Tyre cos hold prices despite rubber rally, hits margins.

India's top tyre firms are reluctantly holding prices, risking a hit on profit margins, despite a recent surge in input costs as they wait for prices of natural rubber to stabilise from a current record high.

The price of the most traded RSS-4 (ribbed smoked sheet) rubber hit a record high of Rs 14,425 per 100 kg on Saturday on demand from tyremakers as well as a poor crop this season.

"We need to increase prices but the market situation is not conducive to price increase. We need to see the market this month and then take a view," said AS Mehta, director-marketing at JK Tyre & Industries Ltd.

"When input costs are higher and the market does not permit the selling price increase there will certainly be an impact on margins," he added.

Indian tyre makers have witnessed a surge in volumes following a boom in the auto industry and have already raised prices by 3-5% in January, while in February they passed on a 2% excise duty increase in the federal budget.

Apollo Tyres' Chief Financial Officer Sunam Sarkar said the company was considering raising tyre prices in the near term, but has not yet decided the quantum, while Ceat Ltd may review prices in April, said Arnab Banerjee, Executive Director, Sales Marketing and Outsourcing

Natural rubber production in the country dropped 4.3% in the first eleven months of 2009/10, pushing prices to a record high and forcing tyre makers to double imports.

"Erratic monsoon has badly affected rubber plantation this year. Tapping and production is unlikely to rise in next 3-4 months. It would remain at last year's level," said a senior official at Rubber Board.

A rally in rubber prices in overseas markets like Thailand and Japan during the period also underpinned sentiment.

This limits their ability to pass on the burden of higher prices also to consumers, say analysts.

So margins for the quarter to March 31 are expected to narrow, say analysts.

"They have taken several rounds of price increases last year and earlier this year, so their margins have been well protected till now," said an analyst from a Mumbai brokerage.

"They will no longer get rosy (EBITDA) margins of 16-18% percent that we saw in the second quarter," he said adding that the margins may narrow to 10-12%.

To keep costs down, tyre makers have been resorting to imports of rubber, which more than doubled to 158,000 tonnes in April-Feb from 71,000 tonnes a year ago.

But, firms say the option is not attractive as the government levies a hefty import duty of 20% on natural rubber.

"Now the international rate is more or less at par to domestic prices. And the 20% duty makes things difficult," JK Tyre's Mehta said.

And rubber prices seem to be heading further up as supplies remain tight, says Shiji Abraham, analyst with JRG Wealth Management, who expects prices to jump to Rs 149-150 per kg.

Source : moneycontrol.com