Mumbai: Margins of tyre companies are likely to fall by 1.5-2% between the second and third quarters of FY19 on rise in imports due to lack of natural rubber supply following the Kerala floods, according to a report.

Domestic natural rubber production meets over 50% of the requirements of tyre companies in the country and Kerala accounts for close to 90% of the total domestic rubber production.

“The floods in Kerala will disrupt domestic supply and hence tyre companies will resort to higher imports to meet the rising tyre demand," India Ratings said in its report. Natural rubber imports attract a duty of 25%.

“Additionally, with a depreciating rupee, imports are likely to be more expensive and will hurt margins of tyre companies amid a rise in rubber procurement costs," it said.

The ratings agency expects the margins of the tyre industry to fall by 1.5-2% between the second and third quarters of FY19, due to a higher cost of production. Input costs for tyre firms are also expected to increase over the next two to three quarters due to the disrupted supply of natural rubber, it said.

However, it was quick to add that tyremakers have sufficient unused working capital limits and liquidity available to meet such near-term disruptions.

Tyre demand is likely to be robust in FY19 and hence the ratings agency expects production and margins to start recovering by the end of the December quarter.

Production is likely to be affected during the August to October period for companies whose plants are located in Kerala, Tamil Nadu and Andhra Pradesh.

Natural rubber prices have been increasing since May, amid low domestic production and an increase in minimum support price (MSP) for kharif crops in July. Also, tyre companies have been facing margin pressures due to a rise in prices of carbon black and other crude oil derivatives.

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