Tyre scrips yet to burn rubber

Rising prices of rubber have led to investor nervousness in the sector.

Stocks of tyre firms have underperformed the broader market over the past fortnight as rising prices of key input, rubber, have led to investor nervousness in the sector.

MRF and Ceat have barely managed 1 per cent rise over the last fortnight compared with 3 per cent gain in the Sensex.

Rubber prices have increased almost 7 per cent to about Rs 79-80 per kg levels over the past fortnight and that's because demand in India and China over the last 6 to 8 months has grown faster than supply, say analysts.

To add to the woes of tyre companies, there have been reports of rubber growers holding back supplies on hopes of getting even higher price realisations.

The cost of rubber, as a proportion of net sales, for a tyre company, typically accounts for 65-67 per cent.

Analysts, however, highlight that despite tougher operating environment, tyre companies are going ahead with their expansion plans and that could bring a reversal in investor sentiment, in the medium term.

For instance, Apollo Tyres recently announced that it will buy Dunlop South Africa (Dunlop SA) for about Rs 290 crore.

Dunlop SA is estimated to have revenues of about Rs 950 crore in South Africa and Rs 50 crore in Zimbabwe during 2005.

The deal will allow Apollo to get market share in southern Africa coupled with leveraging Dunlop SA's tyre exports to Europe and Central Asia.

Although rubber prices are high, a cushion for operating margins has been provided by the decision of several tyre companies to retain about half of the reduction in excise duties, that had been announced in the last budget.

The budget had earlier reduced excise duties on tyres from 24, to 16 per cent.

As a result, Apollo Tyres was able to grow its operating profit margin by 52 basis points to 7.93 per cent in the December 2005 quarter.