Input cost shock may puncture tyre sector margins

₹18,500 per 100 kilograms in January, natural rubber price has risen to ₹21,600 in March so far. Soaring crude oil prices would add to this pain.

Since the Iran-US-Israel conflict broke out, Brent crude oil has increased by 17% to around $87 a barrel on fears of a supply shock.Natural rubber accounts for 30% of the raw material mix for tyre makers, 70% is dominated by crude-linked derivatives synthetic rubber (20%), carbon black (25%), and fabric (10%), according to Icra Ltd.Plus, the Indian rupee’s depreciation to 91.88 against the US dollar would inflate import cost of these raw materials. “Tyres sector is the largest consumer of natural rubber in India, accounting for 65–70% of overall consumption; about 55-60% of natural rubber demand is met from local production, and the balance through imports,” said Srikumar Krishnamurthy, senior vice president and co-group head, corporate ratings, Icra.The downside risks to the sector’s profitability have increased and may rise further if the ongoing conflict prolongs.

Profit estimates of tyre companies are highly sensitive to the change in raw material costs. The impact of rising costs on margins usually comes with a lag, depending on inventory levels.

Sure, price hikes can be taken to protect margins, but prevailing competitive intensity would limit that ability.Plus, hikes may come at the expense of market share. If Brent crude remains around $80 a barrel and domestic natural rubber stays at around ₹220 per kilogram for the next three-six months, CLSA estimates a 400 basis points gross-margin hit for Indian tyre makers, even after assuming a staggered 4% price hike in the replacement market and full pass-through in original equipment manufacturer (OEMs).Tyre companies saw