Given the recent uptick in natural rubber and crude oil prices, coupled with muted demand trends in the domestic market, the margins of tyre companies may come under pressure if prices sustain at these levels, said Kotak Institutional Equities.
'Domestic demand growth has moderated for tyre companies'
Given the recent uptick in natural rubber and crude oil prices, coupled with muted demand trends in the domestic market, the margins of tyre companies may come under pressure if prices sustain at these levels, said Kotak Institutional Equities.
In the last three quarters, revenue growth for listed tyre companies has moderated to low mid-single digits on account of — demand moderation in select replacement segments, weakness in export markets, the brokerage said.
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“We expect demand trends to remain muted in the near term, given weak passenger vehicle replacement segment demand as the base period of sales are muted, assuming a 3-5 year replacement cycle, demand moderation in the OEM segment and subdued trends in the commercial vehicle segment,” the brokerage added.
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Uptick in commodity prices poses a risk to tyre companies’ profitability, the brokerage said. International and domestic natural rubber prices (spot) have risen by 22-32 per cent from 2QFY24 average levels, driven by persistent supply concerns. Leading natural-rubber producers (Thailand, Malaysia and Indonesia) are grappling with lower output, owing to adverse weather concerns.
Further, crude prices have witnessed an uptick, which will further weigh on profitability (500-600 bps impact on gross margins at current spot prices from 3QFY24 levels).
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