Tyre cos jostle to take pole position, hit margin bump

The outlook for tyre industry continues to worsen. While initially, it was the volatility in natural rubber prices that dented margins of most of the local companies, the current removal of import duties on radial tyres will certainly make the matter worse.

[caption id=“attachment_61500” align=“alignleft” width=“380” caption=“The demand-supply mismatch is a cause of concern. Reuters”]  [/caption]

The recent announcement on the removal of duty on radial tyres from countries like China and Thailand will lead to increased competition in the tyre industry as prices for tyres become cheaper. Already, imports account for 50 percent of the market share with a large chunk coming from China. This will benefit certain Chinese companies like Giti and Weifang, said a local media house.

The tyre industry has been grappling with low margins for quite some time now. Raw material, its major cost component, constitutes almost 65-70 percent of sales. Its major raw material is natural rubber, the prices of which have seen a sharp rise in the last few quarters. Prices of RSS4 (Ribbed Smoke Sheets), a variety of rubber which is used in the tyre industry, almost doubled to around Rs220 per kg in March 2011.

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And prices don’t seem to be in a hurry to cool off either. The demand-supply mismatch is a cause of concern. “I do not wish to be an alarmist, but as I look ahead, I am worried by the natural rubber situation that faces us today,” said Apollo chairman in his recent AGM speech. He also said: “A large number of plantations had come up in the 1980s and most of these would require massive uprooting and replanting between 2012 and 2018 and experts expect the gap between growing demand for natural rubber and dwindling supplies to increase to alarming proportions of one million tonnes by 2020.”

Clearly, the impact of high natural rubber prices was visible in the company’s net profit, which grew at a slower pace of 4 percent for the June 2011 quarter compared to the revenue growth of 55 percent year on year. No wonder then Apollo’s scrip declined 7 percent compared to the BSE Auto Index, which fell marginally by 0.69 percent.

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Domestic brokerage firm, Emkay, expects a sharp contraction in the company’s margins in FY12. The subdued demand in domestic business, coupled with the removal of the anti dumping duty on Chinese imports, is expected to have a severe impact on the company’s profitability. Operating profit margins are expected to contract to 9 percent in 2011-12 from 16.5 percent earlier. Net profit margins are also expected to contract to 3.3 percent from 10.4 percent owing to higher interest, depreciation and tax rates.

Other tyre companies also find themselves in a similar position. While Ceat has made a loss for the second consecutive quarter, JK Tyre barely managed to make a profit of Rs 0.96 lakh compared to Rs.19.5 crore in the June 2010 quarter.