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Last Updated : Dec 18, 2014 03:29 PM IST | Source: CNBC-TV18

Auto demand dull; see rubber price rise over 2qtrs: JK Tyre

The company is planning to expand its Chennai plant with an investment of around Rs 1,400 crore.


The global fall in crude prices to below USD 60 per barrel levels is a reason of cheer for a lot of sectors including auto and tyre.


Speaking to CNBC-TV18, Raghupati Singhania, CMD, JK Tyre & Industries says the real impact of the fall in prices will be seen only when costs come down. According to him, the auto industry growth is stagnant at this stage but the demand is expected to pick up next year.


“Hopefully in the commercial vehicle sector we should see some improvement with some economic activity improving and also some mining operations being licensed to operate again and so on, he adds.
 
The company is planning to expand its Chennai plant with an investment of around Rs 1,400 crore.

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Singhania believes rubber prices have fairly hit the bottom and cannot fall further. In fact he expects rubber prices to move higher in the next two quarters.


Meanwhile, the company shuns away any plans to list JK Fenner at the moment.

Below is verbatim transcript of the interview:


Q: Let me begin by asking you about the impact of falling crude prices on tyre companies. What impact has it had on your company?


A: One has to watch. These prices have been varying. In the last week or so they have particularly been more down trend but we have to see where they stabilise.


Also, we should not forget that on a quick fall or quick change you cannot immediately react on the impact because ultimately there are other cost factors as well.


Power costs are going up, salary and wages are going up and whole lot of other things are going up. So it is not a very simple mathematics to be able to straightaway correlated. Yes, we could assess somewhat after the prices stabilise for a while.


It will help the industry, which is fraught with poor demand at the moment because auto industry is quite stagnant and we don’t see any rising demands yet. To compensate that, lower input cost should certainly help.


Q: What about the fall in crude prices, do you think that is going to impact the margins or do you think you are also in an industry where it has to be passed through because of competition?


A: It is not a pass through straight. Please appreciate that the oil is an input or petro goods is an input into our raw materials. So unless the raw material prices move downwards based on the petro goods and oil prices coming down, there is very little we can do or we can even not fathom what we would be doing really. So we will have to wait and watch the trend and also watch how the prices behave for other inputs.


Then we can certainly take a view and respond to this more logically.


Q: What are the capacity expansion plans for the company going ahead?


A: We just put up a green side plant two years back in Chennai, all radial plant at an investment of Rs 1,100 crore and in last October our board has taken a decision to go ahead and expand that plant further by putting in another Rs 1,400 crore. We are investing primarily in truck and bus radial tyres and to an extent in car radial tyres. So we are gearing up ourselves with a turnaround in the market.


Likewise industry is also trying to catch up but the important thing is that the demand must move otherwise these capacities can become a problem.


I am very optimistic in the sense that over the next year or so, demand should move, things should happen, there should be a little more incentive in the consumer financing which is a huge psychological factor if not material factor in boosting demand and if those things do happen, certainly the demand should pick up and therefore the capacity numbers should go up and the output should go up and should augur well for the industry.


Q: How will you capitalize the ongoing capacity expansion plans?


A: We have already finalised the financing of this project. We have done some preferential issues few months back and thereby improving bringing in equity. We have internal generations and part of it is debt and that is how we are financing this project.


Q: What is the demand situation among various car makers and also commercial vehicles segment?


A: At the moment there is a bit of a lull all around. But hopefully in the commercial vehicle (CV) sector, we should see some improvement with some economic activity improving and also some mining operations being licensed to operate again. Car industry is very low at the moment and I can't see too much of a boost coming in certainly unless there is a better consumer sentiment there.


Two-wheelers are booming and the tractor industry is in a bit of a slowdown and I think it will not be before Q1 of next year 2015 or thereabouts April and around then that demand should revive a little bit. So this is what we are seeing but in all these areas we are very well placed in terms of our availability of capacity in products. So whatever happens, we are there to grab the opportunity.


Q: The company has been reporting strong margins, do you think there is more room for improvement considering the subdued demand environment that you just spoke about?


A: We are working and pursuing those initiatives we took earlier which you commented upon and we are pursuing with those initiatives and it should certainly help us move a little forward.


These margins are also so much dependant on what is going around in terms of the market demand, pricing of the raw material and the capacity utilizations which going forward would be available or possible for us to attain, so I am optimistic about a little more positive working in the coming years.


Q: Tyre companies have got a great boost from the way rubber prices have fallen but do you get a sense that these are bottomed out and there will not be any incremental benefit or do you see further fall in rubber prices?


A: Rubber prices have fairly hit the bottom, I can't see them going down. They are fairly low at the moment. It is a question of global phenomenon, which is hitting the prices.


China is a big factor apart from the production and so I don’t see it going down any further but it will not be very much higher immediately and in a quarter or two it might start moving little bit notwithstanding the seasonality factor.


Q: Are you planning on coming out with an IPO for JK Fenner?


A: We are not planning any IPO at the moment. It is an unlisted company and we propose to maintain it that way as of now and we will see when the future comes but we are growing that business and we have just expanded some capacities just last year and now we have to stabilise again because of the market demand to stabilise and accordingly we will move forward that business.


Q: Where do you think the next trigger will come for your company? Will it be focusing on building capacity or bringing price up ticks or catering to new segments, what is going to be the next trigger?


A: It is a very good point. It is a combination of many factors. One of course is the volume as I just said that we are expanding our capacity and that volume will be on the ground by April next year 2015. That should help.


Second, new products that we are launching continuously, even this calendar year we have launched 11 new products both in car tyres and also in trucks. When I say new products, we mean technologically more advanced, better performing products, more cost effective.

Third, the thrust in the market place changing our product mix. In fact, I share with you that with this expansion that is coming in through, we would have become about 65 percent radial and 35 percent bias whereas couple of years back we were just the reverse, we were 35 percent radial and 65 percent bias that itself should help us in improving our market presence as we go forward.

First Published on Dec 18, 2014 01:12 pm
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