Spiralling cost of raw materials may compel tyre makers to raise prices even as they expect a gradual rebound in demand from June, said the top executive of a leading Indian company.
Satish Sharma, President, Asia Pacific, Middle East & Africa, Apollo Tyres, said the steep increase in raw material prices will necessitate appropriate price corrections in this fiscal. “We have taken two price corrections in December and a minor one in March; considering the continuous upward movement of raw material prices, we would need further corrections,’’ he said.
Natural rubber prices have been rising from the end of 2020 and is hovering at a seven-year high of around Rs 170 a kg under the so-called RSS-4 category—used by tyre industry—owing to tight supply and rising demand. The lockdown imposed in Kerala, the top producer of the commodity in India, led the futures prices in MCX to hit a one-year peak of Rs 177.89 per kg earlier this month.
Apollo Tyres is the second largest tyre maker in India in terms of revenue, per FY20 data. The company operates five plants in India and one each in The Netherlands and Hungary with a total production capacity of 2,200 tonnes per day. The company reported a four-fold increase in net profit in the fourth quarter and consolidated revenue from operations showed a 6 percent jump in FY21 over the previous year at Rs 17,397 crore.
Sharma said rising raw material prices, especially natural rubber, have added to the pressure on his company’s margins. “Due to our healthy relationships with our suppliers, the availability of raw materials has not been a concern, but yes, there has been a steep increase in raw material prices in Q3 (last fiscal) onwards,’’ he said in an interview by email.
Impact of Restrictions
The impact of the lockdowns and curfews was felt by the tyre industry from the second half of April and the situation worsened in May. "We are expecting a gradual revival in demand from June onwards when various states will lift the lockdowns,’’ said Sharma.
The pandemic affected original equipment manufacturers (OE) the most followed by the replacement segment. Within the OEs, commercial vehicle segment was the worst hit and passenger vehicles came next.
Passenger vehicles and two-wheelers bore the brunt of the demand slump. The agri-segment was least impacted.
Amid the gloom, tyre exports were the silver lining. In FY21, the industry recovered to a great extent from the losses in the first few months with better performance in the last two quarters.
"As you would see in the financial results of tyre companies, most of the players have reported healthy volume and profit growth and have mostly been able to recover from the losses sustained in the first few months of last fiscal. We, at Apollo Tyres, have had record sales across categories for many months in the last fiscal, and have posted highest ever revenue for India in both Q3 and Q4.’’
Humming Again
The story of FY21 has been that of sequential growth quarter on quarter. In the last two quarters, OEs also did much better, which further contributed to our volume growth, he said.
The steady decline in import of tyres to the country has given a fillip to the domestic industry.
"With the tyres put under restrictive imports category last year, and anti-dumping duty in place from last few years, the imports have come down significantly. Players like Apollo Tyres, which have the advantage of entire range, has gained the most out of this.’’
Since the government introduced demonetisation in 2016 and rolled out goods and service tax (GST) in 2017 has been mild to moderate at best. But the full effect of the tax reforms has begun to take effect and their positive impact is likely to be experienced now, according to Sharma.
“The macros for Indian economy look good and we should be poised for a multi-year growth phase as soon as pandemic impact wanes.”
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