Why Tyre Stocks Are Rising

In the stock market, even a slight wiggle by a heavyweight can be a major headline. But when India's most expensive stock inches forward it doesn't create a simple ripple, it creates an entire wave.

Indian stock markets experienced this wave yesterday as the costliest share of India - MRF - experienced 1.2% surge. And this wave wasn't limited to MRF.

The entire tyre industry seems to be riding a rising tide, with other major players like JK Tyre, Apollo Tyres, and Ceat Tyre experiencing impressive gains of 6.4%, 4%, and 3.8% respectively.

This coordinated surge suggests a broader trend at play within the tyre sector, not just individual company performance.

Let's find out why tyre stocks are collectively experiencing this surge in share price.

#1 Rising Tyre Price

Tyre companies' share prices are rising because MRF, along with other tyre manufacturers, has announced price hikes.

MRF, starting from 18 July will increase truck tyre prices by 2% and passenger car and radial tyre prices by 3-7%. This marks MRF's first price increase since a minor reduction in some categories back in March.

Despite these adjustments, the increases still do not fully cover the cost rises experienced over the past few months.

Apollo Tyres is also raising prices by 1-2.5% across most categories, except for the Farm and Vredestein ranges. Similarly, Ceat will implement a 1-2% price hike in the small commercial vehicle and passenger car radial/utility vehicle radial segments.

The driving factor behind these price increases is the rising cost of natural rubber, a crucial raw material for tyre manufacturing.

Natural rubber prices have surged due to a supply shortage caused by adverse weather conditions, logistical challenges, and heightened demand as economies recover from the pandemic.

To manage these higher production costs and safeguard their profit margins, tyre manufacturers are increasing product prices.

This ability to pass on costs to consumers is seen positively by investors, as it suggests that companies can maintain profitability despite the rising input costs. Consequently, this investor confidence is driving up the share prices of tyre companies.

#2 Efforts on Premiumisation

The premiumisation strategy adopted by leading tyre companies is also contributing to the rise in their share prices.

Premiumisation involves offering higher-end, more advanced, and often more expensive products to consumers. This strategy not only enhances brand perception but also allows companies to command higher margins.

Leading tire companies like MRF, Apollo Tyres, and Ceat have been actively pursuing premiumisation initiatives.

These premiumisation efforts are positively impacting the financial performance of these companies. By shifting their product mix towards higher-margin premium products, tire companies can enhance their overall profitability.

Investors view these initiatives favorably, as they indicate the companies' ability to innovate, capture a larger market share, and maintain strong financial health.

Consequently, the successful implementation of premiumisation strategies is driving up the share prices of these companies.

Tyre Industry Outlook

Industry experts anticipate domestic demand from original equipment manufacturers in segments like passenger vehicles and two-wheelers to remain strong in FY25.

Replacement demand is also expected to support overall tire volume growth. Revenues are projected to expand by 5-7% in FY25. However, high natural rubber and crude prices are likely to moderate the industry's margins.

In FY24, the industry's operating margins expanded to an estimated 15-17%. This was due to lower prices for key raw materials such as rubber and crude derivatives like synthetic rubber, carbon black, and caprolactam for much of the year.

Since January 2024, input costs have been rising. International rubber prices have increased by 25-30% in the past four months, currently trading around Rs 185-186 per kg due to global supply shortages and adverse weather in key rubber-producing regions in Southeast Asia.

India's reliance on imported natural rubber has also led to significant domestic price increases, with prices trading around Rs 180 per kg. These high costs are expected to moderate industry margins by 200-300 basis points in FY2025.

Investment in supply addition is expected to be moderate. Existing capacity utilisation levels are estimated at 75-85% in FY24, providing adequate headroom. Demand growth is forecasted to remain modest in the near term.

Tire export volumes, which make up about 25% of the industry's sales by value, are estimated to have seen low single-digit growth in FY24. This follows a 7% contraction in FY23 due to demand shrinkage in key markets amid inflation and higher interest rates.

On the capital expenditure front, the industry is expected to invest 6-9% of its revenues in FY25. Credit metrics are expected to remain comfortable due to healthy earnings, despite expected margin moderation and moderate capital expenditure plans.

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Happy Investing.

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