Deutsche Bank Bets On MRF, Apollo Tyres, Ceat For At Least 20% Upside

Deutsche Bank has initiated coverage on tyre makers – MRF Ltd. and Ceat Ltd., with a ‘Buy’ rating on both the stocks, while maintaining its bullish stance on Apollo Tyres Ltd.

The industry has seen a pick up on higher truck tyre volume, sustained strength in consumer tyres, favourable regulations and lower input costs, according to the lender’s market research arm.

It expects tyre companies’ compound annual growth rate (CAGR) of revenue (FY17-20 estimates) to improve to 12-14 percent. It also sees margins recovering by 600-1,100 basis points from the current depressed levels, and forecasts earnings per share (EPS) CAGR (FY17-20 estimates) of 12-16 percent.

It said that the capital expenditure plans could be a risk as it could constrain balance sheets if recovery is delayed.

Here’s what Deutsche Bank had to say on the tyre manufacturers:

MRF

• Stocks Rating: Initiate ‘Buy’
• Target Price: Hiked to Rs 80,000, implying a potential upside of 25 percent from Thursday’s closing price
• Stock is valued at 18 times FY19 estimates price to earnings – a premium to global/domestic peers due to better growth/balance sheet
• MRF commands a leadership position across key tyre segments in India
• The company’s brand positioning in both OEM and replacement segments has driven industry-leading margins and a net cash balance sheet
• Volumes to grow 10 percent per annum over FY17-20
• Expect free cash flow of Rs 2,500 crore over FY17-20
• Forecast MRF’s EPS CAGR (FY17-20 estimates) at 16 percent

Ceat

• Stocks Rating: Initiate ‘Buy’
• Target Price: Hiked to Rs 2,150, implying a potential upside of 22 percent from Thursday’s closing price
• Stock is valued at 17 times FY19 estimated price to earnings – a premium to global peers due to higher growth
• CEAT has emerged as a strong player in the industry on the back of profitable niches of 2W+PV replacement segments over the past few years
• Volumes to grow at CAGR of 9 percent over FY17-20
• Market-share gains in OEMs should drive revenue and EPS CAGR (FY17-20 estimates) of 13 percent and 16 percent respectively, driven by continued strong growth in replacement
• Strong growth in replacement and market-share gains in OEMs are the key triggers

Apollo Tyres

• Stocks Rating: Maintain ‘Buy’
• Target Price: Hiked to Rs 325 from Rs 275
• Stock is valued at 14 times FY19 estimated price to earnings – a discount to domestic peers to factor in lower EPS growth in the near-term
• Volumes and EPS to grow at CAGR of 11 percent and 12 percent over FY17-20
• Expect FY18 earnings to be weak due to negative price/raw material mix and capacity ramp-up costs
• Maintain stock rating based on its recovery in India truck tyres, share gains in India PV and volume/margin uptick in Europe
• Apollo’s capacity expansion should drive volumes and EPS