Tyre stocks have been faring well this month, thanks to low raw material cost, steady replacement market and government intervention. In fact, rubber prices, over the last two months, have slipped almost 35 percent turning the returns in tyre stocks positive. During the same time, Indian rupee also weakened by 3-3.5 percent, a key positive for tyre companies that have a strong presence in the international market.

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Declining rubber prices have been the main reason behind the low raw material cost. Rupee depreciation also added more revenue to the books of tyre exporters.

Since August 5, the stock prices of CEAT, Apollo Tyres and MRF have surged 11.45 percent, 13.19 percent and 10.17 percent, respectively.

According to Cogencies data, prices of natural rubber in key markets of Kerala hit a three-month low due to dwindling demand from tyre-makers amid expectation of a rise in imports.

Rubber contracts on Indian Commodity Exchange are likely to remain under pressure due to tepid demand from tyre-makers and expectation of a rise in imports, traders said. Bearishness in benchmark rubber contracts on Tokyo Commodity Exchange is also seen weighing on domestic contracts, the data shows.

Ashwin Patil, Research Analyst at LKP Securities, said, “Inventory clearing has been taking place as most of the original equipment manufacturers (OEMs) are taking production cuts. I think there will be soft recovery in the OEMs moving forward, given the recent government intervention. However, the main attraction for tyre stocks will be the replacement market, which is quite robust as we speak."

Patil pointed out that the month of August has been good for auto stocks. For example, Maruti Suzuki has gone up by Rs 800 per share along with others. Monsoon has also fared well this time, and there’s a strong hope in the market that the sector will recover. Additional advantage for tyre stocks is also the current low raw material cost.

Jay Kale, Vice-President of Research in Elara Capital also echoed this view. “Hope of liquidity infusion in the system and decline in the raw material prices are affecting the tyre stocks positively. Tyre companies drive in 60 percent of revenue from the replacement market and 30 percent from the OEMs. The replacement space is steadier as compared to the OEMs. Further growth will enter the auto ancillary space when OEMs will improve creating better cash flows for the truck operators,” he noted.