'Ache Din' for tyre stocks

Tyre industry accounts for more than 50% of the rubber consumption. To say it the other way round, rubber is a significant raw material for tyre companies and has the potential to swing the margins of rubber companies. 
Indian tyre companies have been dealing with high prices of rubber which has impacted their margins. The margins for all the players, except Balkrishna Industries, dipped by an  average of ~120bps in FY17. The dip was not steep due to better volumes on account of higher automotive sales offsetting impact of inflated rubber prices.

Rubber production and consumption mismatch 
We will try to understand why the rubber prices have  stayed stiff during  last year. We see that consumption of natural rubber for FY17 was 10.4 lakh tonnes and it has mostly stayed in the range for the last couple of years. This is due to use of substitute synthetic rubber replacing natural rubber wher ever possible to avoid vagaries of natural rubber prices. 
However, looking at the production, we see that there was sharp dip in production in FY15-16. FY17 saw some pick- up in the production activity, which again saw a declining trend by May 2017. No wonder, domestic tyre manufacturing companies were left with no choice but to import an d meet the supply deficit. 



However, we expect the production supply mismatch to smoothen out in the coming quarters. We see that rubber prices (proxy used RSS -1 Category, Bangkok market) has corrected by ~31% which will be a huge respite for the domestic tyre stocks.

With rubber comprising ~30% of the cost of tyre companies, we expect margins to see improve by ~100 -150 bps in the coming quarters.