The Economic Times of India reported, “We all know that the performance of the tire industry is directly linked with the performance of the automobile industry. The recent data flow in terms of auto sales figures suggests the onset of revival in the auto industry, and this would result into higher order inflow for the tire manufacturing companies like CEAT, Apollo Tyres, MRF and Goodyear India.
Already the tire manufacturing companies are getting the benefit of falling rubber prices, and with the pick-up in auto demand they will have the advantage of both lower raw material price and higher sales volume growth. Moreover, the replacement market is already giving a good business. So the outlook for the industry is robust going forward. The prices of rubber, which is the key raw material for the tire companies, have been on a declining trend for the last four years. They have fallen from the highs of Rs. 23700 per 100 kg in December 2011 to Rs. 13320 per 100 kg.
If we take a call from the management of CEAT, a strong player in the industry, the raw material prices are expected to remain stable for the next 6-8 months. This will auger well for the company in terms of better profit margins going forward. Now coming to the demand scenario in the automobile industry, the monthly sales data by the car makers is on the rising trend in the last three months. For the month of July car sales in India jumped by 11.3 percent to 183,176 units as against 164,572 units in July 2013.
However, for a better picture six months data will give more convincing view about the revival of the industry. Having said that, the process of bottoming out in the sector cannot be overlooked at this juncture. Also with the upcoming festive season, the demand outlook is positive for the industry. The new government at the Center has already acted as a catalyst in bringing back the confidence among the investors and the same got reflected in the domestic bourses where FIIs are seen buying in the Indian equities. And the Sensex is making new highs every now and then. In order to meet the expected demand by the OMCs, the tire companies have already initiated the process to meet such demand.
This can be justified by the recent data from the state-run Rubber Board showing rising rubber import on the back of increasing overseas purchase of rubber by the tire makers mainly due to a steep fall in the international rubber prices. During the period between April 2014 and July 2014, the rubber import has increased by 47 percent to 133,789 metric tons as against 90,580 metric tons in the same period of fiscal year 2014. Stock prices of the tire companies have added huge value to their respective shareholders, but the upside potential is still there considering the growth opportunity available.