Tyre companies sped to 45% returns in 6 months, but why are they now on a bumpy ride?
Tyre companies were initially established in India to cater to the demands of the Indian market. These companies have continuously enhanced the quality of their products, contributing significantly to the growth and development of India’s automobile industry and overall economy.
As per a report by IIFL Research, the tyre industry has witnessed an impressive 20% growth in revenue over the past two years, however, there is a potential challenge on the horizon – Yes, we are talking about the increasing prices of crude oil.
In this article, we will delve into the current state and the prospects of the tyre industry in India. Furthermore, we will explore how the rising costs of crude oil could impact tyre companies in the country.
As reported by Business Standard, tyre manufacturing companies in India have been riding a wave of success recently. Over the past six months, these companies have delivered impressive returns, with an average of 45%.
While Apollo Tyres saw a slight dip in performance in the last month and a half, others like MRF (30%), CEAT Tyres (56.67%), and JK Tyre & Industries (85.70%) have provided exceptional returns from March 27th to September 25th, 2023.ti
The primary driver behind this growth has been robust demand in the tyre industry, particularly in the replacement market, which accounts for more than two-thirds of total sales.
According to IIFL Research, the industry’s revenue has surged by 20% over the past two years, with increased sales volume contributing significantly, accounting for 10% of this growth.
Improved profit margins have also played a pivotal role in this growth story. During the April-June quarter, gross margins expanded by 360 to 940 basis points, benefiting from lower raw material costs.
However, the upward trend in crude oil prices may present challenges for these companies in the near future.
Why is Crude Surging?
Oil prices have been on the rise lately due to increasing worries about a shortage in supply. This concern stems from recent production reductions by major oil-producing nations like Saudi Arabia and Russia. On September 19, 2023, the international oil benchmark, Brent crude, reached a 10-month high, surpassing $95 per barrel. As of September 25, crude oil was trading at approximately $93 per barrel. Now, these production cuts have been extended until the end of the year, which is expected to push the price of crude oil towards the $100 per barrel mark.
Equation Between Crude Oil and Tyre Companies
Crude oil prices play a significant role in the production of tyre companies since crude oil is a key ingredient in tyre manufacturing. It is used in various tyre components like rubber, nylon, or polyester.
When crude oil prices go up, it directly affects tyre production costs. Higher crude oil prices mean higher production costs for tyre companies. To maintain their profit margins, these companies might have to raise the prices of their products.
Moreover, fluctuations in crude oil prices can impact the entire supply chain for tyre production. If there is a shortage of crude oil, tyre companies may face disruptions in their production processes. This can have a cascading effect on the availability of tyres in the market.
As per a Business Standard report, crude oil prices are heading towards $100 per barrel, and the increasing cost of natural rubber is creating potential pressure on tyre company margins. If these companies don’t raise their product prices, there is a risk of a 10 to 30% decline in their earnings per share estimates for the year 2024-25 at current price levels.
Some experts believe that the surging international prices of natural rubber and crude oil could indeed impact the profits of tyre companies in the upcoming quarters.
However, CRISIL Ratings offers a different perspective. They estimate that Indian tyre companies could grow from 6% to 8% annual production volume, reaching a new high of 27 lakh tonnes in 2023-24. The driving factors behind this growth are the continual increase in replacement sales and the demand for both commercial and passenger vehicles.
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 are for information purposes only. This is not an investment advice.