Tyre stocks are a safe bet amid auto sector uncertainty and falling rubber prices: Anshul Saigal

Synopsis

What our assessment is that the sort of speed bump that we saw in capacity addition in the period say 2012 to 2021, that speed bump will need a lot of catching up going forward and with themes like Make in India, Atmanirbhar Bharat as also attracting manufacturing into the country which is a policy of this government now.

"As you rightly mentioned rubber prices have been kind of easing off in recent times and as a result, we are seeing and what we have noticed in recent times in stock price performance as also margin performance and time will tell whether this continues or not, but by and large if you are positive on the auto sector, then this is the space to be in," says Anshul Saigal, Founder, Saigal Capital.

Help us understand a little bit about some of these tyre stocks that we have seen, JK Tyre for example in focus today, a 12.5% uptick coming in, very sharp uptick coming in on this stock. What are you making of this tyre space, the rubber space right now since commodities are slightly pressured? Give us a sense on what you are making on these rubber beneficiaries as well as some of the crude beneficiaries given that crude is once again trying to find its footing.
Anshul Saigal: Generally, it is a statement within the investment management community that if you are positive on autos, buy tyres, what that means is that you do not know whether EVs will do well or the erstwhile engine companies will do well, but if either of those do well, tyre as a result will be beneficiaries.

And to top it all, here you have the play on commodity because rubber prices decide whether tyre companies make healthy margins or no. And if rubber prices ease off, then clearly that impacts margins positively.

As you rightly mentioned rubber prices have been kind of easing off in recent times and as a result, we are seeing and what we have noticed in recent times in stock price performance as also margin performance and time will tell whether this continues or not, but by and large if you are positive on the auto sector, then this is the space to be in.

Just wanted to have your take on these cap good companies because for today what we are seeing is that for a stock like Siemens, there has been no stopping, after that analyst meet and the company is quite positive across the board, they are expecting a margin recovery as well. The stock has shot up around 5%. In the earnings, we have seen and specifically, I remember it for Siemens that though the net profit was below the street estimates, there was a dip of close to 40%, but the management commentary is really giving confidence to the investors, not just the Siemens other than that if we look at ABB India, all these counters have been holding up quite well. Do you believe it is once again time to look out for these names or the valuations is not giving that much of a comfort here?
Anshul Saigal: So, if you look at these companies you are right, the results were slightly weak for the quarter, but then if you look at both the commentary and the order book release of many of these companies, you will notice that the tailwinds are just not stopping on order inflows in these companies, that is giving you a signal that this is not a flash in the pan that these companies are seeing so much growth or they have seen so much growth over the last three-four years.

What our assessment is that the sort of speed bump that we saw in capacity addition in the period say 2012 to 2021, that speed bump will need a lot of catching up going forward and with themes like Make in India, Atmanirbhar Bharat as also attracting manufacturing into the country which is a policy of this government now.

The next five-seven years are going to be tremendous for capacity addition in the country. Now, as a result, companies like the ones that you mentioned they are going to see significant tailwinds in demand. A quarter here, a quarter there they may see earning slowdown, revenue degrowth or whatever, but over a longish period these companies will see significant tailwind.

And clearly the commentary of management of this one company is indicating that. We tend to concur that this is a sector which will have a long runway for growth and where investor interest will also remain quite strong going forward.

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