Tyre Stocks In Focus With Upswing In Rubber Prices

Tyre manufacturers' commentary on raw material prices will be in focus as they announce their earnings for the quarter and year ended March. Rubber prices have jumped on account of supply-chain disruptions following turmoil in the Red Sea. From a low of Rs 159 per kg in January 2024, the cost of natural rubber has risen to Rs 183 per kg, according to data from Indian Ministry of Commerce and Industry's Rubber Board. The companies in their respective conference calls after the third-quarter results highlighted these challenges.

The total quantity of natural rubber produced from April to November 2023 was 526,000 tonnes, up 1.7% from 517,000 tonnes produced during the same period in the previous year. During the same period, cumulative natural rubber imports fell 12.8% to 330,203 tonnes.

Although lower imports might have led to an increase in prices over the past few weeks, this cannot be confirmed, and we await some qualitative comments from listed tyre companies in the upcoming quarterly conference call for the January to March period.

The crisis in the Red Sea has affected all export-heavy industries by pushing shipping costs through the roof; the same has been the case with tyre manufacturers.

Apollo Tyres Ltd.'s management highlighted this concern during their third-quarter conference call. "The freight costs have gone up by around 30% to 40%, but that's short-term," said Managing Director Neeraj Kanwar. "The transit time has increased to come to Europe, not to America, because America takes a different route. But for Europe, it takes around 14 to 15 extra days." Europe forms roughly 30% of revenues for Apollo Tyres, and commentary on the Red Sea issue will be a key monitorable.

CEAT Ltd.'s management, too, echoed similar sentiments. They expect raw material costs to be in line with the third quarter, while the raw material basket observed an increase of about 2.5% in the second quarter of the financial year, the management had said. This, along with the minor price corrections seen in international markets and adverse product mix as well, led to a gross margin contraction to the tune of about 202 basis points on a QoQ basis, while there has been substantial improvement in gross margin vis-à-vis the same period last year, they said.

They also made some price corrections in the export market to be competitive with other players. The above-mentioned price cut, among other factors, did lead to volume growth of 25% YoY. The company's sale to OEMs is largely insulated from any price pressure, as 70% of their OEM volumes are indexed to underlying raw material prices.

The management of JK Tyre & Industries Ltd. affirmed that the global environment continues to remain challenging as supply chain disruptions have erupted on account of the Red Sea crisis, which has increased ocean freight rates. Managing Director Anshuman Singhania quantified that on a quarter-on-quarter basis, raw material prices have increased by about 2% while expecting raw material prices to remain range-bound in Q4 FY24.

However, they say the demand is on a recovering trajectory in the global market.

Nomura's channel checks across a few tyre dealers indicate that the prices of a few high-selling stock-keeping units of truck, bus and radial tyres have been reduced by Rs 500–800 per pair.

They affirm a price reduction of 1.5–2.0% by leading tyre players like Apollo Tyres and JK Tyres, which is in response to a similar price-cut action taken by the truck segment leader, MRF, the brokerage said in its March 7 note.

They have a lower rating on Apollo Tyres, with a price target of Rs 520 per share.

Nomura recently upgraded its price target on CEAT to Rs 2,751 apiece, implying a 7% upside. This is despite the recent uptick in crude and rubber prices to come in Q1 FY25, while they expect CEAT to deliver an 8% revenue CAGR over FY24–26 and Ebitda margins to stabilise at 13% over FY25–26.