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MRF Tyres, which recently announced 4-6% price cuts, is having an impact on its earnings due to rising raw material costs.
Leading automobile tyres and tubes manufacturer, MRF Tyres, which recently announced 4-6% price cuts, is having an impact on its earnings due to rising raw material costs.
Excerpts from CNBC-TV18's exclusive interview with Phillip Eppan, ED, MRF Tyres:
Q: Pricing seems to be the holding key for the tyre industry for both domestic as well as the export market. Can you give us the outlook for the next three months? How do you see prices really fairing? Are you anticipating any further price cuts domestically as well as in the export market?
A: We see a price increase on the raw material front. As petroleum prices go up, it does not seem to be stopping as far as we can see. Since most of our raw materials are petroleum based, any increase in petroleum price is bound to affect us. We are not seeing the light at the end of the tunnel. It looks like these prices would still move up going forward. We are waiting for the VAT scenario to be cleared before we can understand how we should tackle this.
Q: Did you undertake a price hike or will you if haven’t in the month of April to take care of the margin?
A: We did increase prices in February earlier to the Budget. We did keep back a little bit from the excise cut but we passed on the major portion of the excise relief in our selling prices to the customers. So, we have affected price increases and I understand that my competitors have also done so.
Q: What about demand in the bus and truck space to whom you supply? How do you see it shaping in the next quarter?
A: There seems to be slight stagnancy in the off take for bus and truck tyres but that is only a one time correction because of the emergence of the multi action vehicle in the market place. There is a correction, which is going on. But the demand looks to be robust in the time to come.
Q: Given that you have already taken a price hike, how do you see your financials shaping up?
A: Now we have no alternative but to pass on whatever increases that came in due to the price of raw material. So, we do hope that we will succeed in doing that because this increase in prices depends upon the general scenario in the tyre market and how our competitors themselves behave in this area. So, we cannot tell you what is going to be the outcome of all this. But given the compulsions of the raw material price increase, I am hoping that everybody will see the need to increase the prices and it will happen.
Q: Any comment on VAT?
A: It is too early to say anything now.
Q: Have you thought of stock split?
A: No, we have not thought of it.
MRF Tyres has around 21% market share in the tyre industry. It is planning to step up expansion, with capex at Rs 150 crore for the growth in the domestic and international markets. It is likely to expand the business in Middle East, SE Asia and Australia. The company's export is expected to grow by 40% in FY05.
In the first quarter of FY05, the company's net sales were up 9.3% to Rs 686 crore. But its net profit was down 32% to Rs 11.30 crore due to the rise in raw material expenses, which was up 22%. Its operating margin came down to 7.01% from 8.50%.
Budget improves pricing power of tyre industry
According to Pramod Amthe of Prabhudas Liladhar, the pricing power of the tyre industry is better than what it was before the budget. He also said that MRF and Ceat are the best bets to look into.
The following is the transcript of CNBC-TV18's interview with Pramod Amthe of Prabhudas Liladhar:
Q: The budget got the tyre industry lot of benefits. After the budget how have you viewed the situation of the tyre industry in terms of valuation?
A: One key factor that has emerged after the budget is that the tyre sector was lacking the pricing power. Even though they have been increasing the prices throughout the year, it was not sufficient to cover the increase in raw material. In the single go, the budget has given them a levy of almost 6% in terms of price correction and which the tyre industry was much in need of. This has also given them an opportunity to recover from the customers over a period of time and come back to the pre-budget levels. That way the pricing power is better than what it was earlier before the budget.
Q: Companies like Ceat and JK have been outperforming. But overall which company seems to benefit after discounting the price hike and VAT?
A: look at the companies, which have the highest exposure in terms of replacement segment of both cars and commercial vehicles. The major players in this are Ceat, MRF and Apollo Tyres. I am comfortable in Ceat and MRF to a greater extent. Other companies like Apollo and JK will also outperform in the short term.
Q: Do you think both MRF and Ceat are well positioned for both the export and domestic market?
A: Given the exports, which form around 15% of the overall value of the industry, some of the players have been doing well. Most of them are gearing up towards exports especially to the neighboring companies. Tyres are exported from India to seventy-five countries around the world. Ceat and JK Tyres have good exposure on that. All the players are doing their work. It depends upon what amount of pricing you are getting in terms of exports and domestic market. Still the domestic market play a key role in deciding what amount of total sales you want to get into exports.
Q: Which Company has a further upside keeping in mind the existing factors?
A: You should look at future earnings, which will be 06 and 07 earnings, where you will be getting a large amount of benefit from the pricing power. That will improve the margins almost by 300-400 basis point from the current levels. So if you account that, MRF and Ceat are the best bets to look into.
Tags: Leading automobile tyres and tubes manufacturer, MRF Tyres, which recently announced 4-6% price cuts, is having an impact on its earnings due to rising raw material costs.
May 21 2013, 13:56
- in Results Boardroom
May 21 2013, 11:05
- in MARKET OUTLOOK