The fall in the crude oil prices could improve the gross margins of the stocks of the replacement market in the Indian tyre industry. The industry is set to get benefits from the benign raw material prices as higher consumption, particularly at the factories making tyres for bus and trucks, helps offset the likely slump demand from auto manufacturers.
Crude oil prices have come down by about third from the top. As the crude oil usage in manufacturing of the tyres is approximately 30 percent of the total raw material cost, hence the decline has a direct effect on the tyre manufacturing companies’ gross margins. One of India’s leading tyre makers, Apollo Tyres is among the favourite picks because of its unbeatable leadership in truck and bus radial tyres (TBR) and attractive valuations where utilisation level is more than 90 percent. MRF Tyres and CEAT Tyres are also likely to be benefitted from the scenario.
Tyre companies are also the beneficiary of the replacement demand that constitutes around 60 – 65 percent of the total tyre industry sales. The truck and bus radial tyre facility of Apollo Tyres is running at full capacity. Therefore it is supposed to serve the needs of the increasing domestic demand. Tyre manufacturers will also be investing around INR. 25,000 crores on the greenfield and brownfield capacity in the coming three years. Apollo Tyres could be the major beneficiary of capacity expansion as it derives about three-fifths of its revenue in the medium and heavy commercial vehicle segment, and has a 27 percent share in the Indian TBR market.