Gladiator Stocks: Auto ancillary thematic - Tyres

Transcription

1 Gladiator Stocks: Auto ancillary thematic - Tyres Scrip IDirectCode I-Direct Action Target Stoploss Upside Apollo Tyres APOTYR Buy in the range of % JK Tyre JKTYRE Buy in the range of % Time Frame: 6 Months Research Analysts Dharmesh Shah dharmesh.shah@icicisecurities.com Pabitro Mukherjee pabitro.mukherjee@icicisecurities.com Nitin Kunte, CMT nitin.kunte@icicisecurities.com com Vinayak Parmar vinayak.parmar@icicisecurities.com com Dipesh Dagha dipesh.dagha@icicisecurities.com May 16, 2017

2 Auto Deal ancillary Team thematic: At Your Declining Service natural rubber prices; boon for tyre stocks... Average natural rubber (NR) (accounts for ~40% of total raw material cost) prices have been more volatile in the past year surging from lows of 94/kg in February 2016 to the high of 159/kg in February The sharp surge in NR prices was mainly due to 1) production cut of top NR producing countries (Thailand, Indonesia & Malaysia account for >60% of world s production), 2) floods in Thailand (impacted its production) coupled with higher demand from China in the same period resulting in NR prices moving northwards. However, of late, NR prices have corrected to 129/kg currently and are likely to benefit tyre players. We believe the situation will normalise in major rubber producing countries & NR prices are likely to stay benign, going forward. In addition to the recent correction in NR prices, major tyre players have undertaken a price hike of ~10% in the past six months, which is likely to cushions their margins, going forward. In this edition of our auto ancillary thematic series, we are looking at Apollo Tyres and JK Tyre & Industries Rubber price vs. stock price Rubber Price 12M_avg Rubber price JKTYRES Apollo tyres Rubber prices posted a pullback during 2016 after a prolonged bear market through Stock prices have a negative correlation with natural rubber prices with a lead effect As can be seen in the adjacent chart, during 2016, share prices topped ahead of bottom in natural rubber prices while at the beginning of 2017 share prices bottomed out ahead of the peak in natural rubber prices 50.0 The recent breakout from a two year trading range in share prices of Apollo Tyres and JK Tyres may be seen in this context 0.0 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Natural rubber prices have dipped below their 12 month average recently. Benign rubber prices would augur well for tyre companies, going ahead 2

3 Apollo Tyres (APOTYR): Price rebounding from major breakout area... CMP: Buying Range: Target: Stop loss: Upside: 19% Stock Data 52 Week High / Low / days EMA days EMA Week EMA 196 Face Value ( ) 1 Market Capitallisation ( Cr.) *Recommendation given on i-click to gain on May at 11:13 hrs Stock price vs. BSE May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Apollo Tyre BSE 200 4,800 4,300 3,800 3,300 2,800 Price performance in last five years 150% 50% -50% 51% 20% 108% Year -30% 18% Source: Bloomberg, BSE, ICICIdirect.com Research Technical View Apollo Tyres is a large cap tyre company. It is a global player with good business diversification across geographies. The share price of Apollo Tyres remains in a strong uptrend forming higher highs and higher lows representing persistent demand at elevated levels. The recent price action highlights that the stock is rebounding from a major breakout area indicating resumption of the primary uptrend thereby providing a fresh entry opportunity. Breakout above major downward sloping trend line and Bullish rounding pattern The entire price action since October 2016 till April 2017 appears to have taken the shape of a Rounding pattern as highlighted in the adjoining weekly chart. A rounding formation within an established uptrend develops as a bullish continuation pattern marking a secondary corrective phase amid profit bookings by weaker hands and accumulation by stronger hands at the base of the pattern. The strong up move in March & April 2017 propelled p the stock past the neckline of rounding pattern placed around the 220 region, which also coincides with the breakout area from the long term downward sloping trend line joining the highs of February 2015 ( 249) and October 2016 ( 234) during April The breakout above the major technical pattern signals conclusion of the corrective phase and resumption of the primary uptrend After a strong breakout rally in March & April 2017 from 177 to 254, the share price was seen taking a breather in the past two weeks. The temporary pause after a sharp rally has helped it to work its way out of the overbought condition and in the process built a higher base. In the current week s trade, the stock has rebounded taking support at the major breakout area of 220 highlighting a robust price structure and resumption of the up move The 61.8% retracement of the March & April 2017 rally from 177 to 254 is placed around 207, which will act as a major support base for the stock in the short-term. Faster retracement of fall reinstates bullish momentum Time wise, the stock took over 19 weeks to correct from high of 234 to the base of rounding pattern at 170. However, the up move from there on has seen the stock completely overhaul the 19 weeks fall in just 10 weeks. Faster retracement of the major falling segment confirms the overall positive price structure and reinstates the bullish momentum, which h augurs well for the stock, going forward. Momentum oscillator provide early signs of turnaround The weekly MACD (E-12/26/9) is in a rising trend forming higher high and higher low and is seen sustaining in the positive territory highlighting the underlying strength in the trend thus supports continuationof the uptrend. Conclusion We believe the stock is attractively placed and offers a favourable risk-reward setup for medium term players to ride the next up move. We expect the stock to resolve higher from here on and test levels of 270 being the measuring implication of the rounding pattern breakout i.e. The distance from the neckline to the base of the pattern ( =50 points) added to the breakout point of 220 projects upside target of 270 ( ) over the medium term 3

