High rubber prices could deflate tyre manufacturers’ profitability

High rubber prices could deflate tyre manufacturers’ profitability
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First Published: Sun, Feb 14 2010. 09 43 PM IST

Updated: Sun, Feb 14 2010. 09 43 PM IST
Although rubber prices have been moving northward for the last eight months, the highest spurt from Rs110 per kg to Rs140 per kg was in November and December. This did not, however, adversely affect profitability of tyre makers in the December quarter. Companies rode the benefit of the low-cost inventory of rubber they had piled up. Besides, the input cost hike was partly offset by the increase in tyre prices, which was absorbed by the buoyant original equipment and replacement market.
The coming quarter, however, may tell a different tale. True, with a 6% increase in domestic rubber production in January over the year-ago period, rubber prices have now softened to Rs134 per kg from the peak of Rs140 per kg. The rubber output for January was around 97,500 tonnes against around 91,000 tonnes in January.
Traders in the commodity say rubber prices may sustain at these levels as there is a two-month stock of rubber. This is good news, but will reflect in higher input costs for tyre makers in the March quarter.
Raw material cost, on an average, is likely to be higher by 15% sequentially, thereby affecting operating profit margins. One must note that for the December quarter, the average cost of rubber was only Rs113-115 per kg for most companies. Apollo Tyres Ltd reported an operating profit margin of around 16% during that quarter, around 2 percentage points higher than the preceding sequential quarter. MRF Ltd, too, was able to maintain the margin despite higher rubber prices.
According to Rajiv Buddhiraja, director general, Automotive Tyre Manufacturers Association, “The higher input costs by way of both natural and synthetic rubber prices will impact company financials in the fourth quarter, even as one may see a topline growth.” In other words, while revenue will increase due to higher sales volumes and tyre prices, cost pressures will come in with a lag in the fourth quarter. The increase in crude oil prices in the last few months has led to a rise in the price of synthetic rubber.
Another twist to the tale could be the change in excise duty on tyres. During the cut-back in duties, excise duty on tyres was cut from 12% to 8%. Although not desirable, according to the tyre industry, the duty could be increased by 2-3 percentage points in the forthcoming Budget.
So far, the good news is that strong demand has given tyre companies the leeway to pass on cost increase at least partly to consumers. Most companies have increased tyre prices by 8-12% in the current fiscal year, in phases. However, the rise in input input costs has outstripped this. Analysts’ consensus is that the operating profit margin for the March quarter could drop by around 2-3 percentage points.
Write to us at marktomarket@livemint.com
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First Published: Sun, Feb 14 2010. 09 43 PM IST