It looks like the profit margins of tyre makers are in for a further beating, after falling in the March quarter, due to rising rubber prices. The price of the commonly used RSS–4 grade touched Rs170-175/kg, registering a 70% jump in one year and a 150% jump in 18 months.
Thanks to the surging automobile demand, tyre makers were able to pass on the increase in costs through price hikes. From October, most companies have had at least four price hikes across product categories, each time by around 2-3%. This, along with lower-cost inventory, helped them maintain margins until the December quarter.
Also See Robust Demand (Graphic)
But in the March quarter, cost increase has outstripped the increase in tyre prices. Rubber prices rose by 18-20%, whereas companies increased tyre prices by 6-8%. Given that rubber accounts for nearly 45% of raw material costs, which in turn account for 70% of net sales, this is bound to affect profitability.
MRF Ltd’s sales in the March quarter grew 26% year-on-year (y-o-y) and 7% sequentially to Rs1,767 crore. But operating profit margin (OPM) dropped from 15.4% in the December quarter to 12% last quarter. Ceat Tyres Ltd registered a 31% y-o-y increase in net sales, but its operating margin halved to 5%.
Apollo Tyres Ltd (ATL) is yet to announce its results but analysts estimate its margin may fall by 3 percentage points to around 13% in the March quarter.
According to Neeraj Kanwar, managing director, ATL, and chairman of the Association of Tyre Manufacturers, “Every rupee increase in rubber prices has a Rs60 crore impact on the tyre industry’s profitability.” OPM will continue to fall in FY11 if rubber prices do not recede. Analysts say tyre prices have to go up by 22-25% for firms to sustain current OPM in FY11.
Will rubber prices cool off? Following reports of the Greek crisis, rubber along with other commodities have corrected. Yet, reports indicate that demand will outstrip supply by 200,000 tonnes in FY11, up from nearly 100,000 tonnes in the previous year.
Earlier, international prices were around Rs20-25/kg lower and tyre makers could import. Now, the gap is down to Rs5 and there is an import duty of 20%, which makes imports unviable. Despite this, leading tyre companies seem unfazed. Most have lined up capacity expansions. Since April, top companies have raised tyre prices by 6-8% in the replacement market. But this may not be enough and profitability will be under pressure in the next two quarters.
Graphic by Naveen Saini/Mint
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