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We conducted tyre-focused channel checks across c.20 dealers. Replacement market demand remains muted across segments during 4Q owing to a) steep hike in tyre prices over the last few quarters and b) rise in interest rate/tightening credit supply impacting demand from fleet operators. However, most dealers are optimistic about demand in coming months owing to seasonality and stability in tyre price. In most cases, dealer inventory is at above average levels owing to sales push from tyre companies as tyre manufacturers anticipate higher demand for upcoming summer season. Supply situation, however, remains normal. The JM Tyre RM Index suggests that the RM basket consumption cost has decreased by 2% QoQ for 4QFY23 (-13% since 1QFY23), primarily due to the decline in Natural Rubber and crude derivative prices. There were no price increases during 4Q and dealers indicated that incentives / consumer discounts have increased in Mar’23 (year-end phenomenon). Despite this, we expect the benefit of softening RM basket (with a quarter’s lag) to continue to improve profitability of tyre companies during 4Q and 1QFY24. Sustenance or decline in crude oil price from current ~USD 70/bbl, may continue to drive profitability for the tyre companies. Tyre companies may look to reinvest some of this benefit towards higher incentives / marketing spends to drive demand in replacement market. Both APTY/CEAT significantly outperformed the Auto Index (c.40-65% respectively vs. c.16% for Auto index) over the past one year. Moderating growth (both domestic and exports) remains a near-term challenge. We expect softening RM prices to provide a cushion to margin in a scenario of increased competitive intensity. Both APTY and CEAT are trading at an attractive c.10-11x FY25 PE vs. LT avg. 13-14x. We have a BUY rating on APTY/CEAT. Reversal in commodity prices and delay in demand recovery remain key risks to our thesis.

* Muted demand across segments; majority dealers optimistic on outlook: As per our checks across c.20 dealers, in the replacement market, demand for 2W/PCR/TB tyres remained weak during Jan-Feb’23. While the demand has improved sequentially during Mar’23, it is still expected to end the month on a flattish note at best for most dealers. Various reasons highlighted by the dealers were a) steep hike in tyre price and overall rise in inflation leading to demand deferral and b) financial stress amongst fleet operators owing to rise in interest rate and tightening credit availability. Within TB, while there is no change in preference between TBR and TBB tyres, there has been a higher traction for retreaded tyres mainly due to steep c.25%+ price hike in last 12-18 months. Farm tyre demand has remained steady owing to upcoming harvest of Rabi crop. Few dealers alluded that cheap tyre imports is also affecting demand for PCR tyres. Overall, most dealers are optimistic about the demand outlook in coming months, summer being seasonally strong season for the tyre industry.

* Increasing inventory on companies’ push, anticipation of demand improvement; supply normal across brands: Most of the dealers highlighted that they have increased inventory in Feb-Mar’23 to higher than normal levels owing to sales push from the tyre companies (led by incentives) and in anticipation of demand recovery in the coming months. Supply situation remains normal.

*Softening RM cost to drive profitability: As per the JM Tyre RM Index, RM basket consumption costs for tyre manufacturers have further declined by 2% QoQ for 4QFY23 (-6% YoY), primarily led by the decline in price of crude derivatives (by 2-9% QoQ) and domestic Natural rubber prices (by -4% QoQ). This implies a total decline of c.13% since 1QFY23. During last 10-12 quarters, the tyre companies have taken up to c.30% price hikes. Sustenance or decline in crude oil price from current ~USD 70/bbl, may further drive profitability for the tyre companies and provide headroom to pass on some of this benefit via higher incentives/discounts to support demand. However, overall price stability in the market remains crucial given the backdrop of increased competitive intensity and muted demand environment.

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