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Indian tyre firms may face dent in margins

Indian tyre companies are likely to face a dent in their margins in coming quarters due to  unabated rise in rubber prices over the past six months. The stock price of major players such as Apollo Tyres, JK Tyre, Ceat and MRF have dropped 3-5 per cent on the back of the surge in raw material price over the past one month, when the benchmark Sensex gained 5 per cent.
Rubber prices, which account for half of the cost of a tyre, have shot up 40 per cent since June due to a shortfall in domestic production and high import duty. Rubber prices have increased 20 per cent in the past one month to Rs 130 per kg.
Moreover, since September prices of other raw materials such as synthetic rubber, steel tyre cord, nylon tyre cord, bead wire and carbon black have also increased by 35-40 per cent, putting pressure on tyremakers to raise prices. To protect margins, companies have already hiked tyre prices by 3-5 per cent in October, but this may not be enough to provide a cushion in the face of the surge in rubber prices. On the supply side, India’s rubber output fell 6.5 per cent during April-November while consumption rose 3.5 per cent, widening the gap between production and consumption, according to the Rubber Board of India. The lower output is partly due to erratic monsoon in the country this year. Besides problems on the supply front, the high prices can also be attributed to improved demand. For instance, car sales rose 61 per cent to 133,687 units in November from 83,121 a year earlier, buoyed by improving economic growth, easier availability of loans and festive demand.
Higher consumption, led to better revenues for tyremakers in the past two quarters. On an aggregate basis, the top three players — Apollo Tyres, JK Tyre and Ceat — posted sales growth of around 14 per cent for the quarter ended September 2009 over the year-ago period with a net profit of Rs 280 crore as compared to loss a year ago. This is due to the decline in raw material cost compared to the same period last year and improved demand. However, aggregate raw material cost for rubber companies grew 8 per cent for the quarter ended September compared to the previous quarter ended June 2009. So tyremakers, who benefited from lower material costs in the first six months of 2009, are likely to witness pressure on margins due to higher raw material costs despite expectations of better sales. Investors will be better off adopting a wait-n-watch policy when it comes to tyre stocks in the next few quarters.  

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