Apollo Tyres Plans to Raise Prices as Rubber Surges

By Subramaniam Sharma

April 21 (Bloomberg) -- Apollo Tyres Ltd., India’s biggest tiremaker by market value, plans to raise prices to partly offset rubber costs that have surged to a record on rising Chinese demand and lower output of the raw material in Thailand.

The company will increase prices by about 7 percent as early as May and then consider further gains depending on rubber costs, Neeraj Kanwar, 38, vice chairman and managing director, said in an interview yesterday in Gurgaon, where Apollo is based.

Apollo and its rivals face rising pressure to maintain margins as rubber futures rose to a record. Tiremakers may have to accept narrower profit or risk losing customers if they increase prices too fast, said Surjit Singh Arora, an analyst at Prabhudas Lilladher Ltd. in Mumbai.

“In one go, tire companies can take a maximum 4 to 5 percent price increase because of the competitive landscape,” said Arora, who has an “accumulate” rating on Apollo stock. “Margins of tire makers should be impacted for the next two quarters even if they increase prices.”

Rubber prices have jumped about 18 percent since the start of 2010, based on the benchmark futures contract on the Tokyo Commodity Exchange, while Apollo has increased product prices about 7 percent. Auctioned prices of Thai RSS-3 grade rubber reached a record of 121.27 baht per kilogram yesterday, the Rubber Institute of Thailand said on its Web site.

“There is no way I can absorb such huge jumps,” in rubber prices, said Kanwar. “How much of it can I pass on, how much can I absorb, that is the balance as a company we have to play.”

Shares of Apollo Tyres gained 3 percent to 76.75 rupees at 10:09 a.m. in Mumbai. They rose as much as 5 percent, the most in two weeks, earlier today.

Production Costs

Raw materials account for 70 percent of the production cost of tires, according to the India-based Automotive Tyre Manufacturers’ Association. Rubber accounts for 42 percent of the total raw material cost.

Apollo’s profit, excluding subsidiaries, rose nineteen-fold to 1.02 billion rupees ($23 million) in the three months ended Dec. 31 from 55.1 million rupees. Sales rose 46 percent to 13.2 billion rupees.

Apollo Tyres also plans to change its product mix and sell more of its higher margin radial tires for passenger cars, trucks and SUVs, Kanwar said. It’s also considering importing rubber duty-free, equivalent to the amount of products it exports, he said.

The company’s new factory near India’s southern city of Chennai has started operations and will reach capacity of 500 tons a day, or 6,000 radial tires for trucks and 16,000 for passenger cars, in the quarter ending March 31, 2011, Kanwar said. It will reach half that capacity by September, he said.

Duty-Free Imports

Apollo, set up in 1975, gets about 85 percent of its sales from customers replacing their old tires, and the remainder from selling directly to vehicle makers, the company said in a presentation to investors in March. Tires for trucks accounts for 56 percent of its sales, car tires makes up 32 percent and tractors and other vehicles account for the remainder, it said.

April-delivery rubber futures on the National Commodity & Derivatives Exchange Ltd. in Mumbai gained 0.6 percent to 169.22 rupees a kilogram yesterday.

Tire makers in India last month wrote to Prime Minister Manmohan Singh seeking duty-free imports of at least 200,000 metric tons of rubber and a cut in the import tax on the commodity to 7.5 percent from 20 percent, according to Kanwar, who is also chairman of the Automotive Tyre Manufacturers’ Association.

The group met Commerce Minister Anand Sharma and is waiting to be called by the prime minister for a meeting, Kanwar said.

“The government has to intervene because this commodity is going through the roof,” Kanwar said. Rubber futures may rise to as much as 200 rupees a kilogram, while the price would need to drop to 120 rupees a kilogram, “for me to get a respite,” Kanwar said.

(businessweek.com)