Forex losses, surging raw material prices and margin pressure overshadow strong revenue growth, triggering a broad sell-off across tyre stocks

Shares of Ceat Ltd. witnessed a sharp decline on Friday after the tyre manufacturer reported a steep fall in its June quarter earnings, disappointing investors despite delivering robust revenue growth. The stock fell over 9% in intraday trade, making it one of the biggest losers on the National Stock Exchange (NSE), as the company's profitability was hit by substantial foreign exchange losses and rising raw material costs.

The weak earnings also weighed on sentiment across the tyre sector, dragging down shares of JK Tyre & Industries, Apollo Tyres, Balkrishna Industries, MRF and TVS Srichakra. The broad-based decline reflects investor concerns that higher commodity prices and cost inflation may continue to pressure margins across the industry over the coming quarters.

Stock Slides Despite Positive Market Sentiment

Ceat shares dropped as much as 9.4% to an intraday low of ₹3,471 after the company announced its first-quarter FY27 results. Although the stock recovered slightly during the session, it continued to trade around 7–8% lower, significantly underperforming the broader market.

The sharp fall came on a day when benchmark indices were trading firmly in positive territory, indicating that the decline was largely driven by company-specific concerns rather than overall market weakness.

The stock has now corrected considerably from its 52-week high of ₹4,438, touched in October 2025, though it remains above its yearly low of ₹3,000.50.

Revenue Growth Remains Strong, But Profitability Collapses

Ceat reported healthy revenue growth during the June quarter, reflecting continued demand across domestic and export markets.

The company posted:

• Revenue: ₹4,318 crore

• Year-on-Year Growth: 22.4%

However, the strong top-line performance failed to translate into higher earnings.

Consolidated net profit plunged 96.4% year-on-year to just ₹4 crore, compared with ₹112 crore reported in the corresponding quarter last year.

The sharp earnings decline came as multiple cost pressures impacted overall profitability.

Foreign Exchange Losses Take a Heavy Toll

The single biggest factor behind the weak earnings was a substantial foreign exchange loss.

According to the company, its overseas subsidiary incurred approximately ₹50 crore in forex losses due to the depreciation of the Sri Lankan rupee against the US dollar.

Since part of the subsidiary's borrowings are denominated in US dollars, the weakening local currency significantly increased repayment obligations, resulting in a sizeable accounting loss during the quarter.

Management indicated that this was largely an exceptional item rather than a reflection of the company's core operating performance.

Raw Material Inflation Continues to Hurt Margins

Apart from currency-related losses, Ceat also faced severe pressure from rising raw material costs.

The company highlighted that raw material inflation exceeded 20% during the quarter.

Major cost drivers included:

• Natural rubber

• Crude oil-linked derivatives

• Synthetic rubber

• Carbon black

• Petrochemical products

The surge in input costs significantly reduced profitability despite healthy growth in sales volumes.

Operating Margins Witness Sharp Compression

The impact of higher input costs was clearly reflected in Ceat's operating performance.

The company's EBITDA margin declined to 8.45%, compared with 10.97% in the same quarter last year.

The lower margins resulted from:

• Increased commodity prices

• Foreign exchange losses

• Higher logistics costs

• Expansion-related expenses

• Investments in newly acquired businesses

Analysts believe margin recovery will largely depend on future commodity price movements and the company's ability to pass higher costs on to customers.

Expansion Investments Affect Near-Term Earnings

Ceat also reported losses associated with newly acquired businesses and expansion initiatives.

The company has been investing heavily in:

• New warehouses

• Distribution infrastructure

• Capacity expansion

• Operational integration

Although these investments temporarily affected profitability, management expects them to contribute positively over the long term as utilisation levels improve.

Tyre Sector Comes Under Selling Pressure

Ceat's disappointing earnings triggered a broader correction across tyre stocks.

During Friday's trading session:

• JK Tyre & Industries declined nearly 4%

• Apollo Tyres slipped around 1%

• Balkrishna Industries fell approximately 1%

• MRF traded lower

• TVS Srichakra also witnessed selling pressure

The decline suggests investors remain concerned that rising raw material costs may continue to weigh on profitability across the industry.

Commodity Inflation Remains the Biggest Challenge

Brokerage firm ICICI Securities believes margin pressure was largely expected given the sharp increase in commodity prices during the quarter.

According to the brokerage:

• Brent crude oil prices increased from around $65 per barrel during the previous quarter to above $100.

• Natural rubber prices surged from nearly ₹190 per kilogram to around ₹250 per kilogram.

Higher global commodity prices, rupee depreciation and import parity pricing significantly increased manufacturing costs for tyre companies.

Price Hikes Aim to Offset Cost Inflation

To partially offset rising input costs, Ceat implemented cumulative price increases of approximately 5% during the first quarter.

Management, however, acknowledged that raw material prices are expected to remain elevated during the second quarter as well.

The company plans to continue balancing:

• Selective product price increases

• Cost optimisation measures

• Productivity improvements

• Operational efficiencies

to gradually restore margins.

Major Capacity Expansion Planned

Despite near-term profitability challenges, Ceat remains optimistic about long-term demand.

The company announced a significant expansion of its two-wheeler tyre manufacturing capacity.

The project includes:

• Investment: ₹1,205 crore

• Additional Capacity: 53,000 tyres per day

• Existing Capacity: 80,000 tyres per day

• Commissioning Timeline: By the end of FY31

The investment reflects management's confidence in India's long-term automotive and mobility growth.

Domestic Demand Remains Supportive

Industry fundamentals continue to remain favourable despite short-term cost pressures.

Demand drivers include:

• Rising two-wheeler sales

• Passenger vehicle replacement demand

• Commercial vehicle growth

• Infrastructure development

• Rural consumption recovery

These trends are expected to support volume growth over the medium term.

Key Risks Investors Should Watch

While long-term demand remains healthy, investors will closely monitor several factors over the coming quarters.

Commodity Prices

Future movements in crude oil and natural rubber prices.

Currency Volatility

Impact of exchange rate fluctuations on overseas operations.

Margin Recovery

Ability to restore operating profitability through pricing and efficiency measures.

Capacity Expansion

Execution of new manufacturing investments.

Demand Trends

Growth across passenger vehicle, commercial vehicle and two-wheeler segments.

Investment Outlook

Ceat's June quarter performance highlights the challenges currently facing India's tyre industry. Although demand remains robust and revenue growth continues to be encouraging, elevated raw material costs, currency-related losses and expansion investments significantly impacted profitability.

The company's long-term outlook remains supported by strong domestic automotive demand, planned capacity expansion and continued investment in distribution infrastructure. However, near-term earnings are likely to remain sensitive to commodity price movements and foreign exchange fluctuations.

For investors, the next few quarters will be crucial in determining whether input cost pressures begin to ease and pricing actions successfully restore margins. If raw material inflation moderates and operational efficiencies improve as expected, Ceat could gradually return to stronger profitability, making it one of the key stocks to watch within India's tyre sector.