The Hindu Business Line : Rubber prices: What's in store for tyre companies

Good times
Demand for automotive tyres is expected to grow at 4-5 per cent.
Analysts are of the view that rubber prices are likely to hover around current levels.

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Chennai March 4 Rubber is one of the commodities keenly monitored by various market players. Currently, rubber prices are considered to be ruling higher than what fundamentals command. On Saturday, prices for ribbed smoked sheet 4 (RSS 4) grade ruled at Rs 94 a kg. In the global market, the equivalent RSS 3 was quoted at Rs 103 a kg.

Board Circular

The user industry as well as the trade has been vocal in complaining that current prices are unjustified and it has led to a couple of developments. One, the Rubber Board has sent a circular to the Forward Markets Commission, saying those trading in rubber futures should be registered with it. Then, it has initiated a move to ensure exports, which have been at standstill in the last few months, resume.

The objective behind the move is to ensure that growers do not get caught when prices crash and also that India emerges as a dependable exporter of rubber. Rubber production this fiscal is estimated to be a record 8.31 lakh tonnes against 8.03 lakh tonnes a year ago.

Consumption is expected to rise to 8.41 lakh tonnes from last year's offtake of 8.01 lakh tonnes. Imports are likely to be a record 82,000 tonnes and, therefore, the carryover stocks are likely to be around one lakh tonnes.

It is due to these reasons that the trade and industry feel current rates are unjustified. The growers, on the other hand, point out to the global trend, which is firm on Chinese demand. Also, growers seem to be taking into account the prices that could prevail during lean tapping season that is set to begin from April onwards.

Crude Prices

Tyre manufacturers are concerned over any rise in prices due to the fact that the industry has to foot an extra Rs 44 crore for every hike of Re 1 a kg in rubber. Besides that, the sector has also to worry about firm crude prices since products such as tyre cord fabric, Polybutadiene rubber, styrene butadiene and other chemicals are all derivatives of petroleum products.

Does that mean, tyre companies are in for a tough time? Well, exactly not so. Analysts are of the view that rubber prices are likely to hover around current levels and therefore, there may not be much of a concern for them. In fact, the manufacturers have seen even prices touching Rs 120 a kg last May and, therefore, seem to be well prepared to meet any eventuality.

As regards crude prices, the same theory as that for rubber holds good. Crude prices are now hovering around $61 and analysts are of the view that prices may stabilise around these levels.

Demand For Tyres

Things then boil down to the transport sector on which the fortunes of the tyre sector depend. With the core sector doing well and infrastructure improving besides increase in the average spending in the country, the economy is doing well. This augurs well for the transport sector and in turn, the tyre sector. Demand for automotive tyres is expected to grow at 4-5 per cent. This means, tyre companies could continue to perform well. For example, for the quarter ending December last, MRF's profit more than doubled to Rs 28.96 crore compared with the same quarter a year ago. Apollo Tyres registered a net of Rs 35.07 crore against Rs 16.44 crore in the year-ago period. Ceat posted a net profit of Rs 11.78 crore compared with Rs 1.54 crore.

Tyre companies do offer an opportunity for investment. Companies such as MRF, Ceat, Apollo Tyres, JK Industries, Falcon Tyres and Premier Tyres are some of the ones to look at.

Currently, MRF is quoted at Rs 3,653 on the BSE with its year high and low being Rs 4,800 and Rs 2,100 respectively. Ceat is quoted at Rs 121 (year high and low of Rs 161.90 and Rs 56.40). Apollo Tyres is quoted at Rs 288 (Rs 384.90 & Rs 193.65).