Why CEAT Share Price is Falling

When we go on a long drive, we always look forward to a smooth and scenic experience. But that seldom happens and we often, come across potholes, traffic, and narrow streets.

It gets annoying very quickly. The overall drive is fun and coming back to home also feels good. But these potholes make the experience imperfect.

Investors of CEAT are facing similar annoyance right now. CEAT share price is going through a rough patch on the road that is stock market at the moment.

Let's dig a little deep to understand what kind of potholes are driving out the air from the Ceat share price.

Volatility in Crude Oil Prices

Before the recent outbreak of Covid-19 in China, crude oil prices were edging higher.

Crude oil prices were on the rise after Russian President Vladimir Putin decreed that Russia aims to ban oil sales from 1 February 2023 to countries that abide by a G7 price cap imposed on 5 December 2022.

Gains were further supported by an optimistic market. Markets were optimistic about fuel demand recovery as China continued to ease its Covid-19 restrictions.

The impact of rising crude oil prices on tyre companies' profits, though not immediate, is a sign of concern.

For producing tyres, the company requires a large portion of natural rubber and crude oil derivatives. Rising crude oil prices could possibly reduce the margins of CEAT.

Delayed growth plans

Earlier, CEAT planned to invest Rs 1,200 crore (12 billion) for a new facility near Chennai to manufacture tyres for commercial vehicles.

However, in January this year, managing director Anant Goenka said that the company has decided to cut the planned investment to Rs 5 billion (bn) and that the opening of the plant would be delayed by six months to the start of the next calendar year.

Capex is an integral part of strategic decisions for organisations, because it helps foster growth, improve customer service, increase margins, and promote quality performance. Capex can tell you how much a company invests in existing and new fixed assets to maintain or grow its business.

Hence a delay in capex plans has somehow dampened sentiment.

NCLAT order in case of an appeal against CEAT

On 1 December 2022, National Company Law Appellate Tribunal (NCLAT) issued an order on a batch of appeals filed by tyre makers against the ruling by the Competition Commission of India (CCI), back from August 2018.

Back in 2018, CCI passed an order against five tyre manufacturing companies. These five companies included Apollo Tyres, MRF, CEAT, JK Tyre and Industries, and Birla Tyres.

CCI noted that tyre manufacturers exchanged price-sensitive data among themselves through the platform of their association - Automotive Tyre Manufacturers Association (ATMA),and took collective decisions on the price of tyres.

What this means is the companies formed a cartel and acted against the public interest. The investigation was carried out after a complaint was received from the Haryana state.

According to reports, a finding of bid-rigging could lead to a fine of up to three times the profit in each year the prices were fixed by the companies, or 10% of annual revenue, whichever is more.

Resultantly, the anti-monopoly watchdog has imposed a cumulative penalty of Rs 17.9 bn on the five companies.

CCI has imposed a fine of Rs 2.5 bn on CEAT.

The commission also penalised ATMA for indulging in cartelisation by acting in concert to increase the prices of cross-ply/bias tyres variants sold by each of them in the replacement market and to limit and control production and supply in the said market.

However, this order was kept in a sealed cover as per the direction of the Madras High Court in a petition filed by MRF.

Later on, the division bench of the high court dismissed the plea filed by MRF. Subsequently, the matter reached the Supreme Court, which was later dismissed by the Apex Court on 28 January 2022.

After this, a batch of appeals were filed by tyre manufacturing companies against the order passed by CCI.

In the order passed by NCLAT on 1 December 2022, the tribunal has not challenged the decision passed by CCI but it has issued directions to pass a fresh order.

Now on a superficial look, this order seems to be positive for the tyre manufacturers. That is why tyre companies rose initially when the order was issued.

However, if you take a closer look, things look different. On a deeper analysis, one can see that the order imposed by NCLAT confirms the penalty. The order asks CCI to change the penalty and not remove it.

The readers should keep in mind that changes like this keep happening in the tyre market.

What next?

Demand for tyres in India is likely to grow 6-8% in financial year ending March 2022-23. Tyre manufacturers along expected lines, could witness margin expansion in second half.

Demand will be driven by strong growth in OE (original equipment), and a slight increase in replacement volumes as well as softening prices of natural rubber.

The share of original equipment manufacturer (OEM) business in overall revenue of tyre makers has been inching up. Improving economy and steady interest rates have brought in good news for the demand of automobiles. This in turn, could boost tyre demand.

According to experts, OE demand will witness a low double-digit growth supported by factors like easing supply-related headwinds in the passenger vehicle (PV) segment, improving two-wheeler (2W) demand, and strong growth in commercial vehicle (CV) segment amid favourable macro-economic environment.

Replacement demand, which forms around two-thirds of tyre demand, is likely to witness mid-single digit growth in current financial year.

Natural rubber forms the largest part of raw material expense. Natural rubber prices on international markets have fallen by around 20% quarter-on-quarter. This has translated to 2.5-3% reduction in raw material costs.

The tire maker has also seen a drop of between 12% and 15% in synthetic rubber prices over the last three months.

Thus, owing to favourable factors, the management expects better quarters provided the cost of raw materials remain the same.

How shares of CEAT have performed recently

CEAT share price is down 13% in the past one month. So far, in 2022, the shares have gained 37%.

The company touched its 52-week high of Rs 1,981.5 on 02 December 2022 and its 52-week low of Rs 890 on 20 June 2022.

About CEAT

CEAT is an Indian multinational tyre manufacturing company owned by the RPG Group.

It was established in 1924 in Turin, Italy. It has a presence in global markets. CEAT produces over 165 million tyres a year and manufactures tyres for passenger cars, two-wheelers, trucks and buses, light commercial vehicles, earthmovers, forklifts, tractors, trailers, and auto-rickshaws.

To know more about the company, check out its factsheet and quarterly results.

You can also compare the company with its peers:

CEAT vs Apollo

CEAT vs MRF

CEAT vs JK Tyre and Industries

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