Stocks of tyre companies hit their 52-week highs last week on weakness in prices of natural rubber prices, a key raw material which accounts for 30 per cent of revenue for players such as Apollo Tyres. Prices of rubber, Rs 144 a kg at the start of August, have fallen 10 per cent to Rs 129 a kg. The fall has a large favourable impact on financials of tyre companies.
Barring Apollo Tyres, others witnessed a year-on-year improvement in margins. Higher other expenses dented margins of Apollo Tyres, both on year-on-year and sequential basis. After June quarter results, analysts had expected margins to moderate, given the rise in natural rubber prices, which impact with a lag of a quarter.
Another near-term trigger would be the imposition of anti-dumping duty on Chinese imports. The government had started an enquiry into the import of truck and bus radial tyres, the biggest segment by revenue within the tyre space to see if there is a case to slap a duty. While truck and bus radials have grown 64 per cent in FY16, they are up 32 per cent in the June quarter.
Chinese tyres have a 30 per cent share in the truck and bus radial market and quote at prices which are 25 per cent lower than Indian tyres. While healthy margins of Indian players have been key reason for government delay on taking regulatory action, any import duty could help Indian companies bridge the price gap. Given the rising Chinese imports, Indian companies have had to cut prices to stay competitive, and have turned to volume driven leverage to improve their revenues and margins.
Given the lack of pricing power, the other area companies will gain will be rise in volumes. Some have have started to diversify their product portfolios to cater to other segments of the auto sector. Both JK Tyre and Apollo Tyres are looking at the two-wheeler space (in JK’s case three wheeler as well) which should boost volumes in a fast growing space, though the segment is overcrowded. In addition to this most companies will benefit from demand pick up from the replacement segment (50-70 per cent of sales) as well as higher off take from the auto makers.