That seems okay, coming on the back of an 80.5% jump in profit the previous year and a 41.4% rise the year before that.

But the annual results belie the pressure tyre companies are currently under. In the latest quarter to September, MRF’s operating profit fell by 75.8% and operating profit margin stood at a mere 2.5%. A few tyre makers even slipped into the red last quarter.

Things could get worse for tyre companies as demand has just begun to fall. In fact, in the three months to September, MRF’s revenues grew by a healthy 23.4%.

The reason for the drop in profit was the fact that raw material costs remained high. Tyre companies hold inventory of key raw materials such as rubber of about a month and hence haven’t yet benefited from the drop in commodity prices.

According to an analyst, who declined being named, the benefit of lower raw material costs may be seen only in the March quarter. Meanwhile, demand has begun contracting even in the replacement segment.

Also See Profit Dents (Graphic)

Sales to original equipment manufacturers have been slow for some time now, but a buoyant replacement market sales have kept volumes intact. According to the analyst, replacement sales have begun slowing down in line with the slowdown in economic activity in the past month or so.

To make things worse, competition from Chinese exporters has continued, putting pressure on pricing. With no pricing power, profitability will take a further beating in the December quarter, and if the economic outlook remains bleak, the pain may continue for a few quarters.

All this seems to be reflected in MRF’s share price, which has corrected by 74% from its 52-week high. The stock now trades at less than 6 times trailing earnings, which better reflects the commodity nature of the business.

At its peak, the stock had a valuation of over 20 times past earnings, when the markets were optimistic about pricing power and dismissive of competitive pressures.

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