Softening Rubber Price A Small Relief For Tyre Industry.

Softening rubber price a small relief in the face of slowing automotive demand and rising threat of imports.

Driven by the strong revival in automotive demand, particularly in the passenger vehicle and two-wheeler segments and export demand for tyres, the Indian tyre industry reported a healthy revenue growth of over 25% during fiscal 2010-11. However surge in input costs especially that of natural rubber (NR) negated any scale benefits, and resulted in a contraction of industry-wide operating margins by over 500 bps. This was despite numerous industry wide price hikes, cumulatively amounting to a 15-20% increase in tyre prices. Despite the worrying macroeconomic indicators and a general slowdown in domestic automotive sales, the Indian tyre industry continued to post a healthy 25-30% revenue growth during Q1, 2011-12 supported by strong replacement and export demand. Domestic OEM demand growth was also healthy at around 15-20%, albeit weaker than in the previous fiscal. However continued cost pressure from high cost NR inventory led to a 300-350 bps operating margin erosion, both on a year-on-year (y-o-y) and sequential quarter basis.

During the first quarter of 2011-12, rubber prices have softened (after peaking in April-11) with fall in international prices, slowdown in auto demand and drop in crude prices. However prices of synthetic rubber continued to reign high, following the shortage of its key ingredient, butadiene. While some relief is expected following successful price hikes in Q1, 2011-12 and softening raw material prices, the industry is faced with several headwinds in the form of demand slowdown, threat of imports following removal of anti-dumping duty and large domestic capacity additions post 2011-12.

For fiscal 2011-12, while ICRA expects moderation in automotive OEM tyre demand, the strong growth in OEM sales in the last two fiscals is expected to translate into higher replacement demand. Growth in M&HCV replacement demand however could be affected by a slower economic growth. Besides grappling with high input costs and weak demand, domestic players are expected to face additional pressure with the lifting of anti dumping duty (ADD) (with effect from August 2011) on Truck and Bus radials (TBRs) imported from China and Thailand. While this move is expected to be contested by the industry players, the lifting of ADD makes the imported TBRs cheaper by ~15-20%, limiting domestic demand and pricing power.

2010-11 performance: Margins declined from all time high as raw material prices surged: The tyre industry continued its growth momentum in fiscal 2010-11 (April 1, 2010 to March 31, 2011) registering a strong 27% growth in revenues backed by healthy demand from both the auto OEM and replacement segments and supported by capacity ramp-up by major players. The growth was driven by strong domestic OEM demand from the Truck and bus (T&B), passenger vehicle (PV) and two-wheeler (2W) segments which saw unprecedented volume growths of over 25%. Exports, which had declined by 5% in the previous fiscal, saw a strong recovery registering a volume growth of 22% during 2010-11.

Unlike the PV and 2W segments, where the OEM segment accounts for a significant portion of the volumes, the Medium and Heavy Commercial Vehicle (M&HCV) segment is largely driven by demand from the replacement market, which accounts for more than 80% of total demand. The M&HCV segment, accounting for the bulk of tyre industry revenues (~65%), saw a modest increase of 4% in overall demand on account of weak demand from the replacement segment and despite a 32% growth in OEM demand. The price increases imposed by most tyre manufacturers in response to the unprecedented increase in rubber prices led to a decline in demand from the price sensitive M&HCV replacement markets translating into increased re-treading and delayed replacements. However, strong OEM and export demand supported a 24% growth in overall domestic demand (volumes), as compared to 21% growth in the previous fiscal.

Even as the industry benefitted from the strong revenue growth during 2010-11, higher input costs, especially that of natural rubber, led to a sharp 19% decline in operating profits and 37% decline in net profits. Industry wide operating margins declined to 9.2% in fiscal 2010-11 as against 14.4% in fiscal 2009-10. Players having a diversified product mix with presence in the relatively high margin radial passenger car segment (as compared to the M&HCV segment, which is largely commoditised in nature), higher presence in the replacement market segment which offers better pricing flexibility, presence in niche high margin tyres (like Off-the road (OTR) and winter tyres) and superior brand image, have been able to post relatively healthier margins.

For the fiscal 2011-12, while ICRA expects moderation in automotive OEM tyre demand, the strong growth in OEM sales during the last two fiscals is expected to translate into higher replacement demand, especially in the passenger car and two wheeler segments, to an extent buffering the expected slowdown in the T&B OEM and replacement market segments. In the M&HCV segment, the growth is expected to remain muted as macro economic factors may dampen demand in the OEM and the price-sensitive replacement segments. Growth in replacement demand for T&B tyres however could be affected by slower economic growth.

Source : moneycontrol.com