Falling crude a boon for tyre makers: Apollo Tyres, CEAT and MRF in sweet spot

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26 Aug, 2025 12:21

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A sharp plunge in the global crude oil prices is expected to augur well for domestic tyre manufacturers as one of the key raw materials for tyre-making is derived from crude.

Brent Crude oil prices have plunged more than 50 percent so far in 2020 to a fresh 4-year low amid fears of an economic recession due to coronavirus outbreak.

In normal circumstances, a fall in global crude oil prices is positive for sectors like tyre, paint and aviation and even the domestic economy in general as India is one of the largest importers of crude oil in the world.

A fall in crude simply means strong margin tailwinds for tyre-makers and margins are big levers for the earnings growth of domestic tyre companies as they do not pass on the full impact of increase or decrease in raw material prices in the replacement market.

Tailwind likely to continue

The tailwind for tyre sector is expected to continue as long as the coronavirus issue does not come under control. Brokerages point out that the sharp decline in crude prices will further dent crude derivative prices, some of which had already reached 4-year lows in February 2020.

"Crude derivatives constitute nearly 30 percent of sales for domestic tyre companies, and therefore a sharp decline in crude prices would buoy their margins," said brokerage firm Equirus Securities in a report on March 16.

The brokerage firm underscored that tyre companies had reported strong FY17 margins due to a sharp decline in raw materials.

Before slump in crude last week, some crude derivatives – styrene, butadiene and carbon black feed oil – had already gone to FY17 levels. With a further correction in crude prices, crude derivatives will decline even more and there will be a gradual margin gain over Q1FY21 and Q2FY21, Equirus Securities said.

Stock market expert SP Tulsian of sptulsian.com expressed similar views in a recent interview with CNBC-TV18.

"If you take a call on the falling crude, that will be seen positive for all the tyre-makers as the synthetic rubber prices are falling. Taking that into account, I have a positive view of the tyre stocks," Tulsian had said.

While crude prices touch new lows, there are no triggers for natural and synthetic rubber prices to go up as well.

Equirus highlighted that synthetic rubber, which is nearly 10 percent of sales, is mainly made of compounds, styrene and butadiene. Prices of both these compounds were already at a four-year low before a slump in crude prices this week; these can decline further going ahead.

Prices of carbon black fuel oil – a key raw material for making carbon black – declined 37 percent year-on-year (YoY) in Q3FY20 and can correct further going ahead. Other rubber chemical prices should also decline with crude prices, Equirus pointed out.

Moreover, as per the brokerage, global benchmark natural rubber prices have seen a nearly 5 percent correction over average prices of Q3FY20. Global demand is expected to remain muted with the impact of Coronavirus; hence, there are no upside triggers for natural rubber prices.

Equirus has a 'buy' call on Apollo Tyres, with a target price of Rs 197 and has a 'long' call on Balkrishna Industries, with a target price of Rs 1,329.

CEAT and MRF also have 'long' calls from Equirus with a target price of Rs 983 and Rs 70,857, respectively.

But some challenges persist

Tulsian of sptulsian.com added that that the rise in tyre stocks has to be linked with the revival in the auto cycle.

The auto sector is marred with challenges that were aggravated by the outbreak of coronavirus. A lot will depend on the auto sector for the tyre-makers to reap the benefits of plunging crude oil prices.

Sameer Kalra, Founder of Target Investing said CV sales are low and now BS-VI overhang is there. Besides, lower capacity utilisation at fleet operators impacts aftermarket sales of tyres.

Kalra has a negative view on the sector.

During FY20, volume growth for tyre companies was negative-to-flat due to a sharp decline in original equipment manufacturers (OEMs).

Brokerage Equirus point out that with trucks being the industry’s largest segment, and dependent on the economy, aftermarket volume growth is also impacted.

"With the economy expected to remain sluggish, we believe volume growth for the industry will remain muted. However, a sharp decline in crude prices gives the government some room to revive growth through investment; however, we will have to wait and watch how the government intervenes in this scenario," Equirus said.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.