Tyre companies set for a temporary blip in the performance

On March 29, 2016 in this column we had written on tyre stocks positively (“Tyre stocks set for re-rating”). Since then the combined market cap of top four tyre stocks moved up by 25%. One of the major reasons for such return was global deflationary pressures, which lasted for more than 2 years. These pressures led to severe fall in the prices of resources like crude oil and natural rubber.

The annual revenues of the top 4 tyre companies almost stagnated during the period FY14 to FY16. However, their annual net-profits soared anywhere from 78% to as high as 196% in FY16 over FY14. As synthetic rubber derived from the oil and natural rubber are the core raw materials for the tyre companies, they benefited in terms of significant margin expansions during the period FY14 to FY16, and also during the first half of the current fiscal.

However, the fortune from the tyre stocks is changing quite adversely as the prices of both key raw materials have gone up substantially over the last few months. Thanks to significant moderation in the global deflationary pressures, the prices of crude oil have bounced 67%, while natural rubber prices shot up 106% in the international markets on a year-on-year (YoY) basis. In tandem with the oil prices, the prices of synthetic rubber have also gone up in similar proportion. Consequent to the firm global trends, the domestic natural rubber prices have also moved up by 70% on YoY.

Impressive performance of the tyre stocks over the last three years was mainly supported by the cheap raw materials. Even the Index of Industrial Production (IIP) grew in poor single digit, the tyre industry suffered from both dumping of foreign tyres and also poor sales growth in the automobile sector in the last two years. In fact, during the first 10 months (April-January) of current fiscal (FY2017), the sales of all segments of the automobile sector either de-grew or grew in just single digit on YoY basis.

The trend in the automobile sector worsened in January 2017 – while the passenger vehicle sales alone grew in double digit YoY, sales of total commercial vehicles stagnated, and those of 3-wheelers and 2-wheelers fell 28% and 7% YoY, respectively. Thus, unless the government helps the tyre industry in terms of imposition of anti-dumping duty on import of cheap tyres or the domestic automobiles sales growth pick up in significant double-digit, the tyre stocks are expected to under-perform in the short-term.

The writer is founder & managing director, Equinomics Research & Advisory Pvt Ltd