The Tyre stocks which were considered to be quiet stable(except MRF) in last decade, saw an amazing rally since last few years. Here we will discuss the major threats & strengths of the Tyre Industry.
The Tyre Industry of India has shown great growth in terms of quality, earnings, global market share by continuously raising their product standards in order to be globally competitive.
Some of the companies which have achieved great growth in last 5 years are MRF, Apollo Tyres, Ceat Tyres, Bridgestone. Some companies have marked a CAGR of more than 80% p.a. in last 5 years.
Just like a person is dependent on food to survive, the tyre manufacturers depend on the rubber production as rubber constitutes about 75% of the raw materials used to make tyres. Now, if something bad happens to rubber(like increase in rubber prices or low supply of rubber), it is a bad news for the Tyre industry. Further, rubber is produced in 5 major countries namely Indonesia, Thailand, Malaysia, Vietnam and India.
There are 2 types of rubber used in manufacturing of Tyre, viz, Synthetic rubber and natural rubber. In the past, synthetic rubber price hiked, and due to which demand of natural rubber increased in order to substitute majority of synthetic rubber.
So what are the threats to those immensely rising Tyre Industry?
The biggest shock was the flood in Thailand (in November 2016) which destroyed a lot of rubber production and hence Thailand cut its rubber supply globally, simultaneously increasing the prices of natural rubber. (One must note that Thailand is one of the largest rubber producing country).
Cheap Chinese rubber imports in India has ruined the job of local farmers and they have created apathy for farmers living in Kerala and other rubber growing areas in India, to carry out rubber agriculture.
The Association has demanded that anti-dumping duty should be levied on the rubber imports from China, so that exports and local consumption of Indian rubber can increase.
Rubber growing countries like Malaysia has found an alternate use of rubber, which is, using rubber in making engineered products (i.e. products used in construction of buildings, etc.), roads. This innovative use of rubber in
Malaysia has definitely reduced their costs but it will affect the supply of rubber to the Tyre Industry.
Rubber cannot grow in winters. And most of the rubber producing countries (except India) have entered early winters, which is not a good sign for rubber growers.
The demonetization affected the Tyre manufacturing companies. Due to cash crunch in the market, the rubber imports by those Tyre companies reduced substantially.
Well, don’t worry Tyre stock holders, there are things which can fancy you and I even think that the strengths can even intrigue those who are thinking to take the benefit of the rally in Tyre stocks. Below are some of the strengths and opportunities for the Tyre Industry:
Due to decrease in supply from Thailand, the domestic rubber price rose 24% which has allured the Indian farmers to enter the rubber agriculture again, which they left because of minuscule returns. And so, the Natural rubber output has increased by 12% in December’16(compared to December’15) and is expected to increase by 15% in 2017.
Large quantity of rubber agriculture will be ready for harvesting in India in the early months of 2017.
On a YoY basis the rubber imports have decreased by 39% which gives a lot of Indian rubber growing farmers an opportunity.
The Indian budget of 2017 has focused mainly on Infrastructure. The rise in infrastructure sector will bring a rise in transportation sector, and the transportation sector will eventually bring rise in the Tyre manufacturing sector.
The Tyre companies of India have been very much successful in expanding their business globally by acquiring many companies and starting their operations in Europe, USA, Hungary, etc. New orders will increase their revenues and eventually the shareholders will be benefited.
For a span of time there will be hike in tyre prices due to hike in price of rubber. Companies are estimating a rise of 5-7% in their selling prices against 20-25% rise in rubber price. This will eventually cut the margins of the Tyre Industry.
Concluding, we can say that a fall may be seen in Tyre companies revenue for a short to medium term but the companies like MRF, Apollo Tyres and other top compaies would not fell deep. And as soon as the dust settles down, the companies will show their performance again in the market.