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Indian tyre companies to gain from CVD duty on Chinese imports; top picks

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The government's decision to impose countervailing duty (CVD) on imports of radial tyres from China is likely to be incrementally positive for tyre manufacturers, as the replacement market would see higher inflow of tyres from the listed/organised players, feel experts. The dampener, however, is the overall slowdown in the auto industry as reflected in the sales numbers of the past few months, they believe.

On Tuesday, the government imposed CVD for five years on new pneumatic radial tyres above 16 inches, which are imported from China. These tyres are normally used in buses and trucks. The Centre listed nearly eight tariff items and the duty ranges from 9.12 per cent to 17.57 per cent. CLICK TO READ FULL REPORT

Tyre companies have been under pressure of late, owing to headwinds such as rising raw material costs and stagnant demand due to the slowdown in auto sales. Natural rubber prices have turned positive after a gap of two years in the domestic market during the first quarter of the current fiscal year (Q1FY20). The price of natural rubber has risen a staggering 23 per cent from a low of Rs 11,915 in January and is currently at Rs 14,579, the report added citing Rubber Board data. READ MORE

"Since tyre companies were facing headwinds, such a move was expected by the government. They were unable to compete with Chinese companies; hence the government took this step to protect the interests of the domestic players. However, To protect the indusry doesn't necessarily mean these firms will increase their profit manifold. It is just that they will not make losses, but will sustain. With slowdown in auto sector, the incremental sales will be tough to come by. Therefore, it won't be a gamechanger for the tyre sector, but at least competition will not erode their margin from here on," says A K Prabhakar, head of research at IDBI Capital. 

All tyres stocks have given negative returns in the calendar year 2019 (CY19). Notable names such as MRF, Apollo Tyres, Ceat and JK Tyre have slipped in the range of 15-28 per cent during the period. The Nifty Auto index has slumped around 15 per cent. On the other hand, the benchmark Nifty50 index has gained nearly 9 per cent, ACE Equity data show.

"The monthly run rate of TBR (total truck and bus radial tyres) imports has dropped 60 per cent from levels seen just before the imposition of anti-dumping duty (ADD), effective September 2017. Imports from China in the aforesaid period have dropped in excess of 80 per cent. Hence, CVD measure, though incrementally beneficial, is unlikely to prove to be a gamechanger," said analysts at ICICI Securities in a report.

Top picks

Given the developments, Ashwin Patil, senior research analyst at LKP Securities remains positive on MRF, Apollo Tyres and JK Tyre, as they have a major presence in the trucks and buses segment. JK Tyre is the top pick of ICICI Securities given its market leadership position in TBR segment and its intention to deleverage its balance sheet to the tune of 35 per cent over the coming three years. The brokerage, however, is neutral on Apollo Tyres and Balkrishna Industries (BKT). 

"BKT is not the beneficiary to the said duty as mostly exports its product profile to the European and US markets. JK Tyres is well placed to play on the TBR opportunity domestically," Shashank Kanodia, research analyst at ICICI Securities wrote in a co-authored note with Jaimin Desai.