Early 3QFY18 results suggest a continuing trend in the recovery of EBITDA margins, after witnessing deep troughs in 1QFY18, following disruptions driven by the implementation of the Goods and Services Tax regime. Both Ceat Limited ('IND AA'/Stable) and MRF Ltd reported about 50bp and 160bp improvement in margins, respectively, during 3QFY18 versus 2QFY18 due to higher volumes and softening input costs.
Benign Natural Rubber Prices Could Be Temporary: Natural rubber prices declined about 11% on a three-month moving average basis from end-FY17 levels to INR12,812/100kg in December 2017. With crude oil prices touching its three-year high during the current fiscal year, synthetic rubber prices surged over 40% from the November 2017 level to USD1,405 per metric tonne. Given the flexibility possessed by many global tyre manufacturers in feedstock choice, along with natural rubber substituting for synthetic rubber, the demand for natural rubber is likely to increase over the next 6-12 months. Further, the consortium of the three largest natural rubber exporting countries, Thailand, Indonesia and Malaysia, has implemented an export cutback programme in 1Q18 to boost prices.
To add to the inflationary pressure on the sector's input costs, the FY19 union budget proposed to increase the effective cess on customs duty of all imported goods. This can increase input costs as about one-third of India's natural rubber requirement and a substantially large proportion of synthetic rubber requirement are met through imports.
Truck and Bus Segment Favourable: The imposition of anti-dumping duties on Chinese truck and bus (T&B) radial tyres in September 2017 allowed some market players to improve realisations in line with Ind-Ra's earlier expectations (Market Wire: Anti-dumping Duty on Chinese Truck & Bus Radial Tyres Credit Positive for Domestic Tyre Manufacturers). Moreover, a 500bp increase in customs duty on imported T&B radial tyres, announced in the FY19 union budget, is also likely to favour domestic players focussing on T&B aftermarket such as Apollo Tyres Ltd. ('IND AA+'/Stable) and JK Tyre & Industries Limited ('IND A+'/Negative).
Passenger Segment Aftermarket Vulnerable: Since beginning FY18, there have been insufficient pricing actions in the two-wheeler and passenger car aftermarket segments. Stronger volume demand from two-wheeler (9MFY18: 12.5% yoy rise in production) and passenger vehicle original equipment manufacturers (9MFY18: 5.4% yoy) aided the players to maintain healthy capacity utilisation and fixed cost absorption. However, timely pricing action is critical as the sector is witnessing a high cost environment. Passing on the rising input costs to customers, particularly in the aftermarket tyre segment, has been a measured and slow process due to intense competition.
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