India: Rubber prices surge 15% in April, will it affect tyre stocks?

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Natural prices which account around 35-40 per cent of raw material cost of manufacturers have increased by over 15 per cent in April 2016 so far. According to market analysts, the rise in rubber prices can hit financials of tyre companies going forward. Shares of tyre majors such as MRF and declined by 4 per cent and 3 per cent respectively since the beginning of the ongoing financial year till April 20. However, TVS Srichakra, JK Industries and Balkrishna Industries gained 9.42 per cent, 3.21 per cent and 1.98 per cent, respectively, in the same period.

According to thomsonrubbers.com, RSS 3 and RSS 4 type of are the preferred raw material for radial . RSS 4 prices in Cochin and Kottayam jumped 17.39 per cent to Rs 13,500 per 100 kg on April 20 from Rs 11,500 per 100 kg on March 31, 2016. Rubber prices plunged by 8 per cent in the previous financial year ended March 2016.

India: Rubber prices surge 15% in April, will it affect tyre stocks?
According to market analysts, the rise in rubber prices can hit financials of tyre companies going forward. (Photo: Reuters)

During 2015-16, shares of TVS Srichakra surged the most — 51 per cent, followed by Krypton Industries and Apollo Tyres which gained 5.55 per cent and 0.25 per cent. All other tyre stocks ended the previous fiscal in red with Tirupati Tyres and JK Tyre falling 43 per cent and 28 per cent respectively.

Mahantesh Sabarad, deputy VP, research and Deep Shah, analyst, SBICAP Securities, said, “As account for large chunk of raw material costs coupled with rise in crude derivative products on the back of increase in , we expect gross margins of leading tyre manufacturers to contract from Q4F16 by around 100-150bps. Any further increase in rubber prices from here on will directly impact operating profitability of manufacturers given that they may find it difficult to pass on the increase to finished product prices given intense competition. Hence, we anticipate moderate return from major tyre companies going ahead.”

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For the quarter ended December 2015, TVS Srichakra reported net profit of Rs 48.14 crore, up 81.93 per cent, against Rs 26.46 crore in the same quarter last year. Apollo Tyres, Ceat and MRF reported 51.17 percent, 28.66 per cent and 19.98 per cent year-on-year growth in net profit figures to Rs 278.52 crore, Rs 113.23 crore and Rs 388.15 crore, respectively.

According to market experts, an investor should zero in on competition and pricing power of a company before investing in a tyre stock. Analysts from SBICAP Securities said, “MRF and Ceat enjoys pricing power in two-wheeler and PCR (Passenger Car Radial) tyres whereas JK Tyre despite being leader doesn’t enjoy pricing power due to Chinese competition.” Other factors such as relationship of a tyre company with original equipment makers (OEMs), distribution reach, overseas presence, management track record and existing product portfolio and margin profile can also help investors to select a quality tyre stocks for their portfolio.

For investment in tyre companies, SBICAP Securities is bullish on JK Tyre & Industries shares. The brokerage house in a research note said, JK Tyre & Industries Ltd’s has completed acquisition of 64 per cent (balance 36 per cent by sister concerns) equity shares of Cavendish Industries Ltd (CIL) from its existing shareholder Kesoram Industries Ltd (KIL). With this acquisition, JK Tyre will now be able to penetrate the highly fragmented, but fastest growing, two-wheeler tyre space in . SBICAP has ‘Buy’ rating on JK Tyre stocks with a target price of Rs 135.

JK Tyre & Industries shares were at Rs 86.90 on Wednesday (April 21).

Chandan Taparia, derivatives and technical analyst, equity research, Anand Rathi Financial Services, said, “We are bullish on Ceat. One can buy the counter on dips for a target price of Rs 1,250.” The scrip was at Rs 1,134.65 on Wednesday.

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