,128

16,167

2,04,778

2,22,791

18.5%

8.8%

Source: Company, MOFSL

July 2021

Tyres

Story in charts

Exhibit 83: Expect consolidated revenue CAGR of 14% over

FY21-23E

Consol. revenue (INR b)

18.2

12.6

5.7

164

-6.8

148

FY18

175

FY19

FY20

173

FY21

205

FY22E

223

FY23E

FY18

FY19

FY20

FY21

FY22E

FY23E

Growth YoY %

18.5

8.8

11.1

Exhibit 84: Expect consolidated EBITDA CAGR of ~15% over

FY21-23E; margin to remain flat due to RM cost pressures

Consol. EBITDA (INR b)

15.5

11.2

11.9

EBITDA margin %

15.8

16.2

Source: Company, MOFSL

Exhibit 85: Expect consolidated PAT CAGR of 40% over FY21-

23E

Consol. PAT (INR b)

38.1

15.0

-34.2

FY18

FY19

-42.8

FY20

FY21

FY22E

FY23E

Growth YoY %

64.5

23.0

Exhibit 86: Expect gradual improvement in RoE/RoCE over

FY21-23E

RoE (%)

8.5

8.4

6.2

6.3

6.5

4.8

4.6

5.7

RoCE (%)

9.1

8.3

10.4

9.3

FY18

FY19

FY20

FY21

FY22E

FY23E

Source: Company, MOFSL

Exhibit 87: FCF turns positive in FY21 after an elongated

period of high capex

1.2

FCF (INR b)

1.3

Cash conversion (x)

1.0

0.7

(13)

(12)

(3)

1.1

0.9

Exhibit 88: Net debt to reduce to 0.1x equity in FY23E

Net Debt (x)

3.0

2.1

1.1

0.3

0.4

0.6

0.3

FY21

0.9

0.2

FY22E

0.5

0.1

FY23E

Net Debt/EBITDA (x)

FY18

FY19

FY20

FY21

FY22E

FY23E

FY18

FY19

FY20

Source: Company, MOFSL

July 2021

Tyres

Financials and valuations

Consolidated Income Statement

Y/E March

Total Income from Operations

Change (%)

EBITDA

EBITDA Margin (%)

Depreciation

EBIT

EBIT Margin (%)

Int. and Finance Charges

Other Income

PBT bef. EO Exp.

EO Items

PBT after EO Exp.

Total Tax

Tax Rate (%)

Minority Interest

Reported PAT

Adjusted PAT

Change (%)

FY18

1,48,429

12.6

16,536

11.1

5,926

10,610

7.1

1,629

1,142

10,123

2,884

28.5

7,239

-34.2

FY19

1,75,488

18.2

19,586

11.2

8,127

11,460

6.5

1,811

1,231

10,880

2,000

8,880

2,083

23.5

6,797

8,328

15.0

FY20

1,63,502

-6.8

19,387

11.9

11,381

8,006

4.9

2,808

237

5,434

670

12.3

4,764

-42.8

FY21

1,72,820

5.7

26,825

15.5

13,150

13,675

7.9

4,430

1,294

10,539

4,927

5,612

2,110

37.6

3,502

6,576

38.1

FY22E

2,04,778

18.5

32,349

15.8

14,504

17,845

8.7

4,140

621

14,326

3,510

24.5

10,815

64.5

FY23E

2,22,791

8.8

36,158

16.2

15,566

20,592

9.2

3,534

658

17,717

4,411

24.9

13,305

23.0

(INR m)

Consolidated Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Total Loans

Deferred Tax Liabilities

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Goodwill on Consolidation

Capital WIP

Total Investments

Curr. Assets, Loans and Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability and Prov.

