Rubber price deflates tyre stocks, opportunity to buy

The whopping rise in rubber prices is set to deflate the earnings of tyre companies. After the stock prices registered a fall, these companies looked  reasonably priced and offered an investment opportunity with an upside potential of 15-25% in 12 months time.

While the domestic rubber spot price is trading up from Rs 160/kg in October, 2010  to all all-time high at Rs 242/kg. The price at the international market too shot up from 297 yen/kg in August, 2010  to Rs 535 yen/kg .  The demand for rubber has escalated following a ramp-up in global auto sales.

“The rise in price led to increase in output cost of all tyre companies,” says Alex Mathew, head – equity research, Geojit Financial Services.

“Though tyre companies are partly passing on the cost to their buyers, but margin pressure will be reflected in their March quarter results. Contrarians can enter the stocks at the current levels, which are reasonably priced. Stock price will go up after March-April on higher productions.”

A contrarian investor puts his money in the sectors, which are not currently preferred , but has long term potential.

Some of the stocks that look attractive  at this juncture include MRF (PE 7.47), Apollo Tyres (PE 11.39), J K Tyres (PE 4.67), Ceat (PE 6.67), andTVS Srichakra (5.86). The average industry price earning ratio is at 6.35. Most of the stocks are trading near their 52-week low. In the last  three months, these five stocks  on an average have clocked nearly 26% negative returns.  “Investment at current levels can fetch upto 25% return in a year’s time,” adds Mathew.
Higher prices have put a strain on the working capital requirements of traders/exporters as well as tyre manufacturers, which in turn has kept the gap between Indian and international prices wide for extended periods, says a research report by Geojit Comtrade.
Excess rainfall, particularly in rubber producing state like Kerala, had taken a toll on domestic rubber production . Flood conditions in South East Asian countries, which  are key rubber producing nations, also hit overall productions. However, situation is expected  to  improve after March-April with  the arrival of fresh crop.

India’s production of natural rubber in 2010 was at around 8.5 lakh tonnes while the total demand in the country is nearly 10 lakh tonnes per year.

(Source: http://www.moneycontrol.com/news/asian-markets/rubber-price-deflates-tyre-stocks-opportunity-to-buy_525181.html)