Tyre companies may not be able to fully pass on the surge in raw material costs
Margins for the larger tyre makers, Apollo Tyres and MRF are expected to fall by 330-469 basis points in the March quarter on a sequential basis
The tyre sector is expected to be among the most impacted within the auto component space due to the surge in raw material costs in the March quarter. The impact is due to the rise in crude price derivatives and natural rubber costs which account for 55 per cent and 33 per cent of the raw material basket of tyre makers.
While tyre companies could see sharp sequential moderation in margins in the March quarter, profitability of battery makers should hold up as the price of lead has been fairly steady, according to IIFL Research. This is visible from the March quarter results of companies which have declared their results so far.
While Exide has reported a 159 drop in gross margins on a sequential basis, CEAT’s fall was a steeper 365 basis points. Operating profit margins too fell 352 basis points for the tyre maker as compared to a 35 basis points decline for Exide due to lower staff costs as well as other expenses.
Margins for the larger tyre makers, Apollo Tyres and MRF are expected to fall by 330-469 basis points in the March quarter on a sequential basis. Margin pressures will remain given the rise in prices of crude oil derivatives as well as natural rubber.
Mayur Milak and Nishant Chowhan of BOBCAPS Research say that natural rubber prices have soared 75 per cent from the lows after the pandemic hit demand. They believe that with rising global demand and limited supplies, prices could test 2010-11 highs of $5 per kg over the next five years. Rubber prices are trading at Rs 168-Rs 170 per kg or $2.3 per kg.
Analysts further say that amid rising competition, companies have limited pricing power to pass on the costs fully. Though 30 per cent of revenue comes from auto makers and has cost inflation pass-on clause, inability to pass on costs fully in the replacement space impacts operating profit margin in times of sharp surge in raw material prices, according to Ambit Capital.
In response to the rise in raw material costs, CEAT’s chief financial officer indicated that the first preference would be to increase the prices of tyres.
The company would also work simultaneously to cut discretionary costs. The extent of the price hikes and cost cuts would dictate the margin trends going ahead.
The stocks of tyre companies are down 15-20 per cent from their highs earlier this year and given the margin worries there could be downward pressure going ahead.