4 Apollo Tyres (APOTYR): Weekly Bar Chart Price rebounded taking support at the major breakout area of 240 highlighting a robust price structure and resumption of the up move Measuring implication of rounding pattern Base of the rounding pattern at 170 levels being confluence of: % retracement of previous rally The rising 52 weeks EMA Weekly MACD in uptrend and sustaining in the positive territory highlights the underlying strength in the trend Source: Bloomberg, ICICIdirect.com Research 4

5 Apollo Tyres (APOTYR): Fundamental view Stock Data Particular Amount Market Capitalization ( Crore) Crore Total Debt (FY16) ( Crore) 3,244.5 Cash & Investments (FY16) ( Crore) EV ( Crore) 14, week H/L ( ) 254 / 139 Equity capital ( crore) 50.4 Crore Face value ( ) 1 Key Metrics FY16 FY17E FY18E FY19E P/E (x) EV/EBITDA (x) P/BV (x) RoNW (%) RoCE (%) Financial Highlights Crore FY16 FY17E FY18E FY19E Net Sales 11,793 13,180 15,014 16,420 EBITDA 1, , , ,099.8 Net Profit 1, , ,176.9 EPS ( ) Source: Company, ICICIdriect.com Research Fundamental View Well placed for demand revival Apollo Tyres (ATL) is well placed to benefit from the radialisation story in India. It enjoys a 25% market share in truck tyre segment (in both TBB & TBR). ATL is likely to improve radial volumes, and is increasing its radial capacity, (phase 1 of radial capacity has been commissioned in Q4CY16) with full capacity set to come on stream in mid 2018, thus driving its growth. Further, import of Chinese tyre has declined to <50% of its peak import in Q2FY16 (impacted by demonetisation) i and is benefiting i the domestic tyre industry, especially ATL. Thus, the management is positive on demand outlook & expects double digit volume growth in FY18E. Strong brand + distribution = to supports its European performance! ATL s overall European operation reported volume growth of 12% YoY in FY17 and was mainly supported by strong volumes of its Vredestein brand in the PV space. It continues to expand its PCR capacity in Hungary (has planned capex of 180 million, 1,250 crore in FY18E), which is likely to cater to rising demand, going forward. Apart from that, acquisition of Reifencom - one of the leading tyre retail chain in Germany (with >37 stores), will enhance brand visibility. Q4FY17 is seasonally weak for Reifencom, which posted negative EBITDA margins of 5%, thereby impacting overall margins. However, the management expects Reifencom margins (~2% per annum) to gradually improve, going forward. Margin to be impacted in FY18E; though likely to improve, going forward Average NR prices have been volatile -from lows of 94/kg in February 2016 to 159/kg in February 2017 to 129/kg currently. According to the management, the impact of raw material price rise was 23% (13% in Q3FY17 & 10% in Q4FY17) & requires 15% ASP hike (fully passing on) to maintain its margins. Though, till date, they have increased prices by 6% (3% each in Q4FY17 & in April 2017). Looking at the inventory and current NR prices, the management expects its margins to remain under pressure in H1FY18. It is likely to ease out afterwards. Also, startup cost in Hungary is likely to put pressure on European margins. Thus, we expect lower margins in FY18E with an improvement in FY19E. Decent business case as valuations remain fair! ATL is investing in more diversified, rapid growth areas coupled with a larger scale of business in coming years. Further, the management expects demand to recover, going forward. Hence, we remain positive on the stock from a long term perspective. 5

