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Wednesday, May 25, 2022

Soft rubber prices to aid tyre makers

Robust replacement demand also to help increase margins

Amid sluggish automobile market conditions, Indian tyre makers are expected to sustain good margins, supported by favourable rubber prices and robust replacement demand.

While orders from auto OEMs (original equipment manufacturers) are weak due to demand slowdown in the vehicle market, stronger replacement demand has helped tyre firms to grow revenues.

Industry analysts project a stable scenario on the rubber price front for the next few quarters. This would help companies sustain their margins. Rubber contributes about 50 per cent in volume terms and 55-60 per cent of the total raw material cost for tyre companies, depending on the product mix.

“Soft demand, coupled with good production and decent inventory levels, has led to rubber prices remaining under pressure. Going ahead, in the short-term, we believe rubber prices may recover from these low levels. However, in the medium-to-long term, rubber prices will remain favourable for tyre manufacturers,” said Nishant Vass and Venil Shah, analysts of ICICI Securities Ltd.

The performance of JK Tyres in the first half has beaten estimates on all counts on the back of favourable raw material prices and better capacity utilisation levels, while Apollo Tyres and MRF have benefited from lower rubber costs.

“Considering the estimated surplus of 134,000 tonnes in global natural rubber supply in 2013 as per a report by the Economist Intelligence Unit, we expect rubber prices to remain at lower levels which will help in stabilising MRF’s EBITDA (earnings before interest, tax, depreciation and amortisation) margin, said Nishant Sharma of Angel Broking.

For Apollo Tyres, the share of replacement segment in total sales has gone up to 77 per cent from about 70 per cent last year.

“Rubber prices have been volatile during the last two years and have been declining in the recent past due to slowdown in automobile production and import through duty-free channels that accounted for 50 per cent of the total during 2012-13 and rose by 208 per cent year-on-year till September in 2013-14 due to favourable international price, pointed out Mr. Sharma. Domestic rubber prices, after having peaked at about Rs.240 per kg in April 2011, declined to Rs.160-Rs.170 per kg during 2012-13 and to Rs.153 at present.

Source: The Hindu

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