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Over the last few months, tyre stocks have corrected sharply (~12-32%) from recent peaks on concerns around demand slowdown and sharp margin pressure from elevated crude and rubber prices. While near-term margins (H1 subdued, with Q1, the bottom quarter) will remain under stress, we believe the market is undermining the sharp recovery in the industry's earnings cycle. We remain constructive on the tyres space, supported by a confluence of factors:

1) sustained strong replacement demand triggered by GST cuts

2) strong recovery in OEM demand

3) pricing discipline with ~8–9% cumulative price hikes taken by the industry over the past 3–4M aided by tight demand-supply dynamics

4) peaking of the RM basket with crude reverting to earlier levels

5) sharp valuation correction (Exhibit 2-7). We raise FY28E EPS by ~17-28% and lift our TPs to Rs550 (from Rs425) for Apollo Tyres (16x FY28E PER), Rs4,500 (vs Rs3,600) for CEAT (18x FY28E PER vs 20x earlier), and Rs650 (from Rs550) for JK Tyre (14x FY28E PER), driven by strong demand and improved pricing outlook. We upgrade Apollo/CEAT to BUY from Add/Reduce and reiterate BUY on JK Tyre, owing to increased confidence in recovery of industry earnings amid a stronger demand/pricing environment.

Sharp demand surge with limited capacities to help sustain pricing/margins

Underlying auto demand recovered in Jun-26 (strong growth in wholesale dispatches and Vahan retail registrations) after a lull in Apr/May due to the West Asia crisis. This momentum is also visible in tyres, which has seen a sharp demand uptick across segments triggered by GST cuts. This is visible in Q4 TBR/OEM industry revenue growth accelerating to ~16/17% yoy (H1FY26: ~4/9%). PCR/replacement/export revenue grew ~8/14/8% yoy in Q4FY26 (H1: ~8/10/-0.3%).

Demand-supply dynamics tightening; capacity addition largely back ended

The ongoing demand recovery has pushed industry utilization to ~85–90%, with asset turns expected to reach an 8Y high by FY28E. While leading players have announced both greenfield and brownfield expansions, the bulk of incremental capacity is scheduled to come onstream only toward FY28/FY29. Consequently, the near-term supply-demand balance is expected to remain favorable, allowing manufacturers to retain pricing discipline while simultaneously investing for long-term growth.

Near-term margins remain under pressure; H2 recovery in sight

RM inflation (mainly natural rubber) is expected to weigh on H1FY27 profitability, with Q1 likely the bottom quarter. However, pricing actions across the industry remain encouraging, with most manufacturers already implementing ~8-9% price hikes over the past 3-4M and considering another round in Q2FY27. Additionally, the recent correction in crude prices (indexed RM basket down 7% vs Q1FY27 peak), if sustained, coupled with domestic rubber nearing its peak, should drive gradual margin normalization through H2FY27E. Importantly, while the indexed RM basket has reverted to levels seen 3-4Y ago, gross margins remain structurally higher vs historical averages, indicating improved pricing discipline, product mix, and operating efficiency among tyre manufacturers

Upgrade earnings for the industry; JK Tyre best placed to play this cycle

We are constructive on the tyres space as underlying replacement demand remains robust (per checks), supported by a continued strong growth outlook (robust recovery in OEM demand in June-26), pricing discipline with the tyre industry undertaking ~8-9% price hikes over the past 3-4M aided by tight industry demand-supply dynamics, and a correction in the RM basket. Accordingly, we raise FY28E EPS by ~17-28% and lift our TPs to Rs550 (from Rs425) for Apollo Tyres (16x FY28E PER), Rs4,500 (vs Rs3,600) for CEAT (18x FY28E PER vs 20x earlier), and Rs650 (from Rs550) for JK Tyre (14x FY28E PER), driven by a stronger demand and improved pricing outlook. This translates into FY26-28E revenue/EBITDA/PAT CAGR of ~14/16/9% for our tyre universe. We upgrade Apollo Tyres to BUY (from Add), where we believe its strong TBR exposure, improving dynamics in the EU, and closure of the Enschede plant should support a meaningful recovery in EU profitability from H2. We also upgrade CEAT to BUY (from Reduce) as our earlier concerns around demand moderation and prolonged margin pressure have materially reduced. JK Tyre continues to remain our top pick (BUY) within the tyres space, led by its industry-leading TBR exposure (58% of India revenue), improving competitive positioning, ROE/ROCE of ~15–17% over FY26–28E, and an attractive valuation discount of ~59% to CEAT on 1YF P/E. Robust demand, disciplined industry pricing, and an improving RM outlook underpin our revised EPS estimates and BUY ratings.

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