Account Payables

Other Current Liabilities

Provisions

Net Current Assets

Appl. of Funds

FY18

572

97,195

97,767

53,321

7,433

1,58,521

1,72,196

70,226

1,01,970

2,061

23,041

13,425

60,080

29,454

14,350

5,992

10,285

42,056

24,471

13,439

4,146

18,024

1,58,521

FY19

572

99,826

1,00,398

47,210

7,707

1,55,315

1,93,899

78,352

1,15,547

1,993

15,393

68,516

34,841

13,144

5,627

14,905

46,194

20,665

20,593

4,936

22,322

1,55,315

FY20

572

98,728

99,300

65,799

7,032

1,72,131

2,42,083

89,734

1,52,350

2,134

16,420

194

60,957

32,069

9,399

7,496

11,993

59,924

23,090

31,699

5,134

1,033

1,72,131

FY21

635

1,13,796

1,14,431

51,115

7,020

1,72,567

2,64,875

1,02,883

1,61,992

2,204

11,065

1,096

82,088

33,185

13,808

21,458

13,637

85,878

28,067

53,371

4,440

-3,790

1,72,567

FY22E

635

1,22,323

1,22,958

46,692

7,020

1,76,671

2,83,833

1,17,387

1,66,446

2,204

12,319

195

85,625

39,273

14,026

16,168

16,159

90,118

33,662

51,195

5,261

-4,493

1,76,671

FY23E

635

1,33,054

1,33,689

39,681

7,020

1,80,390

3,00,816

1,32,953

1,67,863

2,204

9,592

195

98,582

42,727

15,260

23,015

17,580

98,045

36,623

55,698

5,724

537

1,80,390

(INR m)

July 2021

Tyres

Financials and valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per share

Return Ratios (%)

RoE

RoCE

RoIC

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Leverage Ratio (x)

Current Ratio

Interest Coverage Ratio

Net Debt/Equity

FY18

12.7

23.0

170.9

2.7

25.4

17.8

1.3

1.2

10.7

1.2

-23.6

8.5

6.3

7.6

0.9

1.4

6.5

0.3

FY19

14.6

28.8

175.5

3.0

30.4

15.5

1.3

1.0

8.7

1.3

-21.0

8.4

6.5

7.0

0.9

1.1

1.5

6.3

0.4

FY20

8.3

28.2

173.6

6.2

90.5

27.1

1.3

1.1

9.7

2.8

-5.0

4.8

4.6

5.0

0.7

0.9

1.0

2.9

0.6

FY21

11.5

34.5

200.0

3.5

57.2

19.6

1.1

0.9

5.9

1.6

22.6

6.2

5.7

5.9

0.7

1.0

3.1

0.2

FY22E

18.9

44.3

214.9

4.0

21.2

11.9

1.0

0.8

4.9

1.8

7.1

9.1

8.3

9.4

0.7

1.2

1.0

4.3

0.2

FY23E

23.3

50.5

233.7

4.5

19.3

9.7

1.0

0.7

4.0

2.0

33.8

10.4

9.3

10.5

0.7

1.2

1.0

5.8

0.1

Consolidated Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest and Finance Charges

Direct Taxes Paid

(Inc.)/Dec. in WC

CF from Operations

Others

CF from Operations incl. EO

(Inc.)/Dec. in FA

Free Cash Flow

(Pur.)/Sale of Investments

Others

CF from Investments

Issue of Shares

Inc./(Dec.) in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc./Dec. in Cash

Opening Balance

Closing Balance

FY18

10,123

5,926

1,629

-2,465

3,154

18,367

-1,170

17,197

-30,672

-13,475

-9,315

1,358

-38,628

14,761

11,608

-1,323

-1,838

2,838

26,046

4,615

191

4,806

FY19

8,881

8,127

1,811

-2,199

-5,433

11,187

-476

10,711

-22,740

-12,028

11,366

1,414

-9,959

3,265

-1,819

-2,069

-314

-936

-184

4,806

4,622

FY20

5,434

11,381

2,808

-925

7,996

26,695

-1,522

25,174

-28,055

-2,881

-134

230

-27,959

13,863

-2,232

-4,310

-2,810

4,510

1,725

4,622

6,347

FY21

5,612

13,150

4,430

-2,035

4,616

25,772

-1,303

24,469

-11,563

12,906

-12,547

667

-23,443

10,800

-3,222

-3,407

-2,626

1,545

2,571

6,347

8,918

FY22E

14,326

14,504

3,519

-3,510

-4,587

24,251

-20,211

4,040

901

621

-18,689

-4,423

-4,140

-2,288

-10,852

-5,290

8,918

3,628

(INR m)

FY23E

17,717

15,566

2,876

-4,411

1,817

33,564

-14,256

19,309

658

-13,598

-7,011

-3,534

-2,574

-13,120

6,847

3,628

10,475

July 2021

Tyres

Initiating Coverage | Sector: Automobiles

Balkrishna Industries

BSE Sensex

52,553

S&P CNX

15,752

CMP: INR2,349

TP: INR2,425 (+3%)

Neutral

Investing for the next phase of growth while improving competitiveness

BIL ranks third in our TII framework

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

12M Avg Val (INR M)

Free float (%)

Aspiring for a bigger share of the global pie

Stock Info

BIL IN

193

453.5 / 6.1

2404 / 1230

2/37/45

1374

41.7

BIL ranks third in our TII framework to evaluate Tyre companies. It scores 3.7

based on operating parameters, while on valuations it scores a three.



