Shares of tyre manufacturers have rallied by up to 10% in otherwise subdued market on hopes of higher margins due to falling rubber prices.
Ceat, MRF, J K Tyre, TVS Srichakra, Apollo Tyres, Goodyear India, Falcon Tyres and Dunlop India are trading higher in the range of 5-10% on the Bombay Stock Exchange (BSE). The benchmark S&P BSE Sensex was up 0.25% at 1140 hours.
Prices of natural rubber, the most important raw material for the industry, have dropped to multi-year low in the international market on account of poor demand from countries like China and oversupply of the commodity.
According to rating agency ICRA, the softer input costs regime over the past one year has proved highly favourable for the industry with industry wide operating profit margins (OPM) climbing to historic peaks.
“With the industry in the midst of a large capital expenditure phase, the benefits to the OPM have not directly trickled down to the net margins (NPM). However, the high cash accruals of the past two years have lent flexibility to the industry leading to a decline in industry wide leverage and substantial cash build up,” rating agency said in research September research report.
ICRA expects demand for tyres to grow by 6%-8% during 2014-15, driven largely by the Truck and Bus (T&B), PV and scooter segments. Replacement demand for T&B is also expected to grow as the economic activity in the country revives, thus leading to increased goods movement.
“The tyre industry is poised to grow in double digits over the next two years. Recovery in the OEM segment (contributing about 30% of the demand) due to positive consumer sentiment, and better replacement sales due to improved economic scenario and fleet utilization levels are likely to boost demand,” says analyst at Angel Broking in recent client note.
Among the individual stocks, Ceat has rallied 10.4% to Rs 814, followed by J K Tyre (8% at Rs 503), Apollo Tyres and Goodyear India (7% each at Rs 205 and Rs 689 respectively), while TVS Srichakra, MRF, Falcon Tyres and Dunlop India are up 5% each.