TYRE COMPANIES - TREADING ON A GOOD ROAD AHEAD
By Ruma Dubey
Over the past couple of days, tyre stocks have been hitting the highway. Ceat, TVS Shrichakra and JK Tyre, all three have been scaling new 52-week highs. MRF is status quo. Balkrishna Industries is also in the green but Apollo Tyres, with the overhang of mounting debt due to its takeover of Cooper is the only tyre stock in the red.
Does this mean that the auto sector has bounced back because logically, if tyre stocks have a reason to rejoice it would in all probability have more to do with the direct user of tyre – automobiles? Well, no such good news from the auto sector. Tyre stocks are moving not because of the prospects of auto companies but due to its own advantage, which has suddenly ‘cropped’ up.
The price of rubber, the main ingredient which goes on to make the tyres, has slumped dramatically. The local rubber price has fallen from Rs.195/kg in September to Rs.159/kg, a drop of 18% in less than three months. And the best news is that – prices are expected to slump further. This is based on the fact that in coming days, supply of rubber will go up as October to January is the time when peak tapping happens. Over and above all this, rubber suppliers were sitting on stocks, holding on to its, expecting prices to go up and with their calculations going for a toss, this supply of old stock is also coming into the market now. 90% of natural rubber in India comes from Kerala and while tyre makers rejoice, rubber cultivators are crying, urging the Govt to hike import duties, with some even demanding a complete ban on rubber imports. Well, this is election time and politicians are eager to please people and there is word on the street that this demand of rubber makers, if prices slide down further could indeed be taken up. Thus a hike in import duty, which is currently at Rs.20/kg or 20%, whichever is lower, say many, is not far-fetched.
On the other hand, tyre companies have already stocked on inventory, mainly from imports and even if, prices go up, they will now wait and look for much lower prices. Around July-Sept, due to heavy rains and hoarding of rubber by farmers in anticipation of a better price, prices had gone up to worrying heights and tyre makers were worried that with auto sales also on the slump and high rubber prices, they were heading into rough weather. Companies then, due to this worry in the Indian markets, imported enough to crimp all demand in the local market and what we are seeing now is an effect of that too, with all hoarded supplies also coming into the markets.
All this translates into? Price of rubber is not going to come down in a hurry. We will witness a buyers market and this means good times for tyre makers. Look at Ceat. The company’s cost of raw material for H1FY14 was 67% of total sales and 76% of the total operating cost. JK Tyre‘s raw material cost comprises 69% of total sales and 75% of total operating cost. TVS Shrichakra too has a similar costing - 66% of net sales and 70% of operating cost. MRF ends its year on 30th Sept and its raw material cost too eats away 70% of net sales and Balkrishna Industries is much lower, eating 48% of net sales.
If price of rubber remains around the same levels or climbs down further, the margins of tyre companies are expected to see a straight improvement of 10-13%. To boost volumes, companies might lower rates but they are sure to retain the lion’s share of the margin for themselves. Q4FY and early FY15, we could see direct benefits of the same.
Yes, the road ahead for tyre companies currently looks good, with a beautiful vista on the horizon.