Oil prices bring cost relief for MRF, Apollo Tyres, others1 min read . Updated: 27 Dec 2018, 02:19 PM IST
Shares of notable tyre manufacturers MRF Ltd and Apollo Tyres Ltd have risen 10% and 18% since oil prices started correcting on 5 October
The latest fall in crude oil prices will bring considerable relief to tyre manufacturers. Crude derivatives, such as nylon tyre cord fabric and chemicals, constitute around 30% of the total raw material cost for tyre companies. Consequently, profitability of these companies can see a notable improvement, if they hold on to the prices.
“Our sensitivity analysis indicates that ~10% decline in crude derivatives prices could lead to ~110 bps improvement in gross margins," Nomura Research said in a note. “At the current levels, this would imply ~250 bps benefit in gross margins, if current prices are sustained and no price cuts happen in the replacement segment by tyre companies."
The fall in crude prices comes amid benign natural rubber prices, another key raw material. As tyre companies exhaust their current inventory, impact of the cost reduction should reflect on their profitability from the next quarter (Q4FY19).
No wonder investors are already counting the gains. Shares of notable tyre manufacturers MRF Ltd and Apollo Tyres Ltd have risen 10% and 18% since oil prices started correcting on 5 October.