Why are tyre stocks like Apollo Tyres, MRF and Balkrishna Industries down so sharply in the last few months?

You are right that tyre stocks have fallen sharply, in fact, much more than the Nifty. For instance, Apollo Tyres corrected 26.6% from its Oct-21 peak to Rs.183.50. Similarly, MRF fell about 25.9% from its peak price to Rs.66,949. Other tyre stocks like Balkrishna Industries, JK Tyres and even Ceat have corrected even sharper from their yearly highs. Some stocks like JK Cements have lost more than 40% and are close to their yearly lows.

There are 3 reasons why tyre company stocks have fallen. The first reason is the distinct in auto production. As microchips have gone short, most auto companies are cutting down on production. Since the demand for tyres is a sort of derived demand, it faces tepidness in demand in tandem with the fall in auto output. The redeeming feature is that the replacement market has still seen rather robust demand for tyres this year.

There are also CCI penalties on tyre companies for cartelization, but this has hardly yielded any results. However, now I come to the third reason, which is the spike in input costs, and perhaps the most important reason for the fall in tyre stocks. Key inputs that go into tyre manufacturers like carbon black, natural rubber, synthetic rubber and oil have seen a sharp price surge in the last few months. On a yoy basis, the input costs are up almost 22%.

Tyre companies have hiked prices but in a competitive market, they have only passed 12-15% out of the 22% spike in raw material costs. A key variable going into the input cost for tyre companies is the price of crude and that is up 85% since the start of December 2021. In addition, there are also factors like relaxation of import restrictions on tyre and rising interest costs and cost of car ownership. The real issue continues to be input cost inflation.