It ranks highest in terms of cost competitiveness and financial strength.

However, it lags behind domestic peers in terms of brand ranking, pricing

power, and headroom to grow.



Premium valuations fairly reflect for its industry leading margins, FCF, and

capital efficiencies.



Financial Snapshot (INR b)

Y/E March

FY21 FY22E FY23E

Sales

57.7 71.4 83.2

EBITDA

17.9 22.4 26.7

Adj. PAT

11.8 14.4 17.4

EPS (INR)

60.9 74.5 89.9

EPS Growth (%)

22.7 22.3 20.7

BV/Share (INR)

310.4 364.9 429.7

Ratios

RoE (%)

21.4 22.1 22.6

RoCE (%)

18.3 19.1 19.9

Payout (%)

27.9 26.9 27.8

Valuations

P/E (x)

38.6 31.5 26.1

P/BV (x)

7.6

6.4

5.5

Div. yield (%)

0.7

0.9

1.1

FCF yield (%)

0.9

1.4

2.1

Shareholding pattern (%)

As On

Mar-21 Dec-20 Mar-20

Promoter

58.3

DII

14.6

15.0

17.8

FII

11.9

14.4

15.5

Others

12.7

11.2

12.0

FII Includes depository receipts

Stock performance (one-year)

BIL's served industries (Agri) are witnessing a sharp increase in underlying

commodity prices. This augurs well for demand for both Agri and OTR tyres.



It aspires to increase its market share to 10% from 6% at present by: a)

ramping-up in the OTR segment, which is much larger than Agri Tyres, b)

strengthening its presence in North America and RoW markets, and c)

gaining share with OEMs.



BIL has been a relatively late entrant in both the OTR segment (67% of the

industry, but 33% for the company) and the US market (25-30% for the

industry, but 13% for the company) – both large opportunities where it has a

huge headroom to grow.



Gaining a larger share of the growth pie

BIL’s capex outlay for the next two years is ~INR19b, with INR8b for

increasing capacity by 17%, INR6.5b for carbon black capacity expansion, and

INR4.5b for modernization.



While carbon black expansion could have been phased out, considering it has

adequate capacity to meet requirements over the next three years, we

believe modernization capex will aid improvement in quality as well as cost

competitiveness for BIL, especially ahead of the planned ramp-up in OTR and

the US market.



Despite the increase, capex intensity (as a percentage of sales) shall decline

to ~12% over next two years from 15-16% in the last two years. This will

result in a sharp improvement in FCF generation over the next two years.



Capex concerns overdone

BIL ranks highest among domestic peers in terms of cost competitiveness

and financial strength. In terms of valuation, it trades at a substantial

premium to its mainstream peers.



We estimate BIL’s revenue/EBITDA/PAT to grow at 20%/22%/22% over FY21-

23E. Even though the capex benefit is not expected to reflect materially till

FY23E, we estimate RoCE to improve 160bp over FY21 to ~19.9% in FY23E.



Though it deserves premium valuations due to its industry-leading margin,

FCF, and capital efficiencies, the current valuation premium is excessive. We

initiate coverage with a

Neutral

rating and a TP of INR2,425 per share (25x

Sep-23E EPS, at a 25%/80% premium to its five/10-year average P/E).



Valuations factor in a focused business model

July 2021

Tyres

Valuation premium reflects a focused business model…

…industry-leading margin, FCF, and capital efficiencies



BIL ranks third in our TII framework to evaluate Tyre companies. It scores 3.7

based on operating parameters, while on valuations it scores a three.



It ranks highest in terms of cost competitiveness and financial strength.

However, it lags behind domestic peers in terms of brand ranking, pricing power,

and headroom to grow.



We have looked at its positioning within the global OHT segment, while

evaluating BIL in terms of operating parameters.



In terms of valuation, BIL trades at substantial premium to APTY/CEAT. Premium

valuations fairly reflect for its industry leading margins, FCF, and capital

efficiencies.

