The aftermath of a roaring bull rally in tyre stocks hints at an approaching breaker. Will this leave manufacturers on the edge?
As we step into the fast-paced world of the automobile industry, where innovation and progress are constantly on the move, auto ancillary companies play a crucial role. Today in auto ancillaries, we are talking about tyre stocks.
In recent times, the growth of these tyre stocks has been unstoppable, with investors riding the wave of success. However, looming on the horizon is a speed breaker, a potential obstacle that threatens to disrupt this upward trajectory.
Curious to know which speed breaker we are talking about? Keep reading to decode.
What’s Happening?
Leading tyre stocks like MRF, CEAT Ltd, JK Tyres and a few more are filled with optimism and are on a strong bullish rally. Investors are riding the rally and are enjoying good profits.
The surge in these tyre stocks can be attributed to their remarkable performance because of two factors. Firstly, the robust top-line growth played a pivotal role in rallying these stocks to new heights. As economies recovered from the impact of the pandemic, there was a strong demand for vehicles and related products, including tyres.
This surge in demand created a favourable environment for tyre manufacturers, resulting in increased sales and revenue, thus driving the upward trajectory of their stocks.
Secondly, the growth in profit margins further contributed to the excitement surrounding these stocks. According to Mint, major tyre makers reported strong results for Q4FY23.
One of the significant factors behind this expansion in margins was the decline in commodity prices, particularly those related to the production of tyres. Lower costs for raw materials, such as rubber and other essential components, allowed tyre manufacturers to maintain healthy profit margins.
This combination of strong top-line growth and improved profitability due to lower commodity prices created an enticing investment opportunity, attracting investors and fueling the rally of these tyre stocks.
However, amidst the current success, a potential breaker looms, posing a challenge to the short-term prospects of tyre stocks.
Problems Looming Ahead for Tyre Stocks
As everything has bounced back to normal, the low base effect, which was seen because of the pandemic, is slowly wearing off, and rubber prices are gradually becoming expensive.
According to CEIC Data, grade RSS4 rubber which is used to manufacture rubber tyres, was trading at an average price of Rs 14,220/100KGs in January 2023, which rose to Rs 14,308/100KGs in February 2023 and Rs 15,283/100KGs in April 2023.
This rising rubber price may cause a threat to tyre makers as it will increase their manufacturing costs and lower their margins.
What’s Next?
According to Mint, in the fiscal years 2022 and 2023, all tyre companies implemented substantial price increases in domestic markets to offset the impact of rising input costs.
If the production cost increases, we might see a similar strategy implemented by tyre makers this time as well.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The companies mentioned in the article are for information purposes only. This is not an investment advice.
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