MRF, Apollo Tyres shares skid after Nomura warns of another margin headwind

Shares of tyre companies like MRF Ltd and Apollo Tyres skid up to 2% in Tuesday’s trade after Japanese brokerage firm Nomura reiterated its cautious stance on the sector, saying a sharp jump in natural rubber prices will be another headwind to the sector’s margins.

Weakness in demand and rising commodity prices could normalise margins faster for the sector, the brokerage noted.

Since February, the global natural rubber market has experienced a substantial increase in prices, marking the end of a prolonged period of reduced demand — at least temporarily.

In the domestic market, natural rubber prices have jumped 23% quarter-on-quarter (QoQ) to ₹186 per kg as of March 18, 2024. The international rubber price increase has been steeper, up 66% QoQ to ₹230 per kg, closer to the last peak seen in early 2011.

Historically, Nomura’s analysis indicates domestic rubber prices usually trade at a 10-15% premium to global prices. Hence, there can be a further uptick in domestic rubber prices, if global prices sustain at these levels.

“Our analysis indicates the sharp increase in global rubber prices has been driven by a demand-supply mismatch arising out of adverse weather conditions in Thailand and disruptions in Red Sea shipping routes impacting supplies while demand remained steady,” it said in its note.

According to the brokerage, industry experts believe there is unlikely to be a short-term respite and prices might remain high until May-June after which supplies should improve.

Nomura believes companies will try to take price hikes to pass on a part of the cost, but this might be difficult and take some time in segments such as truck-bus, where it expects demand to be weak in the near term.

Traders anticipate that Indian natural rubber prices could climb to ₹200 per kg during April-May, putting pressure on tyre companies in the first quarter of FY24-25, according to a MoneyControl report.

The increase in the price of this essential raw material will raise production costs for tyre manufacturers, who constitute approximately 70% of natural rubber consumption, necessitating them to implement measures to mitigate the impact.

The Red Sea crisis has further affected tyre exports, rendering Indian products less competitive in the global market amidst rising competition from China and other Asian nations over the past few months.