Exhibit 89: BIL ranks high in terms of financial strength and cost competitiveness

Brand Ranking

5.0

Financial Strength

2.5

Pricing power

Cost competitiveness

5.0

3.0

Headroom to grow

4.1

Revenue mix

Source: Company, MOFSL

Exhibit 90: BIL ranks second based on

operating parameters

MRF

3.9

Exhibit 91: BIL ranks third on current

valuations

MRF

2.0

Exhibit 92: Overall, BIL lands in the last

quartile as valuations remain

unattractive

MRF

3.4

BIL 3.7

3.6

APTY

BIL

3.0

5.0

APTY

BIL

3.5

3.9 APTY

3.6

CEAT

Source: MOFSL

4.0

CEAT

Source: MOFSL

3.7

CEAT

Source: MOFSL

July 2021

Tyres

BIL

2.5

CEAT

3.2

4.2

#1: Brand ranking



APTY



BIL ranks low in terms of brand ranking due to its positioning of being a low-cost Tier II OHT player

globally. While it has improved its price positioning over the years, it is still considered a Tier II brand.

It has been increasing its investments towards brand building in its key markets.

BIL has significant scope to improve its positioning in select markets of Agri and OTR.

4.3

MRF

BIL

2.5

CEAT 3.4

3.6

#2: Pricing power



APTY

BIL ranks low in terms of pricing power. In the global OHT market, pricing power is in the hands of

Tier I players like Michelin, Goodyear, and Bridgestone.

Among Tier II players, Titan and Trelleborg enjoy relatively higher pricing power.

With a focus on increasing brand awareness through improving its presence with OEMs and via

marketing, BIL would be able to improve its pricing power eventually.

4.4

MRF

BIL

4.1

CEAT

4.0

3.9

MRF

3.8 APTY

#3: Revenue mix



BIL’s revenue mix is skewed towards Agriculture tyres (64%), which is a relatively less cyclical v/s the

OTR segment.

However, the cyclicality impact would be lower for BIL, since it possesses huge headroom to increase

its market share within these segments.

It enjoys a healthy share from the Replacement segment (~75%).

BIL is well diversified in terms of geographies, with a presence across India, Europe, North America,

and Australia.

BIL

3.0

CEAT

5.0

4.0

APTY

#4: Headroom to grow



While BIL has headroom to grow by improving its capacity utilization (79% in FY20), new capacity

addition is ~17%, leaving lower headroom to grow post FY23E.

Although it is incurring significant capex over FY21-23E, much of this capex would be towards

modernization of existing capacity and expansion of carbon black capacity.

4.0

MRF

BIL

5.0

CEAT

3.0

#5: Cost competitiveness



3.0 APTY



BIL ranks highest in terms of cost competitiveness, given its competitive edge in labor costs,

backward integration, and efficient operations.

It is investing towards modernizing its three plants, which will enable further efficiency gains.

BIL enjoys a natural hedge against currency (imported RM is 40-50% of total RM for domestic peers),

as it derives significant revenue from exports (77%).

3.5

MRF

BIL

5.0

2.8

#6: Financial strength



APTY



3.3

CEAT

3.5

MRF

July 2021

BIL ranks highest in terms of financial strength due to its superior return ratios and net cash Balance

Sheet.

It also has the highest margin among its peers.

With improving capacity utilization, return ratios should trend further upwards.

Tyres

Gaining a larger share of a growing pie

Demand tailwinds and market share gain to translate into strong revenue



BIL's served industries (Agri) are witnessing a sharp increase in underlying commodity

prices. This augurs well for demand for both Agri and OTR tyres.

It aspires to increase its market share to 10% from 6% at present by: a) ramping-up in

the OTR segment, which is much larger than Agri Tyres, b) strengthening its presence

in North America and RoW markets, and c) gaining share with OEMs.

BIL has been a relatively late entrant in the OTR segment and the US market – both

large opportunities

where it has a huge headroom to grow by plugging gaps in its

product portfolio as well as by ramping up with OEMs. The OTR segment constitutes

~67% of the industry, but only 33% for BIL, whereas the US market is 25-30% of the

global Specialty Tyre industry, but only ~13% for BIL.

We expect volumes/revenue to grow by ~13%/~20% CAGR over FY21-23E.

BIL primarily operates in the Agriculture tyre/Off-the-Road (OTR) segment

(~64%/32% of volumes). The latter caters to the Mining, Industrial, and

Construction Equipment segments.



Globally, prices for both agricultural as well as metal commodities have seen a

sharp increase in the last six months, driving an improvement in the outlook for

the end-user segment (Agri and Mining industry). This, coupled with a robust

demand for housing in the EU/US as well as focus on Infrastructure, augurs well

for the Construction industry.



