Tyre stocks skid on rising oil prices

Priya Kansara Mumbai | Updated on May 21, 2018 Published on May 21, 2018

Margins to get hit if the trend continues

Tyre stocks have been slipping due to rise in crude oil prices as crude-based raw materials such as carbon black and synthetic rubber form a significant portion of the total raw material cost for tyre companies.

Stocks of Balkrishna Industries, Apollo Tyres, Ceat, JK Tyre & Industries and MRF closed down 1.2-3.9 per cent on Monday. These companies already disappointed analysts with lower-than-expected operating profits and/or pressure on operating profit margin in the March 2018 quarter even as topline growth was encouraging, thanks to robust volume growth.

Raw material costs form 50-60 per cent of tyre companies’ revenues and non-natural rubber (mainly crude-linked) forms 50 per cent of total raw material cost. Hence, movement in crude oil prices,which recently hit $80 a barrel, is a key event for tyre companies. Prices of carbon black and synthetic rubber are on the rise even as natural rubber prices remain benign, analysts said.

Balkrishna Industries, which reported its March 2018 quarter performance on May 17, matched its peer performance in terms of good volume and topline growth but lower-than-expected operating profit. ICICI Securities attributed the reason to cost pressure in non-natural rubber commodities, such as synthetic rubber and carbon black.

“We expect raw material costs to increase by 3-4 per cent over the next two quarters due to recent increase in crude prices, which will, in turn, require price increase of 2-2.5 per cent,” said Kotak Institutional Equities while downgrading the MRF stock to ‘Reduce’.

Higher expenses drag

While revenue growth was strong at 16 per cent for MRF (on the back of a 13 per cent volume growth), gross profit margin declined sequentially and operating profit margin was below estimates due to higher expenses.

Prabhudas Lilladher said Ceat management has cautioned about sequential increase in overall raw material prices over the next two quarters. The brokerage firm continues to have a cautious view on Ceat, which again disappointed on the margin front in Q4.

Edelweiss added on Ceat: “Management expects Q1FY19 to feel the impact of 1-2 per cent increase in cost due to higher crude prices. Q2 could see a larger impact at 2-2.5 per cent if crude oil price rise sustains.”

Apollo Tyres too, disappointed slightly on operating margin. Even though companies hike prices, it is never in the same proportion as the rise in raw material costs. In any case, companies will only be able to maintain the current margin, and not expand the same.

Published on May 21, 2018
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