Which tyre cos to gain most from weak rubber prices?

ICICIdirect.com`s research report on tyre sector.“In the recent past, global rubber prices have gone into a downward spiral with increasing concerns on demand-supply mismatch. The benchmark Bangkok RSS-4 rubber prices have declined from $2.2/kg in March to ~$1.7 levels. These are five-year low prices. Recent news flow of sale of 200,000 MT of rubber stocks by the Thailand government has caused more panic in the existing market. On the demand side, global studies and major manufacturers commentary suggests automotive tyre demand will grow ~4-5% in volume terms. This would be split with demand rising well in the North American region while Europe and Japan would remain sluggish. Emerging markets like India and China are expected to see a moderate recovery. “From an Indian perspective, domestic tyre manufacturers saw another quarter of favourable raw material prices mostly as natural rubber (NR) prices saw a decline to Rs 132/kg from Rs 148/kg in March in the domestic market. Domestic rubber supplies would have ebbed in the monsoon season, however, due to lower tapping. However, in the coming periods, as tapping increases prices could remain under pressure as supply increases domestically. The recent crude price decline (~9% QoQ) may cause a lag decline in crude linked derivatives like synthetic rubber and nylon tyre cord. Rubber contributes ~50% in volume terms and ~55% of the total raw material cost for tyre companies, depending on the product mix. Crude-linked derivatives constitute another 20-25% of the raw material basket for tyre companies. Thus, tyre makers are in a unique sweet spot as commodity prices, unlike historically, are reducing without a demand collapse. Hence, this is providing companies opportunities to focus more on bottomline growth vis-à-vis pace of topline growth.” “As per our analysis, for every Rs 10 change in natural rubber prices (other things remaining constant), EBITDA margins could likely change in varying degrees from 100 bps to 400 bps, clearly showing that Balkrishna Industries would benefit the least from a rubber price fall. On the earnings front, JK Tyres is expected to see ~30% change on every Rs 10 change in natural rubber prices. As per the study conducted by the International Rubber Study Group, natural rubber production has doubled from the levels in year 2000. In the past 14 years, rubber production has been surplus for six years. However, the supply demand surplus has not exceeded two years until the year 2013, which has seen increasing surpluses. Also, in 2014, the same situation is likely to persist. Furthermore, for the next 15-18 months, natural rubber prices are likely to remain muted as supply outstrips demand,” says ICICIdirect.com research report.

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