Rubber prices hit 2-year lows but revival hopes keep tyre stocks in the green

Rubber prices have slumped to a two-year low but tyre stocks have kept rolling in the green.

The stocks of tyre companies such as Apollo Tyres, Ceat and JK Tyre, were up over 9 percent on Monday. All the major tyre stocks were on the rise at 3:10pm on the BSE today.

Natural rubber prices lowered by 24 percent in Q3 over average last year. While Kerala rubber prices were lower by 11%, and butadiene was 1 percent down. This has led to the expected increase in the margins of tyre companies. Also, major tyre players have made capital expenditure (CapEx), according to Equirus, leading to gains in tyre companies’ stock prices.

According to data, the on-year global production of rubber has been on the rise, but consumption didn’t grow in sync this year, though 2021 was a great time with a 10.9 percent run-up.

Markets are at their peak of production season, which has also negatively affected the rubber prices, Rajiv Budhraja, Director General, Automotive Tyre Manufacturers’ Association (ATMA) said, told CNBC TV-18.

The demand from China domestic demand has also been “extremely subdued,” Budhraja said.

Additionally, the Tokyo Commodity Exchange Rubber index witnessed a decline over the period of 6-7 months.

According to Budhraja, OEM demand in India has been sluggish in the last two quarters. However, in January, it will start picking up and will reflect by H1CY23. The momentum is expected to reflect in the rubber sector.

As Toyota also downgraded its Japan production forecast for the year FY23 from 9.7 million units to 9.2 million units. Production forecasts have also been downgraded for companies based in Europe and China.

“On the replacement side, I think the industry has been doing well. Exports have been rather good. Last year, its was 55 percent growth over FY21 and this year also I think it’s going to be a decent double-digit growth of tyres in India,” Budhraja added.

The global annual production of rubber is expected to go up 4 percent, while the demand is expected to go up 1.9 percent.

Foreign brokerage Morgan Stanley is bullish on tyre stocks, on the back of stable volume outlook, improving margins and better return ratios. “Rising return on equity, improvement in India & EU markets could drive multiple re-rating of Apollo Tyres,” it said. The firm has an Overweight call on the stock with a target price of Rs 348 per share.

UBS also believes Apollo Tyres is attractive at a 12x FY24E price-to-earnings ratio. It has a Buy rating on the stock with a target price of Rs Rs 355 per share.