6 JK Tyre & Industries (JKTYRE): Bullish Cup and Handle pattern breakout... CMP: Buying Range: Target: Stop loss: Upside: 20% Stock Data 52 Week High / Low / days EMA days EMA Week EMA 127 Face Value ( ) 2 Market Capitallisation ( Cr.) 3830 *Recommendation given on i-click to gain on May at 09:24 hrs Stock price vs. BSE May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 JK Tyre BSE 500 Price performance in last five years 350% 250% 150% 50% 100% 45% 272% -15% 2% 15,000 14,000 13,000 12,000 11,000 10, ,000 8,000 Key technical observations JK Tyre & Industries is an automotive tyre, tubes and flaps manufacturing company. The company is the market leader in truck/bus radial tyre in India. The share price of JK Tyre remains in a secular uptrend forming rising peaks and troughs on the long term charts and has generated superior returns for long term investors on a consistent basis over the past many years. Within the structural uptrend, the stock has witnessed periodic secondary corrections that have provided fresh entry opportunities. Recent developments on the price front suggest that the stock has concluded an elongated corrective phase in the last two years and is poised to embark upon its next major up move thereby providing a fresh entry opportunity to medium term investors. Cup and Handle pattern breakout triggers bullish turnaround... The stock entered a secondary corrective phase after hitting a high of 160 in December The entire corrective price action over the past 28 months took the pictorial form of a well defined Cup &Handlepattern as highlighted g in the adjoining chart. A Cup & Handle formation is a bullish continuation price pattern having positive implication on the price front upon resolution above the neckline of the pattern. The sharp up move during March and April 2017 from the low of 117 saw the stock register a resolute breakout above the neckline of the Cup and Handle pattern at 160 signalling the end of the secondary correction and resumption of the next up leg, thereby offering a fresh entry opportunity to ride the ongoing uptrend from a mediumterm perspective. After the strong breakout rally from 117 to 184 in just two months, the stock entered a sideways corrective trend in the last two week s. In the current week trade it has rebounded taking support near the recent breakout area of 160 highlighting the change of polarity principle as per which a significant resistance once taken out reverses its role and acts as support for future price movement. The 61.8% retracement of the March & April 2017 rally from 117 to 184 is placed around 146 levels, which will act as a major support base for the stock in the short-term. Volume behaviour, momentum oscillators confirm strength in price breakout... The entire corrective decline since December 2014 was on the back of receding volumes. The upmove during the middle of 2016 and the recent rally of the last two months has seen strong participation as weekly volumes of almost double of the 50 weeks average volume of 90 lakh share per week. Volumes rising in the direction of primary trend highlight inherent strength in the trend. Among oscillators, the weekly 14 periods RSI is forming higher high and higher low and is seen taking support at its nine period average signalling strength in the price trend Conclusion Based on the aforementioned technical observations, we believe the stock has concluded a healthy corrective phase -50% Year and is set to embark on a sustained up move. We expect the share price to head towards 199 levels over the medium term being the 161.8% external retracement of the recent decline from 184 to 160 levels Source: Bloomberg, BSE, ICICIdirect.com Research 6

