Industry to grow at single-digit; await safeguard duty: MRF

With the Indian tyre industry facing Chinese dumping, Koshy Varghese, Executive VP-Marketing at MRF says the government must impose a safeguard duty on tyre imports as an urgent protection step. Right now, a Chinese radial tyre costs Rs 14,000 compared to Rs 20,000 for an Indian tyre, says Varghese in an interview to CNBC-TV18.In April-June quarter, the truck-tyre imports rose nearly 75 percent year on yearHe expects domestic tyre industry to grow at single digit on weak demand and soft raw material prices. Rural demand in unlikely to lift in next 6-8 months, however, some greenshoots are visible on the commercial vehicle side, says Varghese. The company has already cut prices to the tune of 8 percent in the last one year. Owing to the slowdown, the company would now review the price cut decision periodically, he adds.Meanwhile, MRF revenues were better than street estimates due to improvement in the replacement demand and the EBITDA margins for the last quarter improved by 390 basis points quarter on quarter to 22.9 percent. However, original equipment manufacturer (OEM) segment demand witnessed flat volumes.Below is the transcript of Koshy Varghese’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18. Sonia: The dumping of Chinese tyre is something that has spooked a lot of the tyre manufacturers in India and as we understand from dealers and companies things have gotten worst. How is this situation at your end? What is the price differential now between a Chinese tyre and an Indian tyre? A: Essentially, the Chinese influx has been in the commercial tyre segment which constitutes about 60 percent of the total market so we must keep that in perspective. Today, the bulk of the tyres that are coming in from China are truck tyres and they are truck radials. Now people who are familiar with the industry the current tyre industry is going through a radialisation phase essentially in the truck tyre segment. Today the market is about 25 percent radialised. In that segment are the Chinese tyres coming in. Today by and large the aftermarket size is about 3,00,000 tyres a month and currently our information is about 1,00,000 tyres come into the country from China every month. That is very significant when you have a 25 percent of your total market coming in from China at prices which are about 25 percent lower than your cross-ply tyres which in technology is supposed to be lower than radial. Today a radial tyre is in the bracket of about Rs 20,000. Chinese radial is around Rs 14,000. So, that is a significant difference. Customers who may not be willing to buy a Chinese tyre would at least like to attempt to fit a Chinese tyre once and that is a problem that is vexing the industry. We have taken up with the government and I think safeguard duty is one route that we are attempting so that investments made by Indian companies - fairly substantial investments have been made to increase radial capacity. Today none of them are running full. So, there is a problem on Chinese tyres. Latha: Two follow through questions – one is this a productivity issue? Is it that they are getting something right and we have to tighten and make productivity gains and two- what is the research that you have come up with on the Indian elbow room to impose safeguard duties? If you have managed it in steel is the arithmetic working for tyre as well. How strong is the case? A: Let me first address the cost part. Now, about 75-80 percent of the cost is raw materials (RM) on a tyre. When the tyres which hare landing into the country are below raw material prices – today RM prices are fairly, you can import from anywhere across so RM prices by and large if they are far below RM prices then there is something else that is beyond that is creating a problem. We are okay with tyres coming in from any parts so long that it is not below cost. When we look at our own cost today we have all the global players in India. There is no global player who is not today playing in the Indian field and this is a problem vexing all of them. So, obviously practices which are in India today followed by tyre industry are global practices. It is not that it is anymore an insulated market. It is a very large market. On a question of safeguard duty, yes, there was an anti-dumping duty sometime back on Chinese radial which is over so now it is China specific safeguard duty. The application is with the government. They are deliberating on it and we are hopeful that probably something positive may come out of after the government reviews it. Sonia: Some dealers have indicated to us that there are lots of price cuts that have taken place in the last couple of weeks across the tyre industry. Has MRF taken any price cuts in the truck space to combat the cheaper Chinese tyres? A: Pricing is not just the function to combat; it is also function of raw material prices. Now over the last one year as everybody knows there has been a dip in global commodity prices so also in India including INR, crude etc. So, we have affected price reductions at various points of time. We did it in January, we did it post that so there have been reductions that we have done. Yes, we too have affected and I think reductions of the last one year may be of the order of what 8 percent on our truck tyre. Sonia: Will you need to take some more, over and above this? A: Price reduction is something a rationalisation which we periodically review. Pricing is not a kneejerk reaction based on a competition reducing price and hence you reduce. It is based on our raw material, our market position, our market share. It is a function of so many factors. So, at this point we have taken some decisions. Going forward we will wait and watch. Latha: Is your reading of the raw material situation such that you expect you are going to have some space to cut further? A: I don’t expect commodity prices in the immediate quarter hardening. It would probably continue to remain soft; there is no reason to think otherwise. With the global market being fairly lukewarm and China having cut production etc we don’t expect raw material prices to harden up at least in the immediate future. So, if commodity prices continue to rule at his level one needs to relook at prices at probably more frequent intervals than one has done in the past. Latha: What is the duty that will safeguard? Will it be 25, will it be 20 percent? A: The whole idea at this point is that when the tyres come in at these prices what does it affect. It affects investments that are made. It affects jobs, it affects people holding back future investments. On one side we deliberate and say about a Make in India campaign and on another side if events of this type happen people are fairly vary of putting money on the table and that is what happening across industries more so in the tyre industry. So, it is not a question of a certain 10 percent or 20 percent, we are saying keep it at a level playing field. Look at the fact is it being subsidised in a manner which is unfair. We are only asking for a fair level playing. We are not saying that tyres should not be imported. We are okay with that. Latha: I take your point, what I am saying is I thought you told me that those radial tyres are 25 percent cheaper than the non-radial tyres. I am asking you what would be the level playing field, would it be 25 percent? A: Today within the Indian industry there are players who operate about 10-15 percent from the player who is the highest priced. So, anywhere in that bandwidth we are okay with. We are okay in that bandwidth which is fair competition. However, if it is below cost then it is a point to worry. Sonia: You have been through many of these cycles where we have seen so much slowdown in the industry and we are in one of those phases where there is a double whammy on one hand there is a slowdown in demand and on the other hand there is dumping of cheaper Chinese tyres. Do you think that this low single digit growth that we have seen in the revenues for many of your companies will continue going ahead? Throughout FY16 at best we will see single digit growth in topline? A: I tend to agree with you because if you look at the auto industry space over the last one year it has been fairly tepid growth. It is only the last few months the commercial sector is showing some signs of revival, some green shoots are there in the truck industry. But nowhere near levels which were there in the past so it will take some time and passenger segment, the car segment is flat. Two-wheeler has shown a decline. Large of this is also accounted for a fact that the rural sector is not doing well therefore they are not investing. So, the rural demand having come down I don’t except going forward in the next six months to eight months much happening. Everybody is hoping, we are hoping for reforms. We are hoping for goods and service tax (GST), we are hoping for various other measures but it may not make any meaningful difference to the demand. So, from that point I would expect single digit growth to continue at least for couple of quarters. Sonia: Just wanted your view on the recent deal that happened in the tyre space where JK Tyre acquired Kesoram Industries tyre unit. Did you bid for that deal? Did MRF bid for that deal as well? A: We look at options; I don’t want to specifically answer about this particular deal but we look at options. We do review options which come up from time to time both globally and within the country. We used to look at the fact whether there is a synergy between what we intent to acquire and our current business. If we see a synergy we go ahead. But by and large our expansions have been Greenfield that is been our history.