Why Tyre Stocks are Rising

Tyres, tyres, and more tyres. The buzz around the Indian tyre industry has been a hot topic in recent days.

In a single day, three tyre stocks have seen a significant spike in their price.

Shares of some of the tyre majors MRF, Ceat, and JK Tyre have risen by 20-40% in the last three months. Some other stocks in the tyre sector are trading near a 52-week high.

Here is a list of tyre stocks and the gains they have delivered over the last three months.

Company	3-Month Performance (%)
JK Tyre & Industries	80.30%
Ceat	72.60%
Apollo Tyres	60.70%
MRF	27.60%

Now let's see whats behind the rally.

#1 Moderation in raw material prices

The tyre industry, over the last 15-18 months, has witnessed hyperinflation in key input costs.

Raw material prices had seen an increase of over 50% in the first half of the financial year 2021, with the average raw material basket costing Rs 180 per kg.

However, prices of pure and artificial rubber have recently come down from their peak. Brent crude oil costs too have declined.

Natural rubber prices are now 12.5% lower than what they were in the first quarter of the financial year.

Also, the price of latex, which soared during the pandemic due to demand from glove makers, took a more severe drubbing, with its prices rolling down below Rs 120.

Since, crude oil prices have corrected, it should reflect a lag in both synthetic rubber and carbon black prices as well.

#2 Surge in Demand

The demand for tyres from the original equipment makers (OEMs) has improved across categories. This is due to the rising demand for automobiles domestically and internationally.

With the surge in demand for vehicles, the off-highway tyres and the premium segment of the passenger car, radicals are experiencing high demand, leading the rally for the tyre industries.

Also, with the steady embrace of EVs in India, tyre companies have started launching new products to cater for their rising demand adding to the rally.

Tyre exports of India increased 31% YoY to Rs 62.1 bn for the June quarter of 2022, according to the data released by the Union Ministry of Commerce.

This industry further benefited from government interventions restricting high volumes of imports and revised axle-load norms.

These revised norms were to re-engineer the demand for replacement tyres and the buoyancy of Indian exports. This curb on imports has increased the size and scale of production of the industry.

This has led to an increase in the export capacity of the companies.

Bottom Line

The fall in raw material prices also comes along with tyre makers looking at asset sweating and controlled capital expenditure which will drive an improvement in free cash flows, financial gearing, and return on capital employed (ROCE).

Currently, there are no major ongoing greenfield or brownfield expansions by mainstream tyre companies, whereas de-bottlenecking is the preferred mode to expand capacity to meet demand over the next one-two year.

Besides, a huge export opportunity is knocking at the doors of the Indian tyre industry. Several factors are at play in its favor.

The faster recovery from the pandemic, led to demand depression, stringent anti-dumping duties, and China plus one market policy of many countries are prominent among them.

This free cash flow will help the companies to expand their capacity and improve the number of exports.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...