Rise in the price of rubber, the key raw material for tyres and a slowdown in the domestic automobile industry saw tyre stocks turning out of favour last year.

MRF was no exception. For the year ended September 2011, adjusted net profits were down four per cent to Rs 339 crore. As raw material as a percentage of sales rose to 76 per cent (from 69 per cent in the previous year), operating margins dropped by 3 percentage points year-on-year to 8 per cent.

Mirroring this sentiment, the stock remained range-bound for most part of the last 12 months, returning about 5 per cent in the April-December 2011 period. Much of the gains for the stock have hence come about beginning January 2012. A rally in the broader markets, coupled with an improved outlook for tyre makers for the current fiscal has been the reason for the same.

From the April 2011 peak of about Rs 240 a kg, rubber prices have now eased by about 20 per cent. Besides, considering the double-digit growth in auto volumes in 2009-10 and 2010-11, demand for replacement of these tyres will kick in shortly. Replacement sales are higher margin yielding than sale to auto manufacturers. MRF, being one of the biggest players in the industry, will be a beneficiary of these trends.

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