Tyre Companies are Direct play on Commodity prices.
- Over the past 5 years, Most of the Tyres Companies stock price have run up by 300-400%, Whereas Sensex gained around just 40%. (i.e. a CAGR of 30+% vs Sensex’s 7%)
- Only reason for such an extra-ordinary performance is Super Normal Operating Margins, due to steep fall in Rubber prices. Tyres is a small sector, which is one of the big beneficiaries of fall in global commodities prices.
- For past 5 years, every year Operating margin have risen each year, compare to previous year (from FY11 – 10% to FY16 – 24%)
- Topline CAGR is 8%, Operating Profit CAGR is 28% and Profit CAGR is 34%.
- Profit CAGR matches with the stock price CAGR.
One must take a note of this fact that, most of the analyst on the street have assumed similar higher margin for FY17 & FY18. No analyst assumes steep fall in margin.