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Tyre firms: Profits may deflate on high input cost

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Vishal ChhabriaSunaina Vasudev Mumbai
Last Updated : Jan 20 2013 | 12:26 AM IST

If Indian tyre manufacturers fail to pass on the increase in input costs through price increases, margins could fall sharply.

Tyre manufacturers had a good run through most of the year, as they witnessed higher margins due to lower input costs (rubber and crude oil related raw material prices). Moreover, auto sales (tyre demand) also moved into a higher gear. Consequently, their stocks have performed well. As against the Sensex’s 70 per cent rise, stocks of tyre manufacturers have risen 140-250 per cent in the last one year.

The gains from lower costs and improving demand are reflected in MRF’s stellar performance for the year ended September 30, 2009. Its consolidated profit after tax was up 75 per cent year-on-year to Rs 250 crore, with sales rising 12 per cent to Rs 5,668 crore. Thanks to lower rubber prices, its raw material cost fell 1.4 per cent pushing up the operating profit margin (OPM) by 400 basis points to 13 per cent.

Apollo Tyres, too, has witnessed a 249 per cent rise in its net profit to Rs 197 crore for the 12 months to September 2009, on the back of OPM more than doubling to 33 per cent and sales rising 16.7 per cent. Ceat also reported a turnaround with net profit of Rs 122 crore during this period, as compared to a loss of Rs 39.5 crore for the 12 months to September 2008.

MRF’s stock, however, tanked nearly 7 per cent after its results were announced. The market, perhaps, is worried about the future. Rubber prices have come a full circle and are currently 8 per cent shy of the peak seen in September 2008. Stocks of other tyre companies have also been under pressure, reflecting the likely impact of higher raw material costs on profitability. Barring MRF, stocks of Apollo Tyres, Ceat and JK Tyres have underperformed the Sensex by about 6.5 per cent and the BSE Auto index by about 12 per cent in the last one month.

The outlook on rubber prices isn’t comforting. The industry has been operating at around 14 per cent earnings before interest, tax, depreciation and amortisation (Ebitda) margin levels for the first half of the year. This is expected to halve if tyre companies don’t pass on the cost increases to consumers. However, the ticking demand should allow them to raise prices, feel analysts, and this will buffer margins to an extent.

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Average OPMs are expected to be 8-10 per cent for the remaining year. Crude-related input (carbon black and artificial rubber) costs have been steady so far, but could hurt if crude prices edge upwards.

Imports, which accounted for about 8 per cent (100,000 units) of the total Indian truck and bus radial market in 2007-08, is the key worry point for pricing in the segment. Chinese imports are 10-30 per cent cheaper than Indian truck and bus tyres (bias and radial) and the government hasn’t levied anti-dumping duty because of high demand. With capacity expected to nearly double to 2-2.5 million tyres by end of 2010-11, imposing import duties will be necessary to protect margins for the Indian tyre manufacturers.

Both Apollo Tyres and JK Tyres have made timely overseas acquisitions, and if the turnaround is in tandem with a global recovery, they can reap rich rewards. The profitability of domestic players is dependent on their ability to pass on the input cost rise and maintaining this pricing discipline. News flow to this end will act as a trigger for these stocks.

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First Published: Dec 23 2009 | 12:57 AM IST

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