Tyre Stocks Are Rising: Here's What's Driving the Surge

If you keep up with at least some of the market developments on a regular basis, you already know that railway stocks have been raking in all the moolah over the last one year.

Stocks like Titagarh Wagons, RVNL, IRCON, and RITES have rallied 220%, 253%, 106% and 57%, respectively. And if their magnitude is anything to go by, it appears there is definitely a bull market underway here.

On the other hand, the benchmark BSE Sensex has returned a little over 10% over the last one year, not a bull market by any stretch of the imagination.

Last week, RVNL rallied 40% in just four days! Railway stock prices were racing ahead despite dampened market sentiment.

Apart from railway stocks, tyre stocks too have started to show a similar uptrend after MRF posted its Q4 numbers.

Share price of MRF is almost on its way to cross the Rs 1-lakh mark, rising around 4% in a falling market.

Let's take a look at what's happening in the tyre industry and why tyre stocks are rising.

#1 Strong quarterly results

The rally in tyre stocks began when MRF posted its quarterly results for the period ended March 2023.

MRF on Wednesday this week reported a consolidated profit after tax (PAT) of Rs 3.1 billion (bn) for the quarter under review, up 86% on a year-on-year (YoY) basis. In the same quarter last year, it posted a net profit of Rs 1.7 bn.

Its consolidated revenue from operations stood at Rs 58.4 bn, up 10.1% YoY as compared to Rs 53 bn in the corresponding period of the last year.

The board of directors of MRF also recommended a final dividend of Rs 169 per share.

Earlier, the company has already declared and paid two interim dividends of Rs 3 each per share for the financial year ending 31 March 2023. The total dividend for the financial year works out to Rs 175.

Investors reacted strongly to the quarterly results. When the sector leader company or a company that has dominant position in its market shows optimism in numbers, other stocks also gain traction for the short term on hopes that they'll share the similar industry tailwinds.

For example, if Infosys would post strong results, investors would assume that the IT sector is in a decent position and other biggies like TCS, Wipro etc. may show improvement in their numbers.

Following MRF's results, other tyre stocks including Ceat, JK Tyre & Industries, TVS Srichakra, and Goodyear India also surged in the range of 5% - 8%.

Meanwhile, Apollo Tyres hit a fresh 52-week high of Rs 357. In the past one week, the stock has gained 8% on expectation of a robust performance in March 2023 quarter amid a QoQ decline in realised raw material prices.

This brings us to the second reason why tyre stocks are rising.

#2 Declining input material cost

Another reason behind the rally in tyre stocks is the declining price of crude oil and natural rubber.

Since the start of 2023, crude oil prices have fallen due to concerns about interest rate hike, growing recession fear, and uncertainty surrounding Chinese demand.

Rubber constitutes a major portion of the total cost for the tyre industry. Rubber manufacturing companies use crude oil derivatives as their raw material for making synthetic rubber.

MRF uses crude waste carbon black as the major raw material for making tyres. The crude oil derivative used in the manufacturing of tyres constitutes around 30% of the total raw material cost.

Hence, the decline in crude oil prices has a direct bearing on the gross margins of tyre companies.

In the last two years, natural rubber price was also on the decline. Weak demand and high inventory levels dragged down rubber prices.

In January 2023, natural rubber prices dropped to a two-year low mirroring the weaker trends overseas due to lower demand from China and higher supply.

Declining rubber prices have improved the operational efficiency of tyre companies.

#3 Growing demand

The third reason why tyre stocks are rising is due to strong demand. Tyres are integral parts of the automobile industry for obvious reasons. Hence, a growing automobile industry indicates growth opportunities for the tyre industry.

Improving disposable income, a low base of the past three financial years and an improvement in supply chains should continue to support the automobile sector's recovery in this financial year.

Hence, rubber companies might see strong demand from original equipment manufacturers (OEMs). The rising demand for vehicles will lead to growing demand for tyres.

Also, the replacement segment is growing at a stable pace. Reportedly, factors like improving economic activities, increasing freight movement, higher spending on infrastructure, absence of material price hikes, etc. shall support the growth in the replacement segment in the financial year 2024.

Another major shift in the automobile industry is driven by electric vehicles (EVs). Growing EV demand in India will lead to higher demand in the tyre industry.

How top tyre stocks have performed recently

Have a look at the table below to see the performance of tyre stocks over different time period:

Performance of Tyre Stocks

Company Name	Closing as on 04-05-2023	1 Month performance	YTD performance
Apollo Tyres	359.6	11.8%	10.8%
Balkrishna Industries	2,130.0	8.7%	0.1%
Ceat	1,655.2	16.9%	0.8%
Goodyear India	1,150.7	7.6%	3.8%
JK Tyre & Industries	194.9	19.3%	5.8%
MRF	95,096.2	13.2%	7.4%

Source: Equitymaster

Investment Takeaway

Earlier this year in January 2023, the Automotive Tyre Manufacturers Association (ATMA) said the Indian tyre industry will be able to scale a turnover of Rs 1 trillion (tn) in the next three years on the back of new capacities available.

The tyre industry is blooming in India on the hopes of better outlook of macro environment. Sectoral tailwinds and declining raw material prices have made tyre stocks attractive.

But investors should keep in mind that all of this is built on hopes, expectations and market sentiments. If hopes do not translate into numbers, then tyre stocks will not move anywhere.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...