Tyre stocks to do well till another rubber price hike hits margins: Pankaj Pandey

In a chat with ET Now, Pankaj Pandey, Head Research, ICICIdirect.com shares his views on certain tyre stocks. Excerpts:

ET Now: A stock in news yesterday was Apollo Tyres. It has cooled off from the highs of the day, but it is one tyre stock which has not rallied at all and in all probability the Cooper deal is off too. What do you do with Apollo Tyres now?

Pankaj Pandey: If the deal happens and the company is able to negotiate a better price, it will help the stock and in case if it does not happen, we will see a big jump up in the stock price. So we have raised our target price to Rs 101. What has fundamentally changed in the sector is that rubber, which is a major raw material, typically constituting about 55% odd of the raw material inputs, in the last three years, at the November 2010 price levels, till now we have seen a 40% crack in rubber prices because of which the margin profile has improved for all the players, including Apollo.

Hence, from about mid single digits the margins have gone up to about 12% for both Apollo and JK Tyres. So we believe that the tyre segment will continue to benefit from this change and also if you see from a valuation perspective, Apollo is trading at about five times and JK Tyre would be trading at about two or three times and return ratios have improved for the entire pack. Hence, it is now in decent double digits, which is why we believe that this particular segment will continue to do well till we do not see much of a reversal in the rubber prices.