Synopsis: Rising crude oil and natural rubber prices are increasing cost pressures for Indian tyre manufacturers, according to CLSA. With nearly 90% of raw materials linked to commodities, the sector remains highly vulnerable to price volatility. Despite price hikes and cost pass-throughs, margins may shrink if commodity prices remain elevated in the coming months.
Indian tyre manufacturers may face margin pressure due to an increase in crude oil and natural rubber prices. According to CLSA, the ongoing conflict between the US, Israel, and Iran in West Asia has led to an increase in the prices of raw materials, which is impacting the cost structure of the tyre industry.
As the raw materials basket for the tyre industry consists of 90% commodities, the recent 15% to 20% increase in raw materials may have an impact on the margins despite the efforts of the tyre manufacturers to mitigate the same through gradual price increases.
Rising Input Costs Threaten Margin Stability
India’s tyre market appears to be on the verge of a margin squeeze, with a rise in prices of crude oil and natural rubber. According to a report by broking firm CLSA, the ongoing conflict in West Asia involving the US, Israel, and Iran has led to a rise in raw material costs for tyre manufacturers. This is because a rise in prices of raw materials, which form a significant part of the production costs, has a significant impact on the margins of companies, despite a marginal rise in prices.
As mentioned in a report by CLSA, the Indian tyre market is a raw material-dependent business, with close to 90% of the raw material basket being commodity-related. Further, about 45% of the raw material costs are linked to crude oil derivatives, which are used in the production of synthetic rubbers, while another 45% is linked to the prices of natural rubber. With a sharp rise in oil prices since the beginning of the conflict, tyre manufacturers are already experiencing a rise of 15-20% in raw material costs.
This pressure is further exacerbated by the weakening Indian rupee, which has recently hit a new low of ₹91.62 per US dollar. This would mean a rise in the cost of importing both natural and synthetic rubbers, which would be a result of the rise in prices of these commodities. This would be a significant factor for tyre companies, who import a lot of raw materials, thus affecting their costs in the near future.
As per a study by CLSA, if the prices of Brent crude oil are predicted to stay at a constant $80 per barrel, along with a constant rate of ₹220/kg for natural rubber, tyre manufacturers could face a reduction of 400 basis points in their gross margins by FY27. This has been calculated on the basis of a rise in prices of about 4% in the replacement market, which would be completely absorbed by the OEMs. Even after this, the rise in raw material prices might prove to be a larger factor than the rise in prices.
Valuation and Cash Flow Risks Ahead
The brokerage also stated that such a situation may have broader financial implications for the sector. Lower margins may also impact the free cash flow and capital structures, as many tyre companies are entering new capex cycles in FY27 or are focused on debt reduction following recent acquisitions. Hence, at CLSA, it is believed that if commodity prices remain high for a longer period, the cost pressure may impact the valuation multiples of tyre stocks.
Overall, the significant jump in crude oil and natural rubber prices is likely to put profitability pressure on Indian tyre manufacturers in the near term despite the price increases announced by the companies. While the companies will partly mitigate the adverse effects through price increases and cost pass-throughs to OEMs, the commodity inflation and the weaker rupee will continue to put downward pressure on their profitability. If this is the case over the next few quarters, Indian tyre manufacturers will face a challenge in sustaining their profitability, cash flows, and valuation multiples.
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