Rubber prices drop, but little respite for tyre makers

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Rubber prices drop, but little respite for tyre makers

Rubber prices have fallen over the last few months, which should bring a cheer among tyre manufacturers. But that is unlikely for at least the third and fourth quarters, as the recent rupee depreciation has increased import costs, thus limiting the gains if any from falling cost of the key raw material.

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Moneycontrol Bureau

Rubber prices have fallen over the last few months, which should bring a cheer among tyre manufacturers. But that is unlikely for at least the third and fourth quarters, as the recent rupee depreciation has increased import costs, thus limiting the gains if any from falling cost of the key raw material.

Price of rubber has fallen to around Rs 200 a kg from Rs 240 in April. Natural rubber accounts for 44% of total raw material costs of tyre makers. So a drop in its price should be good news as it will boost margins. However, gains will be limited this time around.

"There will be very small improvement in margins, at best 20-30 basis points sequentially. Tyre companies import a lot of rubber, so the depreciation in rupee will hurt," Vineet Hetamasaria, vice president - research at brokerage Pinc told moneycontrol.com.

About 50% of the tyre industry's raw materials, including rubber, are imported. So the rupee depreciation makes importing expensive. Apollo Tyres , for instance, is expecting a better third quarter, compared with July-September, but margins will be under pressure still.

Rubber prices may have fallen to Rs 200 a kg, but they are still much higher than the Rs 110 a kg two years ago, according to Neeraj Kanwar, vice chairman and MD of Apollo Tyres.

In July-September, the company's raw material cost was up 57% year-on-year. Other tyre makers too saw a surge in input costs. MRF 's raw material costs rose 43% for the fiscal year ended September 30.

"As far as Apollo is concerned, in Q3 we will have better profit margins, though there is still challenge on bottomline and margins are still very much under pressure," he told CNBC-TV18 recently.

On the volume front too there is not much good news. Automobile sales accelerated 30% in 2010-11, which prompted many tyre makers to expand capacities to cater to the strong demand. But high fuel prices, and expensive loans have hit auto sales, especially passenger cars, where volumes are down 3.5% year-on-year over April-November.

"On the volume front things are not looking good as car sales remain subdued and that will affect tyre sales too," Hetamasaria said.

Although commercial vehicle sales have maintained a steady uptick, here too tyre sales remain slow due to a drop in after-market demand, analysts say. The mining ban in Karnataka and Goa among other regions too has hurt tyre sales in the CV segment.

"Car and truck tyre dealers in northern and western India largely affirm that medium and heavy commercial vehicle tyre off-take remains sluggish, while the demand for two-wheelers and LCVs has held up so far. Overall, dealers expect growth in 2011-12 to be at a subdued 10%," said Rohan Korde and Nirav Bhatt of Anand Rathi Research.

Production too has been slow due to sluggish sales. Tyre production in India rose only 10% year-on-year in April-September, according to Automotive Tyre Manufacturers' Association data.

Due to the recent sluggish demand tyre manufacturers haven't been able to take any price hikes over the last few months, a move that could have eased some pressures.

In the last three months, there have been no price increases, nor have the dealers provided any discounts, point out the Anand Rathi analysts.

Tyre stocks were mixed on Wednesday. While TVS Srichakra and Ceat were up 0.5-1%, MRF , Apollo, JK Tyre and Goodyear India were down 0.5-2%. Since April this year, JK Tyre and Ceat have been among the worst performers among its peers, down 33%, 30% respectively. Apollo Tyres is up 12.7% and MRF has risen 8.5%.

Pinc and Anand Rathi Research have "buy" rating on Apollo Tyres.

Nachiket Kelkar
nachiket.kelkar@network18online.com