Apollo Tyres Ltd., CEAT Ltd., and JK Tyre Ltd. are trading at 52-week highs. One of the biggest triggers for the recent surge is the cool-off in commodity prices. Yet, the second quarter of the current fiscal was a mixed bag for tyremakers, mainly impacted by high input costs. Margins narrowed in the first half
The second half, however, looks promising. Positive momentum from original equipment manufacturers in the auto sector, replacement demand, and lower raw material costs could come to their rescue.
Falling Rubber And Crude Oil Prices
After witnessing hyperinflation in its key input costs over the last 15–18 months, the industry is seeing a moderation in natural rubber as well as crude prices, with a lag in synthetic rubber and carbon black prices. This augurs well for a margin recovery in the second half of the current fiscal.
Every 10% change in natural rubber, synthetic rubber, and carbon black prices—over their FY22 averages—will lead to a change of 160, 80, and 100 basis points, respectively, in Ebitda margins.
Crude oil is trading at a 10-month low, and rubber is trading at a two-year low. The decline in rubber prices, which began in July 2022, has continued. Natural rubber prices are down globally due to weak demand in China and an energy crisis in Europe.
In the domestic market, prices have been impacted by subdued demand, erratic rains, and the impact of global markets. West Texas Intermediate crude oil prices are down approximately 35% from their peak in CY22.
This drop in raw material prices will aid the margins and profitability of tyre companies going forward. Tyre companies are expecting margins to be in the range of 10–12% in FY23. Analysts at Motilal Oswal, Yes Securities, and Reliance Securities expect the margins of tyre companies to get a boost of approximately 200 to 220 basis points in the second half of the current fiscal.
Raw Material Break-Up By Volume
Synthetic rubber and natural rubber each constitute approximately 30–35% of the raw material basket by volume and value for domestic tyre companies, and the price fluctuations in these commodities have a significant effect on the margins of tyre companies.
CEAT's management said in its Q2 conference call that they had taken an average price hike of around 4% in the second quarter to mitigate the impact of higher raw material costs. The company took the largest price increase in the two-wheeler replacement category, at around 8–9%.
CEAT is further expected to see a price increase of around 1% in the third quarter. The company expects its raw material basket to witness a cost decline of around 2.5–3% quarter over quarter in the third quarter due to the softening of crude oil and its derivative prices. The company expects the margins to improve from the third quarter onward.
The management of JK Tyre indicated in its Q2 conference call that raw material and other input costs have started softening after a long spell of unprecedented increases, which is likely to improve margins in the medium term.
The recent softening in raw material prices would be visible from Q3 onward. The margins would be slightly better than Q2 in Q3, and also the demand remains robust.
According to Reliance Securities, healthy OEM demand, a likely revival in replacement demand, and better traction in Apollo Tyres' EU operations, despite the overall global slowdown, offer comfort. They also believe that the regular price hikes taken by the company and the declining commodity costs will expand its margins strongly going forward. The company took a price increase of around 5% in 2QFY23.
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