Tyre stocks rally since Modi deal, may not sustain

Shares of Indian tyre companies have gained by three to 13 per cent after German tyremaker Continental AG agreed to buy Modi Rubber’s unit last week.

Since the Continental-Modi Tyres deal last Monday for an undisclosed amount, shares of Modi Rubber have rallied nearly 20 per cent. Other tyre stocks like MRF (up 12.1 per cent), Apollo Tyres (up 7.3 per cent), Balkrishna Industries (up 4.55 per cent), JK Tyre & Industries (up 3.1 per cent) and Ceat (up 3.3 per cent) have all gained since then.

However, market experts are not impressed. “Whenever some deal happens, shares of other companies in the same sector are also going up. This has been the trend in the market in the recent past,” said S P Tulsian, an independent investment advisor. “The upmove in tyre stocks post the Continental-Modi Tyres deal is irrational and not sustainable,” he added.

Last month, shares of paper companies rallied 13-20 per cent after US-based International Paper, the world’s biggest paper company, agreed to buy a majority stake in Andhra Pradesh (AP) Paper Mills for $423 million. Most paper companies have sustained those gains since, as International Paper had offered a 180 per cent premium to the promoters of AP Paper.

In the case of tyre companies, the outlook for the sector is not rosy. “There will be some pressure on margins of tyre companies in the next two-three quarters due to high natural rubber prices,” said Ashwin Patil, analyst at LKP Securities. “However, current rubber prices which are ruling at Rs 230-240 a kg are not sustainable and should come down to around Rs 180-200 a kg by that time.”

Prices of natural rubber, which comprise a little over 40 per cent of raw material cost in tyre manufacturing, have increased 16 per cent in this year so far. Over the next 12-15 months, rating agency Icra expects the profitability of tyre manufacturers to be affected by the expected supply gap for rubber, despite robust demand for tyres.

Domestic tyre manufactures are also facing the threat of increasing penetration of Chinese imports into the Indian truck and bus radial tyre segment.