Tire stock investors are betting on a hike in prices amid strong demand

In the backdrop of ongoing input cost inflation, this gives companies an opportunity to raise prices to protect margins. Natural rubber, carbon black and synthetic rubber are among the raw materials used to make tyres. As per the raw material tire index compiled by JM Financial Institutional Securities Ltd, consumption cost for tire manufacturers increased by about 7% sequentially in Q2FY22, mainly driven by increase in the price of crude derivatives. JM Financial said the overall increase in raw material prices is around 43% from Q2FY21 lows.

To deal with this, so far in 2021, tire companies have increased prices by about 9 percent.

“We believe that in order to maintain sustainable margin levels, tire companies will have to increase further by 3-5% in the replacement segment. Most of the dealers have highlighted that they are looking at multiple rounds of prices in the near term. which will be absorbed by the market due to absence of competition from imported tyres,” the JM report said. Investors are of the view that in June 2020, the government had imposed an import ban on tyres.

Major listed tire makers are likely to see a single-digit to double-digit growth in sales in the September quarter.

As per estimates by Kotak Institutional Equities, Apollo Tires Ltd is likely to see a volume growth of 8% sequentially in the second quarter. This will be led by 20% quarter-on-quarter (QoQ) growth in PCR (Passenger Car Radial) segment, 8% sequential growth in TBB (Truck Bus Bias) segment and strong growth in two-wheeler replacement segment. Growth in the TBR (Truck and Bus Radial) segment will be flat.

“We expect Balkrishna Industries volume to grow by 8% qoq to 74.1kmt (million tonnes) in 2Q, with strong demand especially in the agriculture segment (60% of revenue) and the OTR (off the road) segment ( 40) because of the strong recovery in. % Revenue). The October 5 Kotak report stated that Ceat is likely to post 12% qoq growth in standalone segment volumes in Q2.

Meanwhile, shares of some of the above tire companies have gained 65-75% in the past one year, touching a new 52-week high. Analysts said further rise in prices would now depend on the outlook on price hike and operating margins. In terms of valuation, these stocks are trading at 35-45 times the one-year forward price to earnings multiple, according to Bloomberg data. Analysts said the valuations are fair, but could see some downside if raw material prices continue to rise.