Mumbai: Indian tyre makers are scouting for rubber plantations and devising a more profitable product mix in order to arrest the decline in margins, resulting from an unrelenting surge in rubber prices amid fears of a slowdown in the auto market.
JK Tyre & Industries Ltd has said it was “seriously looking” to acquire rubber plantations and had enough cash to fund a deal.
Apollo Tyres said it was open to “possibilities of buying plantations” or any other mode of backward integrations.
Both fear prices of rubber - that account for 40% of the tyre production cost - are unlikely to subside anytime soon and the strategy to protect margins needs to be long term.
“Production of natural rubber is not increasing, while demand for tyres is increasing globally,” said JK Tyre president Arun Bajoria.
Global natural rubber production was forecast to rise to 9.936 million tonnes in 2011, lower than a previous estimate of 10.025 million tonnes, due to output revisions in Indonesia and the Philippines, industry group ANRPC said last week.
This has boosted natural rubber prices more than a quarter in a year as supply trails demand and analysts believe a likely shortfall of 100,000 tonnes of natural rubber in 2011 further boosting prices.
The most traded RSS-4 variety is currently trading at Rs 215 a kg.
Bajoria did not provide any details about the possible plantation buyout.
Analysts, though, believe such an acquisition would not be a cakewalk.
“There is no rubber plantation up for sale. They have to go and acquuire it from existing players. And most of it (plantation) happens in Kerala, where rubber manufacturers are very upbeat about rubber,” said Amit Bagaria, analyst with Angel Broking, expressing doubts whether they will actually be able to get one.
Southern state of Kerala accounts for about 95% of India’s rubber output.
Farmers there are struggling to expand acreage because of scarcity of land and are also reluctant to replant crops as the government’s subsidies are insufficient, said George Valy, president of the Indian Rubber Dealers Federation.
Valy said acquiring plantations overseas too would be a challenge.
“Countries like China which is a major consumer are identifying places abroad suitable for rubber cultivation, instead of directly acquiring plantations,” he said.
Tyre maker Ceat, whose group firm Harrisons Malayalam produces rubber, has to look elsewhere for supplies as Harrisons has not been able to meet the firm’s requirements.
Price hikes and beyond
“The movement of rubber prices will decide the future of tyre companies,” Angel Broking’s Bagaria said, adding the six-month outlook for tyre makers looked bleak unless rubber prices corrected.
India’s top four tyre firms Apollo Tyres, MRF JK and Ceat have seen profits falling as they failed to pass on the full impact of the input cost hike. Shares in JK Tyre and Ceat have fallen about 28% this year, and MRF 8%. Apollo, meanwhile, has gained 6%.
Most of them have announced plans to raise prices by 4-6% in June, after having raised prices at least twice thus far in 2011.
But a stubbornly-high inflation and a rising interest rate scenario that threaten to dampen demand for cars, bikes and commercial vehicles, will likely squeeze tyre makers’ ability to raise prices further.
“I see a stage where tyremakers will not be able to pass on the costs,” said Kishor Ostwal, chairman of brokerage CNI Research.
Therefore, tyre makers are looking beyond prices.
Some tyre makers are shifting focus to higher margin products.
“What we are doing is essentially moving towards a more profitable product and markets. The focus is on making the product mix more profitable,” said Anant Goenka, deputy managing director at Ceat.
Ceat is planning to increase focus on the profitable non-truck segment like LCVs , passenger cars radials and two-wheelers, rather than on truck and bus radials which currently make up almost 60% of its sales, he said.
It also plans to raise share of its aftermarket sales, currently at about 65 %, he said.
Raw material substitution is another possibility tyre firms such as Apollo and JK Tyre are working on keenly.
Among other measures Apollo Tyres is looking at are reviewing existing contracts with suppliers to make corrections wherever possible and maintaining a leaner and efficient inventory.
Betraying optimism is Neeraj Kanwar, vice-chairman and managing director, Apollo Tyres, when he says “any or all these measures” is unlikely to help completely offset the cost rise.