Shares of most tyre companies have underperformed despite the fall in natural rubber prices and marginal revival in automobile demand, coupled with sharp depreciation of Indian rupee against the greenback which dimmed the earnings prospects of these companies.
In the period of October 1 to December 22, shares of most tyre companies have fallen in the range of 15-25% compared with the Bombay Stock Exchange’s Benchmark 30-share Sensex which fell only by 2% in the same period.
“Slowing auto demand, unexpected rupee depreciation (Indian companies import rubber) and rise in other input costs are likely to offset the advantage of softening natural rubber prices which in turn may impact the tyre companies in the near future,” says Shreyas Bhukhanwala, analyst from Sushil Finance.

Corporate performance

However, shares of Apollo Tyres outperformed the broad market, due to better performance in the July-September quarter helped by improved show of its European business which recorded 43% growth in the quarter. Apollo’s stock increased 11.56% in the period of October 1 to December 22.  “Apollo Tyres is seeing good demand from its European operations and that has reflected in its second quarter results,” says an analyst from a Mumbai-based research firm.
MRF was the second company whose share price moved in northward direction in the period as its stock improved by 7% in the period of October 1 to December 22.  The Chennai-headquartered tyre company’s net profit for the July- September quarter rose to RS 3.95 billion from RS 771 million  in the year-ago period due to exceptional gains in the current quarter worth RS 4.04 billion.

Negative sentiments

While JK Tyres’ share price also dropped by 17% in the period, the company registered poor July-September quarter results due to cheaper valuation compared with its frontline peers. The company swung to a net loss of Rs 549.9 million from the net profit of Rs201.9 million in the same period last year.
Other major tyre companies CEAT and Goodyear India have also shown negative results in the quarter of July- September. CEAT and Goodyear India’s net profit plunged 63% and 16% in the quarter ended September 2011 compared to the corresponding period last year.
Stocks of Dunlop India Ltd, TVS Srichakra, PTL Enterprises and Modi Rubber were the worst performers during the period as their share dropped by 31%, 25%, 25% and 20% respectively. However, the CEAT stock was down by 12% and the Goodyear stock marginally slipped by 0.46% during the period.

Auto sales pick up

Indian automobile demand, which registered robust growth of 30% in 2010, has witnessed a sharp decline this year due to rising interest rates and fuel cost which has tampered the consumer’s purchasing power.  However, the festive mood in November brought some relief for auto producers after four consecutive months of decline.In November, the car sales figures rose by 7% to 171,131 units in the domestic market as compared to 159,939 units during the same period last year, according to the figures released by the Society of Indian Automobile Manufacturers (SIAM).
The devaluation of rupees against the dollar is impacting profit growth as most tyre companies are net importers. The power cost, which is about 60% of the conversion cost, has gone up by 50%-60%, say some research analysts.
“Prices of natural rubber have softened over the last few months and most of the Indian tyre companies are net importers of rubber. The depreciation of Indian rupee against dollar has increased import cost and that has reflected on the balance sheet of tyre companies,” say the analysts.
In the midst of slow demand and depreciation of rupees, there is still some relief for domestic tyre producers as the government has not yet removed the anti-dumping duty on Chinese tyres.