Tyre manufacturers struggle amidst rising costs
One can argue that indices have fallen sharply, but some sectors have taken it on their chin. One such example is that of tyre industry. Apollo Tyres has already corrected 26.6% from its Oct-21 peak to Rs.183.50, while MRF has corrected 25.9% from its peak price to Rs.66,949. Other tyre stocks like Balkrishna Industries, JK Tyres and even Ceat have corrected rather steeply from their yearly highs. Most stocks are actually inching towards their yearly lows.
What exactly has gone wrong with the tyre stocks. There are broadly 3 reasons with the third reason being the most important, so we will cover that in detail later. The first reason is the slowdown in auto production due to supply chain constraints. Since the demand for tyres is derived demand, it tends to face tepidness in demand in tandem with the fall in auto output. However, replacement market has still been fairly robust.
The second reason has been the huge penalties that have been imposed on the tyre companies by the Competition Commission of India (CCI). These penalties pertain to allegations of cartelization against these tyre manufacturers. However, most of the penalties imposed by CCI have been disputed by the tyre companies and they are confident about this factor not having a very significant impact on their financial numbers.
The third and, perhaps the most important reason for the sharp fall in tyre stocks has been the cost push inflation. Most of the key inputs for tyre manufacturers like carbon black, rubber and oil have seen a sharp surge in the last few months. That has resulted in margin compression and despite frequent price hikes, the costs spikes are only partially covered. Just to give a picture, compared to the year-ago levels, input costs have shot up by 22%.
Tyre companies have only been able to pass on about 12-15% of the cost spike via price hikes, so there is still a hit on margins that these tyre companies are facing. That has been the big headwind for the tyre stocks. A key determinant of input cost for tyre companies is the price of crude and that is up nearly 85% in the last 3 months. In a market, where auto demand and production has been tepid, there is only so much price hikes they can handle.
There are also other risks for the tyre industry. For example, the government is expected to announce relaxation in import restrictions for tyres. This is also likely to put pressure on the tyre companies in India. In addition, the rising interest costs and the higher cost of petrol and diesel are increasing the cost of ownership of four-wheelers. However, the biggest challenge for the tyre industry remains unfettered cost inflation.
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