While most component makers made hay when the auto industry boomed in 2010-11, it was an entirely different story for the tyre industry. Manufacturers such as Ceat and J K Tyres, for instance, witnessed their profits slump by 86 per cent and 62 per cent in FY-11 to Rs. 22 crore and Rs 61 crore respectively, compared with a year ago. This performance was despite a healthy top line growth of between 20-30 per cent clocked by both the companies. Ceat in fact posted a loss of Rs 42 crore in the first quarter of 2011-12, while JKT just managed a profit of 0.96 crore in April-June 2011 period.

Unprecedented rise in the price of natural rubber, a key raw material and a surge in crude prices to above the $100 a barrel mark (from which inputs such as synthetic rubber, nylon tyre cord and carbon black are derived) have been the key reasons for the lacklusture performance.

Cup of woes

With material costs accounting for about 65 per cent of the turnover, the tyre industry is among the highly raw material intensive. And, forming about 45-50 per cent of the total input costs, natural rubber is the key raw material. Beginning December 2009, domestic rubber prices have relentlessly marched upwards. Since then, prices of the RSS 4 (Ribbed Smoked Sheets) variety of rubber which is used by the tyre industry has almost doubled to about Rs 220 per kg in March 2011. International prices too have followed similar trends. A worldwide shortage in the availability of rubber (partly attributable to unfavosurable climatic conditions for tapping), robust demand from countries such as China and India ( which together make up for three-fourths of the global consumption) and speculation arising from forward trading have been the key reasons for the shoot up in prices. Additionally, geo-political factors also pushed up crude oil prices above the $ 100 a barrel mark, inflating the prices of other raw materials such as synthetic rubber, nylon tyre cord fabric, carbon black and rubber chemicals. From about Rs 250 per kg in April 2010, prices of nylon tyre cord, for example, moved up to around Rs 300 by March 2011.

Considering the necessity for rubber imports in view of the demand -supply gap domestically, tyre makers were hit on that front too. Topped with high international prices, companies had to pay a high import duty of 20 per cent. It was only in end December 2010 that the government cut the duty to 7.5 per cent, allowing an import of 40,000 tonnes until March 2011. This however, became a case of ‘too little, too late’ as the licences were in place only by mid-February 2011 and companies had less than six weeks to organize the imports, say industry insiders.

High costs though, could be passed on to a good extent to clients, thanks to the 26 per cent growth in auto industry last year. Price hikes have continued into the first few months of 2011-12 too. Apollo Tyres, for instance, has effected a price increase of over 20 per cent in the last five quarters. But the challenge has been that, even as companies were taking price increases, rubber prices have moved at a faster pace, thus laying siege on margins. From around 11.4 per cent in the December 2010 quarter, MRF’s operating margins , for instance, gradually decreased to 9.8 per cent in the March 2011 quarter and further to 6.4 per cent for the three months ended June 2011.

Added to the cost pressures, domestic tyre manufacturers also had to contend with increased competition from imported tyres from countries such as China, Malaysia and Thailand that are known to be cheaper. The government too freed the import of radial tyres (earlier under the restricted list) into the country in last year.

Road ahead

Much of the challenges mentioned above could continue to haunt the tyre industry this year too. Domestic RSS 4 variety prices, which peaked at Rs 235 in April 2011, have cooled off to around Rs 205 currently. International prices too have followed suit. Although it may take a quarter or two for this to show up in the margins, a stabilisation at this levels could help companies breathe easy. But considering the demand-supply gap, chances of any big drop in the prices remain unlikely, feel industry observers. The Rubber Board projects domestic natural rubber production for 2011-12 at 9,02,000 tonnes and exports, at 50,000 tonnes while the consumption is expected to touch 9,77,000 tonnes. Countries such as Indonesia , a major producer, have revised the expected production for the current year downwards..

So what is the way out for the industry? One solution could be effecting further price increases. Companies have already resorted to this measure in the first four months of the year. However, considering the steep hikes last year, further increase may be difficult, especially at a time when the auto industry growth is moderating. That said, it must be mentioned that the tyre industry, like the battery industry is more dependent on replacement demand than on supplies to OEMs. On an average, tyre manufacturers derive 65 per cent of the revenues from the replacement market and also enjoy greater pricing power in this segment. As auto OE sales slow, replacement demand for vehicles sold in the last few years, may give a leg-up to the industry profitability. However, cheaper imports and higher demand for re-treading in the wake of high tyre prices, may impact this pricing power.

Some respite could also come from duty-free imports as demanded by the industry, if allowed by the government. Already, in comparison with the flat 20 per cent duty on imports earlier, tyre companies pay a 20 per cent duty or Rs 20 per kg, whichever is lower, from April 1, 2011. A medium-to-long term solution to control the input costs could also be backward integration. JK Tyres, for example, has announced that they are looking to buy existing rubber plantations either in India or abroad.

Radialisation benefits

High rubber prices notwithstanding, what could immediately prop up realizations is the improving share of radial tyres in the product mix. While 98 per cent of the cars use only radial tyres, radialisation in commercial vehicle tyres is at 15 per cent currently. Considering the improving road infrastructure, the extended life span of radial tyres and the higher fuel efficiency that they offer, radialisation in CVs is expected to reach 30 per cent by FY14. This presents a huge opportunity for manufacturers , who have set up greenfield capacities to cash in on the increasing demand for truck-bus radials. Global market leaders like Michellin and Bridgestone too have started production of truck-bus radials in India. Goodyear and Continental are also mulling radial facilities in India. However, though the higher cost of these tyres could help improve margins for the domestic companies, there could be pricing pressures due to increased competition.

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