The Agri Machinery industry in North America/South America/EU is expected to

rise by 25%/20%/10% in CY21 (Source: Deere & Co).



We expect the Specialty Tyre industry to grow at 6-8% CAGR (on a low base of

FY21) over the next three years.



Exhibit 93: Sharp increase in metal and Agri commodity prices augur well for a pick-up in demand for OTR and Agri Tyres

280

220

160

100

Bloomberg Base Metals Spot Price

Commodity Index (Ex Steel)

110

Bloomberg Agriculture Index

Strong commodity prices to drive sharp growth for both Agri and OTR tyres

Source: Bloomberg, MOFSL

July 2021

Tyres

Exhibit 94: Commentary of key industry participants

Company

Commentary



North America will continue to benefit from strong Residential demand. Nonresidential Construction is recovering at a

gradual pace, with the Infrastructure segment recovering faster than Nonresidential Building. Demand is strong in China

on the back of government spending on Infra.

Oil and Gas should continue to slowly improve from lower levels as customers remain disciplined with their capex spend.

Industrial is expected to grow, with activity strengthening across most applications. In Transportation, Rail and Marine

are expected to see slight improvements from the first quarter, although on a low base.

Demand in both Mining and Heavy Construction and Quarry and Aggregates is expected to increase due to supportive

commodity prices and the restart of investments that were delayed last year.

For Specialties, market growth is still expected to be between 8% and 12% in CY21, with a stronger growth in Agri,

Construction, and Material Handling.

Rising cost of raw material is beneficial for a premium player like Michelin as it can pass on the price increase easily as

compared to its Asian peers. Rising logistic costs is another concern.

Mining grew, but it was unlike other segments.

It is seeing strong demand for Agri Tyres and Aftermarket. Material Handling and Construction is likely to pick up as OEM

have a strong order book. It expects industrialization and mechanization in Agri to continue. The company is facing freight

challenges, but the situation is manageable.

It expects a 10-12% rise in production in CY21 (v/s CY20). North America: Higher commodity prices and farmer sentiment

have led to an increase in sales. Replacement demand for an aged fleet of larger equipment is expected to drive most of

the increase.

It expects North American industry unit sales to rise ~15% in CY21 v/s CY20. Industry demand in Western Europe is

expected to remain strong and grow modestly in CY21. Elevated commodity prices and favorable exchange rates are

expected to support additional growth in South America during CY21 as farmers continue to replace aging equipment.

Total industry demand in South America is expected to improve by 5-10% from CY20 levels.

It sees strong demand for Agri from South America and Brazil, and has a strong order book in Construction and Agri

segments. The company is seeing robust demand for Earth Moving Equipment. The Aftermarket business in North and

South America is doing well. It has taken appropriate price increases to mitigate rising input costs.

Source: Companies, Industry, MOFSL

Caterpillar



Michelin



Trelleborg



Agco



Titan

International



All critical success factors in place to grow faster



BIL has a well-established competitive advantage, which has enabled consistent

market share gains. Its competitive advantage is driven by: a) competitive cost

and pricing, b) consistent product portfolio expansion, and c) expanding reach.



BIL’s strategy to grow faster than the industry pivots around: a) ramp-up in the

OTR segment, which is much larger than Agri Tyres, b) strengthening its

presence in North America and RoW markets, and c) gaining share with OEMs.



This should help BIL to attain its targeted market share of 10% (v/s 6% at

present) of the USD15b global Off-Highway Tyre (OHT) segment.



A granular look at the industry suggests that BIL is relatively stronger in the

USD5b Agriculture tyre market, with 8-8.5% market share. In the bigger OTR

segment (Mining/Construction/Industrial), the size of which is estimated to be

~USD10b, BIL has a meager presence with a 2-2.5% market share. It has

identified gaps in its product portfolio and is taking several strategic initiatives

to strengthen these areas.

July 2021

Tyres

Exhibit 95: BIL is targeting higher contribution from OTR…

OTR contribution (%)

Exhibit 96: …and 10% share of the Specialty Tyre industry

Market share (%)

Current

Target

Source: Company, MOFSL

Current

Target

Source: Company, MOFSL

Focus is on tapping a larger share of the global OTR segment



BIL started catering to the USD10b OTR segment much later in CY07. This

segment has a high gestation period, but presents large opportunities to BIL.

