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    ​Tyre sector looks attractive; MRF, Ceat, Apollo Tyres can be good long-term bets

    Synopsis

    A persistent drop in input costs of natural rubber and crude oil has kept profit margins of tyre firms at elevated levels as rural demand continues to surge.

    By D K Aggarwal

    Domestic prices of natural rubber, which makes up more than 50 per cent of the cost of a tyre, have been falling continuously. The consistent fall in rubber prices can be attributed to some artificial curbs raised in a couple of Southeast Asian countries, especially China, and more production coming into the system amid weakness in crude oil prices.

    A continued drop in input costs – that of natural rubber and crude oil – has kept profit margins of the tyre industry at elevated levels with good monsoon leading to a spurt in rural demand and expectation of an increase in disposable income due to the implementation of Seventh Pay Commission award pushing urban demand.

    Additionally, the possible implementation of GST by 2017 along with a number of other major macroeconomic improvements has improved the outlook for the automobile sector. And the tyre industry's performance is closely linked to that of the automotive sector.

    Tyre manufacturers are expected to invest large amount in the industry over the next few years, for brand building, new and innovative product developments, research & development (R&D) initiatives and extensive expansion of distribution networks.

    Tyre companies are exploring all the avenues to ensure that the growth of their businesses, which include deeper penetration into existing markets within India as well as outside, extending their relationship with OEMs and expanding product range.

    With investment for the enhancement of existing capacities – both Greenfield and Brownfield -- in India and new capacities in other countries such as Hungary and Bangladesh, the tyre industry is likely to get the boost. Strong interest in expansion of radial tyre capacity and tubeless tyres would augur well for the industry.

    Meanwhile, the concept of 'green tyres' is becoming a paradigm of the country's competitive edge. A persistent decline in raw material (rubber) cost once again boosted the margins of the Indian tyre companies and helped tyre manufacturers increase operating margins significantly.

    However, rigid competition from higher imports and slower pickup in some sectors of the automobile industry led to a decline in top lines.

    With better monsoon rains this year and new models, both OEs (original equipment manufacturers) and the replacement market across product categories in India would support the tyre industry.

    Latest data released by SIAM showed that passenger vehicle sales are projected to grow between 6 to 8 per cent, M&HCVs at 12-15 per cent and intermediate CVs at 7-9 per cent.

    In the two-wheeler segment, motorcycle sales are forecast to grow between 0-3 per cent and scooters between 17-19 per cent.

    With the two key variables, further improvement in auto sales and declining rubber prices, the tyre industry is expected to continue its ongoing joyride. Stocks such as MRF, Apollo Tyres and Ceat can be better bets for long-term investors.

    (The author is Chairman and MD, SMC Investments and Advisors. Views and recommendations given in this section are his own and do not represent those of ETMarkets.com. Please consult your financial adviser before taking any position in the stock/s mentioned.)



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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