Benign input cost likely to lift profit margins of domestic tyremakers

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Benign input prices are expected to help domestic tyremakers improve their profit margins in the near term when demand is low.

 

Domestic rubber prices are not rising in sync with international prices and this is being seen as a big relief. Prices of natural rubber jumped by 12 per cent to trade at Japanese yen (JPY) 190.3 a kg on Monday as against JPY 170.2 a kg early this calendar year in the Tokyo Commodity Exchange. Its prices in the benchmark Kochi spot market rose by a marginal 3 per cent to trade at Rs 128 a kg as of Monday as against Rs 124 a kg on January 1. Analysts believe that natural rubber is unlikely to see a sharp spike in its prices in the short term as supplies are good.

 

The profitability of Indian tyremakers depends on the volatility in the prices of natural rubber. 

 

“For FY19, tyre industry revenue growth is pegged at 14-15 per cent, with operating and net margins of around 14 per cent and 7 per cent, respectively, almost in line with the previous year. For the next two years, however, revenue growth is projected at around 9-10 per cent, with operating and net margins at 14–15 per cent and 6-7 per cent, respectively,” said K Srikumar, vice-president and co-head, Corporate Ratings, Icra.

 

According to a recent report by the Association of Natural Rubber Producing Countries, the global output of natural rubber fell 6 per cent year-on-year to 2.14 million tonnes for the two-month period between January and February 2019. Global tyre demand, according to the report, declined by a mere 0.1 per cent to 2.17 million tonnes for the period between January and February 2019 versus 2.173 million tonnes reported in the same period last year.

 

“The tyre industry is likely to undergo significant regulatory changes in the coming three-five years, not only driven by increasing research and development capabilities but also due to original equipment manufacturers (OEM) demand for light-weight, high-performance tyres. These regulations are valid considering the safety and environmental impact but will increase product cost at the customer level,” Gautam Duggad, an analyst with Motilal Oswal Securities, said in a report on Apollo Tyres.

 

Tyre companies are expecting replacement demand to remain robust in the near to medium term following weak auto sales. A detailed analysis from Emkay Global Financial Services said weak performance across auto segments in March 2019 was due to high base, deferred purchases during the election and dealer inventory corrections by some firms.

 

The Indian tyre industry is an oligopolistic market with the top seven players accounting for around 80 per cent of the industry’s estimated revenues for FY19. Demand originates from OEMs and the replacement segment, with the share of replacements high at around 65 per cent (in tonnage) and 55 per cent (in unit terms).


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