The company has steadily made inroads. Within the OTR segment, it foresees

huge opportunities in the Mining segment in North America, where it is severely

under-represented. BIL has a two-pronged approach to grow in this segment

via: a) product portfolio expansion and b) making inroads with OEMs.



It is continuously bridging gaps in its product offerings in the Mining segment.

BIL started manufacturing ultra-large mining tyres at its Bhuj plant in CY16. It

recently began manufacturing 51” and 57” ultra large all steel giant tyres to

further expand its coverage in this segment. Till date, it was manufacturing tyres

up to 49”, while the market leader has a product range up to 63”.



With the launch of its ultra-large mining tyres, BIL has successfully completed

the cumbersome evaluation process of OEMs and has strengthened its position

with them.



The Replacement opportunity in this segment is very lucrative. The average life

of Mining/Construction tyres spans 9-15/18-24 months.

Exhibit 97: BIL’s contribution from the OTR segment is much

lower than the industry…

Agricultural tyres

Off the Road (OTR) tyres

33%

67%

33%

Industry

BKT

Source: Company, MOFSL

Overall

Agri

OTR

Source: Company, MOFSL

2-2.5%

Exhibit 98: …reflecting in substantially lower market share

for BIL in this segment

8-8.5%

July 2021

Tyres

Strengthening its presence in the US



BIL has a relatively weaker presence in the US Specialty Tyre market as it

entered this market much later in CY07-08. However, the real push came only

towards CY13, when it had new capacity available in Bhuj.



The US market contributed ~13% to BIL’s FY21 volumes as against 25-30% of the

Specialty Tyre industry.



Despite being a late entrant, BIL has established a strong presence in the US Agri

Tyres market, with a market share of 7-10%, and over 25% in the Agri

Replacement market.



With a focus on ramping-up in the OTR segment and manufacture of ultra large

tyres, BIL’s US business would get a major boost as it has a much lower presence

in the US OTR market.

Exhibit 99: BIL has a much lower contribution from the US

market than the industry…

US Contribution (%)

25-30%

Exhibit 100: …but has a good presence in the Agri segment

BKT's Market share in US Agri (%)

38.5

26.5

5.5

13.5

3.5

13%

BKT

Industry

Source: Industry, Company, MOFSL

Source: Industry, MOFSL

Strengthening roots with OEMs



BIL’s focus is on increasing its presence among OEMs in the global OHT segment.

OEMs account for ~45% of the market, but just 23% for BIL. It has ~2% market

share in the OEM segment.



The strategy of improving market share in the OEM segment will reap long-term

benefits for BIL as it aids in improving brand visibility, creating brand value, and

pull factor.



Contrary to the general belief for BIL, margin does not vary materially between

the OEM and Replacement segments. Hence, we do not estimate any margin

dilution due to increasing share of OEMs.

Exhibit 101: BIL has a much lower volume v/s the industry

Replacement

OEM

45%

27%

55%

Industry

73%

BKT

Source: Company, MOFSL

July 2021

Tyres

Capex concerns overdone



Investing for the next phase of growth as well as improving competitiveness

BIL has chalked out a capex of ~INR19b over the next two years. Of this, INR8b would

be allocated towards setting up of new capacity, INR6.5b for carbon black capacity

expansion, and INR4.5b for plant automation. Hence, incremental capacity would be

~17%.

While carbon black expansion could have been phased out, considering it has

adequate capacity to meet requirements over the next three years, we believe

modernization capex will aid improvement in quality as well as cost competitiveness

for BIL, especially ahead of the planned ramp-up in the OTR and US market.

Despite the increase, capex intensity (as a percentage of sales) shall decline to ~12%

over next two years from 15-16% in the last two years. This will result in a sharp

improvement in FCF generation over the next two years.



Brownfield expansion at the Bhuj plant



BIL plans to invest INR8b for a brownfield capacity expansion at the Bhuj plant,

which will add ~50,000mtpa capacity, taking the total achievable capacity to

335,000mtpa. The same is expected to be completed by 2HFY23.



Rationale:

Growth capex is required to cater to growing demand and achieve

its 10% market share aspiration, which would require a capacity of

~450,000mtpa (v/s current capacity of 285,000mtpa).



Our view:

The increased capacity would cater to the growth momentum and

provide headroom to grow and grab any opportunity. While the Bhuj plant has

infrastructure for more capacity additions, BIL is increasing capacity in small

batches without putting any pressure on its Balance Sheet.

