🔥 Why Tyres Stocks are on Fire!
Despite market volatility, tyre stocks seem to be experiencing a very smooth ride. Here's why.
Disclaimer: Nothing in this post should be considered as investment advice.
The stock market has been pretty volatile lately.
And understandably so. We’re living in risky and confusing times.
But unlike the rest of the stock market one sector has been doing really well: the tyre industry.
In the last few months, the stocks of JK Tyres, CEAT, and MRF have risen 15-18%, while that of Apollo tyres have surged by 23%, hitting their 52-week high on September 6 (Some tyre stocks ended lower on September 7, probably due to profit-booking*, but not Apollo Tyres).
Wondering why? The answer is complicated, just like the stock market.
So, this is our attempt to explain to you how multiple factors impact a stock’s price by focussing on the tyre industry.
🏎️ Why The Tyre Industry is Going Fast & Furious
The tyre industry like most sectors was having a really tough time in 2020 and 2021.
But now its fortunes have changed.
And a major reason? Rising vehicle sales.
Thanks to the economy opening up and inflation going down, the demand for vehicles is at an all-time high right now.
Dispatches at India’s top passenger vehicle makers have risen by 30.2% in August.
The fact that the semiconductor shortages have eased is also allowing companies to now make more vehicles to fulfill the demand. The drop in crude oil prices has also helped.
And more vehicles= more tyres.
Plus, with the EV space booming and more and more EV companies coming up, more people are betting on the tyre industry.
Tyre companies are also capitalising on this EV boom and have started making specialised tyres for electric vehicles.
CEAT has launched tyres designed specifically for EV buses (which provide 30% higher mileage), while Apollo has launched tyres for passenger vehicles as well as two-wheelers.
But this isn’t the only reason behind the tyre industry’s surge.
You see, a major reason that the tyre business had slowed down in the last two years was also the high price of rubber.
📈 Why Rubber Prices had been Skyrocketing
During Covid rubber suddenly became a very valuable commodity. It was being used to manufacture all the non-reusable latex gloves used in hospitals.
So, latex prices boomed. And since manufacturing latex is much easier than manufacturing rubber (farmers don’t have to make rubber sheets from the liquid rubber they have tapped), farmers began selling more of latex and less of rubber.
This, plus the fact that heavy rains often caused delays in rubber tapping, led to a hike in rubber prices.
And this directly raised costs for tyre manufacturers.
But now because the demand for latex gloves has died down and recession worries have also caused a lot of other sectors worldwide to slow down, we have plenty of rubber.
So, rubber prices are down to a 16-month low of Rs. 150/kg.
And you know what else is used to manufacture tyres?
Steel.
Steel prices have also been pretty low lately, down by Rs. 3,000-Rs. 3,500/tonne, thanks to the government of India.
Back in May when commodity prices worldwide were soaring, the government removed the duties on import of raw materials (like coking coal) to make steel cheaper.
The move aimed to boost infrastructure development in India and has kind of worked.
This cheap steel and cheap rubber have worked wonders for the tyre industry, drastically reducing their costs at a time when demand is high.
And experts believe the sector will continue to boom for quite some time.
Especially Morgan Stanley. It is expecting tyre volumes to grow at a CAGR (compound annual growth rate) of 7% in 2021-2025, as compared to its 3% growth from 2016-2021.
And Morgan Stanley has really high expectations from Apollo Tyres.
It is betting big on the company because around 68% of its business comes from India (a lot of foreign investors are bullish on India right now because demand in our country is seeing growth). In comparison, only 17% of market leader Balkrishna Tyres’ business comes from India.
Also, Apollo is trading at a discount as compared to other tyre companies.
However, the government is now thinking of removing the taxes it levied on exports of steel.
This means more manufacturers may start exporting the metal to get higher prices. This could be a problem for the tyre industry.
But the recent rise in travel and in e-commerce and quick-commerce deliveries could very well counteract this risk, at least for companies that are India-focused.
For tyre companies that mainly export their tyres, the future could be bleak as global demand is set to decline even further due to recession fears.
So, you see, it takes a stock minutes to rise or fall, but so many factors are behind the decision to buy or sell. Let us know if you want similar analysis on stocks of other sectors as well.
🤓 Noob's Corner: Profit booking is when people sell their stocks when they are at a high to cash in on their profits.
⚡In a line: Tyre stocks are rising because the industry's demand and supply side problems have both been fixed.
💡Quick question: Do you think this industry will continue to boom?
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please analyse other sectors as well