7 JK Tyre & Industries (JKTYRE): Weekly Bar Chart Consolidation above the 28 months bullish Cup & Handle breakout area suggests accumulation and thus offers fresh entry opportunity 161.8% external retracement of previous 199 Neckline of the Cup & Handle The long term 52 Weeks EMA has acted as strong support for the stock during the entire consolidation Low volume during price correction and strong volume during price rally signals larger participation in the direction of trend Weekly RSI in uptrend and is seen taking support at its nine period s average thus validates positive bias Source: Bloomberg, ICICIdirect.com Research 7

8 JK Tyre & Industries (JKTYRE): Fundamental view Stock Data Particular Amount Market Capitalization ( Crore) Crore Total Debt (FY16) ( Crore) 2,669.7 Cash & Investments (FY16) ( Crore) EV ( Crore) 6, week H/L ( ) 185/79 Equity capital ( crore) 45.4 Crore Face value ( ) 2 Key Metrics FY16 FY17E FY18E FY19E P/E (Dil.) (x) EV/EBITDA (x) P/B (x) RoNW (%) RoCE (%) Fundamental View SignsofChineseimportsfadingaway JK Tyres & Industries (JKTIL) is one of the leading player in the M&HCV truck bus radial (TBR) segment with market share >30%. In the passenger car radial (PCR) segment, it has a share of >12% in India. Import of Chinese radial tyre in India had substantially increased from May Average monthly TBR import from China was at ~54,000 in CY13, surging to 166,000 tyres in June However, since then, Chinese TBR imports have gradually come down - 52,000 tyres in January 2017, mainly due to 1) demonetisation adversely impacting Chinese TBR distributors in India as their transactions were largely cash based, 2) media reports suggest US International Trade Commission will not levy any kind of duty on Chinese tyres, making US a preferable destination for Chinese TBR exports. The reduction in Chinese TBR import is positive for a player like JKTIL (derives 74% of its revenue from CV segment). Lastly, any anti-dumping duty on imports of tyres, will favour JKTIL. Price hikes to support margins Average NR (key input cost) prices have been more volatile - from lows of 94/kg in February 2016 to 159/kg in February 2017 to 128/kg currently. The sharp surge in NR prices was mainly due to 1) production cut of top NR producing countries (Thailand, Indonesia & Malaysia account for >60% of world s production), 2) floods in Thailand (impacted its production) coupled with higher demand from China in the same period resulting in NR prices moving northwards. However, we believe the situation will normalise. NR prices are likely to stay benign, going forward. To protect their operating performance, major tyre players (including JKTIL) undertook a price hike of ~10% in the past six months that will cushions their margins. Average prices of other raw material costs (that are crude linked) may also stay subdued. Further, a better product mix (higher share of radial tyres) will also support margins Financial Highlights Acquisition of Cavendish Industries to yield better returns crore FY16 FY17E FY18E FY19E The acquisition of the Laksar unit (of CIL) has strengthened JKTIL s leadership position in the TBR segment and Net Sales 6,953 7,492 8,332 9,342 helped them enter the fast growing 2-W & 3-W segments. According to the management, JKTIL has managed to EBITDA 1, , , ,526.7 turn around the unit by higher productivity & reduced its plant conversion cost (down 40%) thereby turning PBT Net Profit positive. We believe CIL would have been operating at very low utilisation level at its time of acquisition. The FDEPS ( ) utilisation is gradually expected to ramp up (considering JKTIL s stake of 64% in the unit could contribute maximum revenues of > 4,000 crore) thereby generating higher margins. Thus, CIL is likely to yield better returns, going forward Source: Company, ICICIdriect.com Research Attractive valuations The expectation of a revival in the capex cycle makes us optimistic about the revenue/earnings growth possibilities. Its plans to explore the 2-W space and new radial capacity would drive incremental growth. JKTIL is available at attractive valuation - currently trading at PE of 8xFY18Evs.thetyreindustryaverageof >13x. Thus, we remain positive on the stock 8

