Shares of tyremakers tumbled on October 4 amid concerns of global supply shortage of natural rubber due to adverse weather conditions, which has led to the sharp uptick in the international natural rubber prices in the last two months. Natural rubber is a prime raw material for tyre manufacturing.
Additionally, international natural rubber is trading at a significant premium to domestic prices, which may further push up the domestic prices and add to margin pressures on the tyre companies.
The factors had a sharp bearing on the scrips of the domestic tyremakers, which witnessed sharp decline this week. Balkrishna Industries stock has been falling for the last two days and has declined 6.61 percent in the period. In October 4 trade, the share price touched an intraday low of Rs 2,847.15 per share on the NSE, down 3.97 percent. The counter settled at Rs 2,860 apiece today, declining 3.53 percent from its previous trade.
Kotak Institutional Equities, in its October 4 research report, said, "Tyremakers have taken blended price increases of 2.5-3.5 percent over the past six months; however, our analysis suggests that they will have to take further 5 percent price increase to achieve 4QFY24-level margins."
"Given softening demand trends and limited price hikes taken by MRF in TBR/TBB/2W segments coupled with RM headwinds, we see downside risks to consensus FY2025 EPS estimates," it added.
The international natural rubber prices have witnessed sharp uptick of nearly 28 percent over the past two months on concerns around global natural rubber supply shortage, especially in South East Asian countries where heavy rainfall and flooding have impacted the tapping activity.
Also, prices have further risen on expectation of recovery in Chinese demand due to stimulus measures announced.
A similar downtrend was seen in other tyre stocks in India with Apollo Tyres' shares declining 3.26 percent to day's low of Rs 508.65 apiece on the NSE. The stock has been losing for the last two days and has fallen 7.12 percent in the period. It is trading lower than 5 - 50 day moving averages.
Shares of CEAT Ltd too have been falling for the last two days and were down by 4.35 percent in the period. In Friday's trade, the counter was down 2.8 percent to its intraday low of Rs 2,985.75 on the NSE.
Kotak, in its report, noted: "The stockpile of global natural rubber is expected to decline to 2.1 mn tons in CY2024E from 2.8 mn tons in CY2023, which may put upward pressure on rubber prices unless demand trend weakens. While crude oil prices have corrected over the past one quarter, ongoing geopolitical tensions may restrict further price decline in crude oil."
Shares of JK Tyre & Industries have been declining for the last four days and have fallen 6.53 percent in the period. In today's session, it touched an intraday low of Rs 400.65, down 3.5 percent. It settled at Rs 405.50 per share, lower by 2.34 percent.
Shares of MRF Ltd closed at Rs 1,33,500 apiece on the NSE, down 1.91 percent. Tacking the global factors, the stock has been losing for the last two days and has declined 4.89 percent in the period.
The analysts at Kotak Institutional Equities expect capex spends to remain at lower levels over the next one-two years, saying that they believe it will be difficult for the company to maintain current profitability/return ratios on a sustainable basis.
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