Tyres: Spike in input costs raise profitability concerns amid robust sales
Tyre firms are doing the balancing act. On the one hand, the note ban and much-awaited anti-dumping duty on truck and bus radials have led to good sales growth in the replacement market. On the other hand, the firms are battling the challenges of rising cost of rubber and scarcity of carbon black, a key input in the making of tyres.
In a response to Mint’s queries, Apollo Tyres Ltd pointed out that input prices could spike by 7-10% in the next two-three months. Rubber prices, although lower in the last month, have not softened as expected. Besides, the steep prices in the last two quarters will continue to have an impact even on the current quarter’s (Q4 FY18) margins. The average cost of rubber was up 7% from the year-ago period during the December quarter.
Another concern is the shortage of carbon black—a fallout of the shutdown of a huge facility in the country due to environmental reasons. Tyre makers are forced to import carbon black, which is expensive on account of higher import duties.
Therefore, input cost increases, along with firm prices for crude oil (whose derivatives are used in tyres), are likely to weigh on the profitability of tyre firms in the quarters ahead. Operating margins of the four leading listed tyre makers—MRF Ltd, Apollo Tyres, JK Tyre and Industries Ltd and Ceat Ltd—have trended downward over the last three (like-to-like) December quarters. Some such as Ceat, whose margins fared a little better in the December 2017 quarter, face pressure on margins in future as the company plans to strengthen original equipment (OE) partnerships, where profitability is lower than that in the replacement segment.
Fortunately, the demand for tyres both in the OE and replacement markets across most segments has been strong, translating into commendable sales growth. That is why some tyre firms are confident of passing on some of the cost pressures through price increases in the coming months.
Another positive factor is that increased anti-dumping duty has kept Chinese and Korean tyre imports at bay, leading to better demand for domestic products.
So, even as tyre firms hope that rubber prices will ebb in the medium term, the challenge is to manage price increases to offset cost pressures in a manner so that demand in the replacement market is not adversely impacted.
That said, strong auto sales are the key driving force for auto component makers and their stock prices too. Tyre stocks have appreciated by about 20% in the last six months although they have shed their gains in recent months given the various cost pressures. News of tyre price hikes and robust auto sales numbers may however support the current valuations of tyre manufacturers.