The tyre manufacturing industry, encompassing companies like JK Tyre, Ceat, and Apollo Tyres, has witnessed a decline in stock values ranging from 2 to 8 percent in the current month. This downturn is primarily attributed to the upward trajectory of commodity prices and a reduction in demand from original equipment manufacturers (OEMs). Kotak Equities has adopted a cautious stance towards tyre manufacturers, expressing the belief that maintaining price increases without adversely affecting demand might pose a challenge.

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Anuj Kathuria, the President of JK Tyre & Industries shared, “In quarter three of last year, we saw that the commodity prices have started softening, and they have come down to a certain extent. But more importantly, when the prices were going up, we were able to pass on the increases, although at a lag in certain in the replacement market, but in the OEM, especially in the passenger car segment the prices are indexed with the raw material prices.”

He went on to add, “While there are reports of rising crude oil prices, we anticipate that these fluctuations will be contained within a certain range. We do not anticipate a repeat of the extreme price volatility witnessed in previous years. Therefore, our expectation is that raw material prices will remain within manageable bounds.”

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Rishi Vora, Vice President at Kotak Institutional Equities, has pointed out emerging signs of a slowdown in various segments of the market. Notably, the export sector is currently grappling with the repercussions of a global economic deceleration. Additionally, there is a noticeable decrease in demand within the Original Equipment Manufacturer (OEM) segment and specific replacement segments. The passenger car radial (PCR) category, in particular, is experiencing a slowdown.

In this complex economic environment, where multiple factors contribute to the slowdown, maintaining price increases without dampening demand presents a considerable challenge. Vora said, "Over the past two months, crude oil prices have surged by more than 20 percent from their lowest point. This development undoubtedly exerts significant pressure on the industry. If crude oil prices continue to sustain at these elevated levels, we anticipate an adverse impact of 300 to 400 basis points from Q1 FY24 levels for most tyre companies.”

He added that the assumption that tyre companies may avoid raising prices plays a critical role in mitigating this impact. “However, based on current trends in commodity prices, we foresee potential margin pressures for tyre companies, possibly in the coming quarters—though not in the second quarter, but more likely in the third or fourth quarter," Vora said.

Shifting focus to the demand outlook, Kathuria said that the demand remains robust, especially within the small and light commercial vehicle segment, where they have observed a significant uptick. "Our interactions with other OEMs also suggest that truck and bus buyers within the OEM category anticipate a revival in demand during H2. Thus, the overall outlook appears positive. While certain uncertainties persist, our current perspective is that the outlook remains favourable for the industry,” said Kathuria.

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First Published:Sept 13, 2023 2:19 PM IST