How tyre majors stack up

Recommendations

MRF: Hold/Sell on declines

Apollo Tyres: Hold/Sell on rally

Ceat: Sell

J. K.Industries: Hold/Sell on rally

Goodyear India: Sell

B. Krishnakumar

BLAME it on the sharp sell-off in the stock market or the lacklustre business prospects, the bottomline is that the share prices of tyre companies have been pushed into obscurity in recent months.

The market capitalisation of almost all tyre majors has been sharply eroded in the last six months.

Given that the industry's prospects are unlikely to significantly improve in the near term, it would be safer to avoid tyre stocks for the moment. Top companies such as MRF, Apollo, J.K. Industries, Goodyear and Ceat possess positive features such as a presence across various segments, strong presence in radial market and an entrenched distribution network.

From a long-term investment perspective, MRF could be the best bet in the tyre sector considering the present market conditions. On price weakness from current levels, Goodyear, Ceat and Apollo probably deserve a closer look. Though J.K. Industries is a major player, it has a presence in industries such as sugar and agri-genetics. Sugar continues to be the chief contributor to its earnings stream.

The acquisition of Vikrant Tyres has made J.K. Industries a dominant force in the truck and bus segment. Given that the company has performed relatively better, shareholders could remain invested and use price rallies to book profits.

MRF

The market leader MRF readily graduates to the portfolio status. A strong presence in the car radial segment and the replacement market of truck and bus tyres is the major positive feature for MRF. The wide distribution network, strong brand equity and sound fundamentals are other positive features from an investor's perspective.

However, the negligible presence in the OE market of the truck and bus segment and the low floating stock are negative factors. On the financial performance front, the company has had a bad run in recent quarters.

Given the present market situation and the firm trend in input costs, the near-term prospects for MRF do not appear positive. Shareholders could use any price rally to book profits and contemplate re-entering on declines.

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Goodyear India

A 74 per cent subsidiary of Goodyear Tire and Rubber Company, US, Goodyear India is a major tyre producers in the country. Goodyear India is prominent in both the original equipment (OE) and the replacement market.

The company has a strong presence in the car radial and tractor segments. Goodyear is an OE supplier to top auto majors and tractor producers. Aided by the strong demand growth from the passenger car and tractor segments, Goodyear India posted impressive performances in recent years.

However, the overall downturn in the industry has negatively impacted the company. It has had to contend with a net loss of Rs 12.60 crore in the quarter ended September 2000. Having acquired full control of South Asia Tyres, Goodyear has solved the constraint on capacity.

Strong brand image, the technical backing of the American parent and a presence across tyre segments allows Goodyear India to take on competition effectively. The company could also resort to imports as and when the norms are further liberalised.

From an investment perspective, it would be safer to stay away from the stock now, especially considering the company's recent losses. Fresh exposures may be contemplated on the evidence of a pick up in the automobile sector and economic growth. Meanwhile, the price rally could be used to clip exposures in Goodyear.

Apollo Tyres

Earlier plagued by labour unrest, the company has now settled the problem by entering into a long-term agreement with its workforce. After posting a robust growth performance for 1999-2000, the company has had to contend with a sharp decline in earnings this year.

Like MRF, Apollo has also been affected by the slowdown in the truck and bus segments. From the long-term perspective, the recent aggressive stance adopted by the company towards the radial tyre segment is a positive development. However, the company faces mounting competition from other established players.

Given the strong fundamentals, high dividend payout and entry into the radials market, Apollo Tyres shareholders could remain invested. Fresh buys may be contemplated on evidence of pick up in demand for truck and bus tyres.