Carbon black capacity expansion much ahead of its time



BIL plans to invest INR6.5b to increase carbon black capacity to 200,000mtpa

(v/s 115,000mtpa at present), including 30,000mtpa of a high value advanced

carbon material and a power plant. The same is expected to be completed by

1HFY23.

Rationale:

At full tyre capacity of 335,000t, it would require 110-115mtpa of

carbon black to achieve 100% utilization. Therefore, BIL needs the new carbon

black capacity to be future ready, as post commissioning, 25-30% of capacity will

be available for third-party sales (from 170,000t after removing 30,000mtpa of

high value advanced carbon material).

Our view:

BIL could have matched the timing of carbon black capacity with the

next leg of capacity addition above 335,000mtpa. However, carbon black

capacity is important to maintain its low-cost model and reap long-term

benefits, without having any material negative impact on financials in the

transitory period.

Modernization of Rajasthan and Bhuj plants



BIL would invest INR4.5b towards modernization, automation, and technology

upgradation of equipment and material handling at Rajasthan (two plants) and

the Bhuj plant.

July 2021

Tyres



Rationale:

It is necessary to improve quality and efficiency of the two plants in

Rajasthan (set up in CY01 and CY06) and at the Bhuj plant. It has a payback

period of five years and would enhance its margin profile. It would be used to

increase radialization and reduce manual touch points in material handling and

movement.

Our view:

We are not too concerned by this capex as it’s a regular activity and is

distributed between three plants (v/s earlier capex of INR5b only for upgrading

the Waluj plant). Also, the two Rajasthan plants are quite old (established in

CY01 and CY06). As it aspires to ramp-up in OTR and US, this capex can

potentially provide consistency in quality as well as further improve cost

competitiveness for BIL.

Exhibit 103: …and keep enough headroom for growth

beyond FY23E

Capacity utilization

3,35,000

75%

72%

81%

92%

93%

Exhibit 102: Capacity to increase by ~17% in FY23E, led by

Bhuj plant capacity additions…

Capacity (MT)

2,85,000

FY21

FY23E

Source: Company, MOFSL

FY19

FY20

FY21

FY22E

FY23E

Source: Company, MOFSL

Exhibit 104: Capex intensity (as a percentage of sales) to

moderate...

Capex (INR m)

13.9

8.8

4.8

15.9

% of sales

16.0

11.9

12.0

Exhibit 105: … and drive a sharp improvement in FCF

FCF (INR m)

6.8

2,387 1,809 4,113 7,344 7,830 9,232 8,500 10,000

FY16

FY17

FY18

FY19

FY20

FY21 FY22E FY23E

Source: Company, MOFSL

8,333 6,660 3,386

FY16

FY17

FY18

860

FY19

3,901 4,159 6,292 9,615

FY20

FY21 FY22E FY23E

Source: Company, MOFSL

July 2021

Tyres

Valuation and view

Huge opportunity size, strong competitive positioning

Profitable market share gains to continue:

We expect BIL’s outperformance to

the industry to continue, with scope to strengthen its competitive positioning.

BIL has a well-established competitive advantage, which has enabled consistent

market share gains. Its competitive advantage is driven by: a) competitive cost

and pricing, b) consistent product portfolio expansion, and c) expanding reach.

With a current market share of ~6% in the USD15b global Specialty Tyre

segment, BIL aspires to increase this to 10% over the next 4-5 years by: a)

ramping-up in OTR segment, which is much larger than Agri Tyres, b)

strengthening its presence in North America and RoW markets, and c) gaining

share with OEMs. We estimate ~13%/~20% volume/revenue

CAGR over FY21-23E



Investing to further improve competitiveness:

BIL has chalked out a capex of

~INR19b over the next two years. It would allocate INR8b towards setting up

new capacity, INR6.5b for carbon black capacity expansion, and INR4.5b for

plant automation. Hence, incremental capacity would be ~17%. Despite the

increase, capex intensity (as a percentage of sales) will reduce to 10-12% over

the next two years from 15-16% in last two years. This, in turn, is resulting in a

sharp improvement in FCF generation over the next two years.



Earnings growth to pick-up:

We estimate revenue/EBITDA/PAT for BIL to grow at

20%/22%/22% over FY21-23E. We expect ~100bp improvement in EBITDA

margin over FY21-23E, led by improving mix and operating leverage. Despite a

capex plan of INR19b, we expect FCF generation to improve (to INR9.6b in

FY23E) and cash on the Balance Sheet to rise to ~INR13.5b. Even though the

benefit of this capex is not expected to reflect materially till FY23E, we expect

RoCE to improve by 160bp over FY21 to ~19.9% in FY23E.



