This part of Motown is racing ahead in full speed | Economic Times

Mumbai: The Indian tyre sector is at the cusp of a visible recovery with robust demand in the replacement market, increasing sales to automotive companies, and likely sustainable margins.Import curbs and migration to a low-capex phase are also helping the tyre industry, with analysts saying stocks such as CEAT, MRF, Apollo Tyres and JK Tyres can give returns up to 25% over the next year and a half.Tyre demand in the replacement market started picking up from June, initially in tractors and later in all categories. Passenger car radial was the last to recover but has started growing well from July, according to analysts.There is a short supply of tyres across segment, especially for two-wheelers, due to curbs on im import of tyres and crude-based raw materials from China.“Channel interactions reveal that the replacement market is growing in high single digits over the last few months and dealers are running at low inventories,” said Ashutosh Tiwari, analyst, Equirus Securities. “On a full-year basis, FY21 gross margin for tyre companies is likely to post 200 bps year-on-year improvement,” said Nitinn Aggarwala, analyst, JM Financial. “We maintain a buy on Apollo Tyres and CEAT driven by a robust recovery in the replacement market, increasing OEM volumes and sustainable margins.”After five years of negative cash flows, Apollo Tyres will likely turn free cash flow positive in FY22. The stock is currently trading at 13 times its FY22 earnings, on a par with its long term average. CEAT is trading at 14.3 times its FY22 earnings, compared to its five-year average PE of 16.5After four years of heavy cash flows, MRF will have low capex intensity over the next four years and the return ratio is set to improve. MRF is currently trading at 18.5 times its FY22 earnings.