Panther Tyres IPO deserves a closer look 

I suggest you have closer look at the upcoming IPO (initial public offering) of Panther Tyres. The suggestion stems from: 1) industry dynamics where motorcycle and tractors auto sales are increasing sharply, 2) stable margins due to higher proportion of sales from replacement market and 3) attractive floor price.

Rebound in Motorcycle and Tractor sales:

After three tough years, bikes and tractor sales are rebounding in Pakistan, evident from 1HFY21 growth of 19%YoY and 43 YoY respectively. The growth is likely to continue due to economic recovery amidst low interest rates and improvement in farmers’ income on the back of measures taken by the government i.e. increase in wheat support price amongst others. Panther Tyres has vested interest in tractors and bikes as company holds market share of 30-40% in both categories.

Stable margins:

Tyre sales are mainly categorized under two segments: 1) Replacement and 2) Original Equipment Manufacturers (OEMs). OEMs are market for new vehicles and replacement are market for vehicles on road. Tyres/Tubes sold in replacement market are immune from economic headwinds, from where Panther earns 70% of its sales. This in turn has helped in keeping gross margins stable in the range of 13-15%.

Attractive Valuations: 

Based on P/E multiples, Topline Securities has recommend investors to subscribe up to Rs52. The stock has a potential to return 17% from Rs52 over a period of one year. Panthar’s P/E for FY21 at Rs52 computes at 10.2x, vs. GTYR and SRVI estimated P/E of 14x and 12x, respectively.

Key risks:

No investment is risk free and Panther faces: 1) lower than expected sales due to slowdown in economy, 2) sharp increase in rubber prices and/or currency depreciation and 3) increase in competition from local manufacturers and smuggled goods.

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