Tyre companies have been buzzing of late as Brent crude fell to 4-year low on supply glut, in turn causing synthetic rubber, one of tyre companies’ key raw materials to see price fall too.
Subba Rao Amarthaluru, CFO, CEAT anticipates a 10 percent growth in second half of FY15 as plummeting crude prices will reflect in prices of its derivatives such as synthetic rubber, carbon black and nylon tyre chord.
As another shot in the arm, tyre major is also facing headwinds in export markets, he says in an interview with CNBC-TV18’s Ekta Batra and Latha Venkatesh.
Below is the verbatim transcript of the interview:
Q: How are lower crude prices affecting synthetic rubber prices for you all in particular and how much of a margin boost will it be for you all?
A: The crude prices have fallen off but the synthetic rubber prices have not fallen off, initially there is a lag of about three-four months between the crude and the rubber prices. So the prices of synthetic rubber have been stable around Rs 145 for the last six months, there is no significant change - Rs 140-135 is the kind of pricing. It is not circulated to the synthetic rubber prices.
Q: What is the likely fall you are expecting after these three-four months? A 30 percent fall in crude prices is not laughable; it should have some impact on crude derivatives.
A: Yes it would definitely impact. It would lead to fall in synthetic rubber prices but not exactly the same correlation, it could be anywhere between 20-25 percent also. But till it falls, we do not know what the extent of that fall is till it happens.
Q: So you will most likely be advantaged in the fourth quarter, in the January March quarter is it?
A: Yes, that is right.
Q: How much will your raw material costs go down by? I understand 30 percent of your raw material cost comes from these crude derivatives?
A: Yes, nylon the synthetic rubber directory is about 18 percent in the overall weight per KG of rubber produced. So, if there is a reduction of say 20 percent, 18 percent of 20 percent the overall raw material cost should come down by that extent.
Q: Is their any fall or rise in natural rubber prices, what is the movement on natural rubber and hence will there be a possible shift towards the mix or change in mix that the company could contemplate?
A: No they are not substitutable, research is going on to substitute the synthetic rubber with natural rubber but to some extent, theirs has been success but it is not a complete success, it depends upon the requirement of the tyre.
Q: We got a research report that had among other things the following statements: 30 percent of raw material cost for tyre makers comes from crude derivatives. Crude derivatives expenses form 20 percent of net sales of tyre companies. Every 1 percent decline in crude prices can boost net profit of tyre companies by 2-2.5 percent.
A: Yes, these are correct figures. If you are manufacturing one kilo of rubber, 30 percent is on account of the crude derivatives. 30 percent we do not know whether it would translate into 30 percent in the derivative prices.
Q: So some 8 percent fall will be their at least?
A: Yes it could be at least 50 percent of the fall in the crude prices should reflect in the derivatives prices which means there should be 15 percent fall. 15x30 so about 4.5 percent raw material reduction should happen in the due course.
Q: We have seen two two-wheeler numbers come out and one is indicating that festive demand is not that great but Hero MotoCorp is expecting around 10-11 percent growth in the festive season. In your sense what is demand looking like at this point in time.
A: Two-wheelers remain consistent, it is good or at least in the retail market. OEM market will not be significant in terms of the overall demand, the overall demand only 20 percent demand comes from the OEM market. It is the replacement market which gives more margins, which gives sustained demand for the tyre industry, that has been stable and consistent.
Q: So what would you say could be the revenue growth for CEAT in the second half looking at the festive and non-festive demand?
A: We are facing some headwinds in the export market whereas the domestic market continues to be consistent with the last year. So given the overall blend of the markets we should grow close to 10 percent.
Q: How much is the export market for you?
A: Roughly 20 percent comes from the OEM market, 20 percent comes from the export markets and 60 percent comes from the domestic replacement market. So overall replacement market including the overseas replacement market is about 80 percent for us and that is doing fairly well.
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