Kerala floods: Tyre companies may face short-term impact on rubber shortage

Tyre stocks have been making news over the past few days, especially after reports about losses to Kerala because of severe rainfall and flooding started emerging.

Shares of industry majors like Apollo Tyres, JK Tyre, MRF and Goodyear are down by up to 10 percent so far. Analysts Moneycontrol spoke to attribute this fall to the impact of reduced supply of rubber, a key input for making of tyres.

Having said that, experts believe that the impact of the grim situation is likely to be short term and investors may want to focus on the long term growth story in case of tyre companies.

For instance, Sharekhan's Head of Research, Gaurav Dua explains that though these are early days to count the impact, the overall sentiment is positive for tyre companies.

"…Though we believe there could be some increase in rubber prices, production in Indonesia and Malaysia and south-east Asian nations which produce rubber has been fairly good. This should give some support to rubber prices," he told Moneycontrol.

Meanwhile, Sanjiv Bhasin of IIFL sees a contrarian play in the tyre space. The expert said the state is going through a tough phase because of the floods and that he hoped for the situation to improve at the earliest.

"Rubber prices will be under pressure, but will be temporary. The situation needs to be looked at in two ways. One, Chinese imports have risen on the back of a weaker yuan. Simultaneously, bigger firms always have inventory for 3-4 months. So, inventory and price outlook will be key determinants. If you are a contrarian, rubber and tyre makers could be a bet, where MRF may stand out," Bhasin, EVP-Markets & Corporate Affairs at IIFL told Moneycontrol.

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According to CARE Ratings' report, Kerala produces 92 percent of the rubber that India uses. So any impact on production could hit supplies, thereby pushing prices up, analysts said.

Meanwhile, Apollo Tyres told the exchanges that production operations at the company's plants in Perambra and Kalamassery have been disrupted due to the floods.

"The production loss due to this natural calamity is 1,500 MT (approximately). However, consequential loss of profit is not significant," it said. The company produces commercial vehicle tyres and off-highway tyres at the two plants.

Kerala has witnessed incessant rain and floods over the past couple of weeks, affecting many districts and resulting in losses of life and property. CARE Ratings expects a hit of 1 percent to the state's GDP because of the negative impact on employment, tourism, and state’s finances, among others.