‘At MRF, we expect a change for the better from March’

Koshy Varghese, EVP (Marketing)

Cash crunch, rising global rubber prices have impacted sales, says MRF official

Chennai January 30



MRF is the market leader in the Indian tyre industry, which is served by scores of domestic and international players. Koshy K Varghese, Executive Vice President – Marketing spoke to The Hindu group of reporters on the impact of demonetisation, brand MRF, expansion plans and future outlook. Excerpts:

Has the market come back to normal post-demonetisation?

There has been a postponement of purchases in the replacement market and that has definitely led to a very significant demand compression. This is visible and palpable across all product categories. Since tyre trade per se operates on cash, retail trade was affected. However, the situation has slightly eased.

The impact was severe on the vehicle OEM front as they had to cut production significantly. Maximum cut was in two-wheelers and it was to the extent of 40-50 per cent over normal production.

Even in January, it has not come back to normal, though it was better than December. By March, things are expected to come back to near-normal.

So, what is the near-term demand scenario?

Regulatory changes are coming for trucks - BS 4 norms from April 1. With that, cost of a truck is likely to go up by ₹1.5-2 lakh. Trucks makers expected some preponement of purchases in November and December. That didn’t happen.

Now, there could be a spurt in truck sales in February and March, with money coming in and things getting little easier.

For us, raw material (RM) prices have suddenly gone up. In the past one-and-half-months. Rubber price has gone up to about ₹155 per kg from ₹120. So, this increase has happened in a very short period. Crude prices are hovering at $55. It will go up and with that other derivatives will also increase.

From February 2013-January 2017, tyres prices declined to the extent of ₹5,000 on a pair of truck tyres – which is a 15-16 per cent drop.

Meanwhile, international prices, which used to be much lower than domestic prices, are now higher by ₹30, while domestic output is not adequate to meet the demand.

Today, 67-70 per cent of the total rubber produced in the country is consumed by the tyre industry. Demand of the industry is about 10-10.5 lakh tonnes and domestic supply is 6-6.5 lakh tonnes – so there is a shortfall of 4-4.5 lakh tonnes, which needs to be imported. We are now caught in a peculiar situation where international prices are higher than, and there is a deficit in domestic supply. Therefore, there is an imminent cost push, which we see.

With subdued market conditions, can you increase tyre prices now?

If you don’t pass it on, your bottomline suffers. If you pass it on, you may lose market share. We are caught in the devil and deep sea situation. While we expect things to get back to near normal by March, time has come to relook at pricing now. We have to do a calibrated move. But the reality is there is a cost push.

Are you confident of retaining dominant position?

Incidentally, 2017 is the 30th year of our market leadership. We became the market leader in 1987 in the replacement market that is where the war is happening as it accounts for 65-70 per cent of the volumes.

The investments made in developing products for right applications and brand building over these years have helped. Also, our distribution network is very wide. We have consciously created a very strong network which we directly deal with.

Are you little late in moving outside south to set up a factory?

We have been continuously making capex of ₹800-₹1,000 crore a year across our plants. Had we not expanded with capex of such huge amount, we would not have retained our position. It is a fact that capacity was added and was sold. Hence, we have remained in that position.

The Gujarat investment is natural extension of our thought process that going forward, India will continue to be a dominant consuming market. Some of the consuming markets are also in the North and the West. Going forward, logistics cost will increase. With that in mind, we thought it would be appropriate to have a factory close to consuming centres.

Also, some of our newer OEMs like Maruti and Honda have gone there. I think it will give us savings in logistics costs as also service customers in those markets better.

How do you define brand MRF in today’s context?

While there is brand promiscuity on one side, there is also an element of trust associated with the brands for end customers.

In the surveys we conduct, couple of things that come up very often is reliability and trust for our brand. This is important from tyre business perspective. Going forward, we see an interesting fight for brand space. Because the way the market is evolving and the demography is changing, the business model has to encapsulate the demography of the country.

Published on January 30, 2017
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