Do tyre stocks make for the right investment?

To buy or not to buy tyre stocks.

To buy or not to buy tyre stocks.

The stock market is in a rally over the last few days, and various sectors are emerging as potentials for investment and portfolio diversification. Buoyed by strong fundamentals and other favourable factors, the tyre segment is making its mark in the stock market. The stock of major tyre companies is experiencing an uptrend. Is it the right time to invest in tyre stocks?

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Why tyre stocks are in the green?

Two primary factors are powering the rally in the tyre sector. Let’s understand what these factors are and how they are affecting tyre stocks-

1. Cost of raw materials

Like any other industry, the tyre manufacturing industry is also affected by the prices of raw materials. Lately, these prices have been falling. Compared to the March-June 2022 period, natural rubber prices have reduced by 24% on the Singapore stock exchange. The price of Kerala rubber during the September 2022 quarter was 11% lower than in the March-June 2022 period.

Tyre companies usually rely 60% on domestic rubber and 40% on imports. Since the prices in both markets are down, the overall cost has been reduced.

Moreover, besides natural rubber, the cost of other raw materials has also reduced. For instance, the cost of synthetic components like Butadiene and Styrene has come down by 18% to 20% over the past two years.

These reduced prices have created a considerable tailwind for tyre companies which might improve their margins.

2. Capital expenditure (Capex) by tyre companies 

Tyre companies often resort to high Capex, which downweighs their profits because of the total supply. However, in the next financial year, i.e., 2023-24, the Capex is expected to remain limited to Rs.12 billion. In the subsequent years, too, the Capex will be limited as it is expected to be a maintenance capex. Furthermore, the Capex will be distributed on increased revenues and profits, which will be favourable.

As Capex reduces, tyre companies can benefit from enhanced profits which will reflect positively on their stock prices.

The rising automobile sales

The rising automobile sales directly correlate with increasing tyre demand. As more and more vehicles are sold, more and more tyres will be needed. As such, a boom in the automobile market should also result in a boom in the tyre market.

However, in the past, this phenomenon did not hold true. Though the automobile stocks delivered exponential returns, tyre stocks failed to match the momentum. The reason was the high capital expenditure that tyre companies incurred. This barred them from delivering a performance in tandem with auto stocks.

However, now, the scene is different. As Capex is limited and the automobile sector is booming, tyre stocks are poised for growth.

The bottom line

All in all, it looks like a good time to invest in tyre stocks as they are poised for a boom. So, check your portfolio and your risk appetite. If you want to diversify, tyre stocks can be a good choice as they can help you capitalize on their boom.

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Check out the video to know whether it is the right time to add tyre stocks to your portfolio

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