Tyremakers are on a roll but watch out for bumps

Tyremakers were on a roll in CY22, with shares of most companies rallying by 20-45%. An analysis of seven listed tyremakers by CareEdge showed that in the last five years, investment in capex pushed the sector’s gross block by two times. According to Nithya Debbadi, assistant vice president and sector head - corporate ratings, Icra Ltd, the estimated interest coverage ratio for Icra’s sample set of seven tyre companies for FY23 is around 5-7x and total debt/Opbitda at around 2x. “Elevated capex intensity has pushed the sector’s leverage higher and return ratios lower," said Varun Baxi, an analyst at Nirmal Bang Institutional Equities. So, lowering of capex intensity means that companies will have more money on the table which can be used for deleveraging and leaner balance sheets are a positive for tyre stocks, he said.“Going ahead, capex per tonne is likely to be at ~60-65%, much lower than seen in the previous capex cycle," Baxi added.