Valuations factor in a focused business model:

BIL ranks highest among

domestic peers in terms of cost competitiveness and financial strength. In terms

of valuation, it trades at a substantial premium to its mainstream peers.

Premium valuations fairly reflect for its industry leading margins, FCF, and capital

efficiencies. We value BIL at 25x Sep-23E EPS (at a 25%/80% premium to its

five/10-year average P/E, with a TP of INR2,425. We initiate coverage with a

Neutral

rating.



Exhibit 106: BIL trades at substantial premium to its LPA of P/E multiple

P/E (x)

Min (x)

33.0

25.0

17.0

9.0

1.0

14.1

6.8

4.2

Avg (x)

+1SD

31.2

21.4

Max (x)

-1SD

29.0

6.5

5.0

3.5

2.0

0.5

4.0

2.8

1.5

1.0

P/B (x)

Min (x)

Avg (x)

+1SD

Max (x)

-1SD

6.0

Source: MOFSL

July 2021

Tyres

SWOT analysis



Tier II brand in the

global OHT segment



Weak OTR segment



Weak presence in the

US and Replacement

segment



To improve

market share in

the OTR segment



To improve

positioning in the

US market



Increasing

competition from

Indian players



Among the lowest

cost producer

globally in the

OHT industry



Strong Balance

Sheet with net

cash



Strong presence

in the EU

Bulls and Bear Case

Exhibit 107: BIL: Scenario Analysis

INR m

Volumes (MT)

Growth (%)

Realizations (INR/t)

Growth (%)

Revenue

Growth (%)

EBITDA Margin (%)

EPS (INR)

Growth (%)

RoE (%)

Target P/E (x)

Upside CAGR (%)

Remarks

FY22E

2,61,288

2,73,167

7.6

71,375

31.4

74.5

22.1

Base

FY23E

2,88,209

2,88,613

5.7

83,181

32.1

89.9

22.6

2,242

-5

Bull

Bear

FY22E

FY23E

FY24E

FY22E

FY23E

FY24E

2,68,015

3,00,176

3,30,194

2,49,844

2,67,333

2,83,373

2,74,133

2,90,581

3,08,016

2,66,518

2,77,179

2,85,494

73,472

87,225

1,01,705

66,588

74,099

80,901

32.0

32.5

33.0

30.0

31.0

116

23.2

23.8

23.9

19.5

19.8

19.1

2,698

3,238

1,657

1,813

-29

-12

Strong recovery in the Farm and OTR Demand recovery moderates, with

segment, with ramp-up in the US;

slower ramp-up in the US; slow ramp-

carbon black fully ramps-up,

up in carbon black

contributing additional revenue

Moderation in RM prices and benefits High RM prices and adverse forex

of modernization

Source: MOFSL

FY24E

3,10,880

3,02,084

4.7

93,912

32.7

104.3

22.3

2,603

July 2021

Tyres

Story in charts

Exhibit 108: Revenue to grow ~20% CAGR over FY21-23E

Revenue (INR m)

growth YoY (%)

23.8

13.6

49,262

53,010

FY19

(7.1)

FY20

57,652

FY21

71,375

FY22E

83,181

FY23E

13,931

FY19

13,863

FY20

17,924

FY21

22,413

FY22E

26,691

FY23E

17.0

16.5

Exhibit 109: EBITDA margin to expand by 100bp over FY21-

23E

EBITDA

28.1

31.1

EBITDA margin %

31.4

32.1

26.3

Source: Company, MOFSL

Exhibit 110: PAT to grow ~22% CAGR over FY21-23E

PAT

growth YoY %

Exhibit 111: RoE to expand despite ongoing capex

RoE

17.7

19.9

21.4

RoCE

22.1

22.6

7,736

9,597

FY19

FY20

11,775

FY21

14,396

FY22E

17,373

FY23E

14.9

16.9

18.3

19.1

19.9

FY19

FY20

FY21

FY22E

FY23E

Source: Company, MOFSL

Exhibit 112: Market mix can potentially improve towards India and US

India

22%

13%

51%

14%

FY18

19%

15%

48%

18%

FY19

Europe

18%

16%

48%

18%

FY20

North America

15%

13%

49%

23%

FY21E

Others

15%

14%

49%

22%

FY22E

16%

14%

49%

22%

FY23E

Source: Company, MOFSL

July 2021