Tyre makers continue to face cost pressure

The three months to end-March turned out to be a bumper quarter for Indian tyre manufacturers. The sharp uptick in demand has allowed tyre makers to improve their operating margins despite being hit by rising raw material costs through rubber prices. 

The tyre sector is driven by replacement demand that accounts for close to three-fourth of total sales, with the balance coming from sales to vehicle manufacturers and exports. Within various market segments, tyres for commercial vehicles dominate the overall volumes and the pick-up in industrial activity over the past one year has ensured high demand for truck tyres. 

The top-six tyre firms, including Apollo Tyres, MRF and Ceat, together reported a 25% rise in revenues on a standalone basis for the quarter ended March ’10 over the year-ago period, over four times as fast as the growth during the three months to end-March ’09. 

Improvement in demand is also visible on a sequential basis with a 10% growth in revenues for these companies over the quarter ended December ’09. This was twice the growth rate in sales in the previous quarter compared to the three months to end-September ’09. 

However, the companies faced a big jump in the raw material cost, with the price of rubber almost doubling to Rs 140/kg. 

The increase in the cost of rubber that makes up half of the cost of a tyre also pushed up the raw material cost-to-sales ratio to 68% last quarter from a little over half of the total in the same period last year. Despite the hardening raw material cost, companies were able to clock a double-digit operating margin. 

Companies were able to generate as much as a 63% jump in aggregate net profit over the corresponding quarter last year. Although high demand lifted operating performance, the bottomline was largely boosted by moderation in non-operational costs, like interest and depreciation. 

Rubber prices have been increasing quarter-over-quarter and that has impacted sequential profits. Although the decline in net profit for the quarter ended March ’10 over the previous quarter moderated to 4%, it indicates companies continue to face pressure due to raw material expenses. 

Despite cost pressures, investors have taken a fancy to tyre makers, with scrips of top firms outperforming the market benchmark index. All top firms generated double-digit returns for shareholders led by a 32% rise in the price of Apollo Tyre, compared to a 3% decline in the Sensex since January 1.

(economictimes.indiatimes.com)