In the second week of last September, Mumbai-headquartered corporate office of tyre maker Ceat had an occasion to celebrate. For the first time, the company’s market cap had hit a mark of Rs 5,000 crore. The party lasted for a while and the company’s stock hit a fresh high of Rs 1,318 in October.
But a reverse trend started early this year with a spurt in price of rubber, the industry’s key raw material. By June this year, Ceat’s stock had pared much of the gains to touch a 52-week low of Rs 731. But tyre makers have got lucky again.
Rubber Board data shows that rubber prices zoomed from Rs 114 a kg in February to Rs 149 in July this year, up 31 per cent. In last two months, prices have softened again to Rs 120, not every different from what they were early this year. The result: Ceat stock has zoomed 65 per cent since June end. Country’s biggest tyre maker, MRF saw its stock hit a new high on Wednesday. It has gained 30 per cent in value in last one month alone. Stocks of JK Tyre and Apollo hit their 52 week high last week.
“The rubber prices had bottomed out in February 2016, and then, increased steeply till May. It started softening since July and is now stable at a new level. We are hoping that it would remain at the current levels for the next few months,” said Satish Sharma, President (Asia Pacific, Middle East & Africa) at Apollo Tyres.
There are other triggers besides benevolent rubber price. Sales of passenger vehicles (car, vans and utility vehicles) have grown by 11 per cent in first five months of the current financial year. Two wheeler sales have jumped by a sharp 16 per cent as well. The comparable growth for the corresponding period last year was just 6 per cent for passenger vehicles while two wheelers were flat. Sales growth this year has resulted in an increased demand for tyres. Not to forget the strong demand in replacement market as well.
“Our volumes have grown in double digits in the first quarter of this fiscal, as compared to the same period last year,” said Sharma. Margins were not significantly higher to previous year, when it touched a historical peak. But rising volumes and a stable raw material will help margins in the current quarter. Analysts expect rubber to remain stable.
Rubber prices will stabilise at the current levels due to the prevailing rubber demand-supply dynamics. Crude oil prices have also increased from the low levels seen in February 2016, but are unlikely to increase further. Thus, tyre companies will not face increased input pressure over the next 12 months, said a recent report by India Ratings and Research.
The only concern for tyre makers remains in form of Chinese imports, especially in the replacement market for truck and bus tyres. “The cheap imports continue to make inroads into the Indian market, putting at risk the investments made by the domestic tyre industry,” said Sharma.