9 Strategy Follow up Open Recommendations: Date Scrip Name Rec Price Target Stoploss CMP Return till date (%) 20-Mar-17 IDBI % 11-Apr-17 Ashoka Buidcon % 18-Apr-17 EIH Ltd % 21-Apr-17 Cera Sanitaryware % 21-Apr-17 VST Tillers % 21-Apr-17 Monsanto % 27-Apr-17 Nestle India % 3-May-17 Cummins India % 4-May-17 Vadilal Industries % 9-May-17 Larsen & Toubro % 9-May-17 BGR Energy % 11-May-17 Rallis India % 11-May-17 Hero MotoCorp % Summary Performance - Recommendations till date Open Recommendations 13 Total Recommendations 159 Yield on Positive recommendations 20.0% Closed Recommendations 146 Yield on Negative recommendations -8.0% Positive Recommendations 111 Strike Rate 76% 9

10 Notes It is recommended to enter in a staggered manner within the prescribed range provided in the report Once the recommendation is executed, it is advisable to keep strict stop loss as provided in the report on closing basis. The recommendations are valid for six months and in case we intend to carry forward the position, it will be communicated through separate mail. Trading portfolio allocation It is recommended to spread out the trading corpus in a proportionate manner between the various technical research products Please avoid allocating the entire e trading corpus to a single stock or a single product segment Within each product segment it is advisable to allocate equal amount to each recommendation For example: The Daily Dil Calls Cll product carries 3 to 4 intraday recommendations. It is advisable to allocate equal amount to each recommendation 10

11 Recommended product wise trading portfolio allocation Product Allocations Product wise Max allocation in allocation 1 Stock Number of Calls Return Objective Frontline Stocks Mid Cap Stocks Duration Daily Calls 8% 2-3% 3-4 Stocks 0.5-1% 2-3% Intraday Stocks on the Move 6% 3-5% 7-10 Per Months 7-10% 10-15% 3 Months Weekly Calls 8% 3-5% 1-2 Stocks 5-7% 7-10% 1 Week Weekly Technicals 8% 3-5% 1-2 Stocks 5-7% 7-10% 1 Week Monthly Call 15% 5% 2-3 Stocks 7-10% 10-15% 1 Month Monthly Technical 15% 2-4% 5-8 Stocks 7-10% 10-15% 1 Month Techno Funda 15% 5-10% 1-2 Stocks 10% and above 15% and above 6 Months Gladiator Stocks 15% 5-10% 1-2 Stocks 15% and above 20% and above 6 Months Cash 10% - 100% 11

12 Pankaj Pandey Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC Andheri (East) Mumbai

13 Disclaimer ANALYST CERTIFICATION We /I, Dharmesh Shah, Dipesh Dagha, Nitin Kunte, Pabitro Mukherjee, Vinayak Parmar Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a SEBI registered Research Analyst with SEBI Registration Number INH ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. ( associates ), the details in respect of which are available on ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining i i a financiali interest in the securities ii or derivatives i of any companies that the analysts cover. The information and opinions in this section have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non- rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. The research recommendations are based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. These research recommendations and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. ICICI Securities will not treat recipients as customers by virtue of their receiving these recommendations. Nothing in this section constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed herein may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of these recommendations. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. 13

14 Disclaimer ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received ed any compensation from the companies mentioned ed hereinei during the period preceding twelve months from the date of these recommendations for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation forproductsorservicesotherthaninvestmentbankingormerchant banking or brokerage services from the companies mentioned herein in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its Analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this reports. It is confirmed that Dharmesh Shah, Dipesh Dagha, Nitin Kunte, Pabitro Mukherjee and Vinayak Parmar, Research Analysts giving these recommendations have not received any compensation from the companies mentioned herein in the preceding twelve months. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the company/companies mentioned herein asof the last day of the month preceding the publication i of these research recommendations. Since Associates (ICICI group companies) of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned herein. It is confirmed that Research Analysts do not serve as an officer, director or employee or advisory board member of the companies mentioned herein. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented herein. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned herein. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report or recommendations are not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. 14