Tyre stocks gain on easing oil prices; JK Tyre, Kesoram up over 5%

Shares of tyre manufacturing companies have rallied by up to 14% on the BSE in early morning trade in an otherwise subdued market on easing crude oil prices.

Kesoram Industries has surged 14% to Rs 94.40, while JK Tyre soared 7% to Rs 110 on back of heavy volumes. Shares of TVS Srichakra, Apollo Tyres, MRF, Balkrishna Industries and Ceat were up in the range of 1% to 3% on the BSE in intra-day trade. In comparison, the S&P BSE Sensex was down 0.39% at 36,340 points at 09:58 am.

On Wednesday, the prices of Brent crude was seen at $56.6 a barrel, dipping sharply from the over $80 a barrel mark during the first week of October.

Carbon black and synthetic rubber, which form a major portion of the raw materials for tyre industries, are crude-based, hence, a change in crude oil prices have an impact on tyre stocks.

During September quarter, higher crude prices and crude linked raw materials’ prices impacted the profitability sequentially of most of the tyre companies, leading to lower than expected EBITDA (earnings before interest, tax, depreciation and amortization).

“Rubber prices have largely been range bound in FY19. Though, the demand of Natural Rubber is significantly outpacing the Rubber production in India over the past few months, leading to a rise in the domestic prices. This coupled with a sharp rise in the cost of power will put pressure on the profitability of JK Tyre,” analysts at Quantum Securities said in Q2FY19 result update.

Meanwhile, the recent trend of falling crude oil and rubber prices bodes well for the tyre companies.

“Natural rubber prices are expected to remain benign in the medium term, while cost pressures due to crude are expected to be passed on owing to strong demand (3% price hike in November). Recent softness in crude prices is expected boost margins in Q4FY19,” analysts at Elara Capital said in Apollo Tyres result update.