Declining rubber prices, reduced imports to keep tyre stocks on a roll

Sentiments have turned bullish for tyre stocks thanks to the double bonanza of declining rubber prices and reduced imports of Chinese tyres. Shares of MRF and Balkrishna Industries recently hit their lifetime highs on the bourses.

The other three — Ceat, Apollo Tyres and JK Tyre and Industries — are 10-22 per cent away from their all-time highs.

Rubber prices have been falling and seem to be in a bearish phase, according to analysts. Shanghai rubber futures tumbled a further 6 per cent and now quotes 25 per cent below the recent highs on worries of rising inventory (Shanghai exchange inventory nearing all-time highs) and a sharp pick-up in output/tapping in Thailand post floods.

While this will significantly help reduce costs, demand is seen getting a boost as imports from China have reduced. “Chinese manufacturers are focusing on the US market (more profitable one) since the US Department of Commerce decided not to impose anti-dumping duties on Chinese truck and bus radial (TBR) tyres. Chinese players have raised their TBR tyre prices for the Indian market by 10-15 per cent,” Nitesh Sharma, analyst at PhillipCapital, pointed out in a report.

TBR tyres have been the fastest growing segment for the tyre industry, accounting for two-thirds of the ₹35,000-crore investments made in recent years and 55 per cent of the tyre industry’s revenues in India. Currently, China accounts for 90 per cent of total TBR imports into India.

This has led to better pricing power for tyre makers here. According to Sharma of PhillipCapital, the industry is geared to take a cumulative 15 per cent hike by mid-April. Aggressive price hikes coupled with rising volumes in the TBR segment augur well for the sector.

Combined market capitalisation of the five tyre companies has jumped 57.25 per cent in the last one year, compared to 48 per cent for the six frontline automobile companies: Maruti Suzuki India, Tata Motors, Hero MotoCorp, Bajaj Auto, TVS Motor Company and Ashok Leyland.

The trend will continue as automobile companies are still not out of the woods of demonetisation while most of the revenues for tyre companies come from the replacement market, which is relatively less affected from demonetisation or economic cycles.

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