Rubber prices puncture Ceat’s profits

Ceat Ltd slipped into losses in the March quarter, hit by a sharp and sustained increase in rubber prices during fiscal 2011 (FY11). The RPG Enterprises-owned tyre maker had a tough year, with each of the first three quarters of the current fiscal seeing a decline in profit margins.

While analysts had expected its net profit to be a meagre Rs. 10 crore in the last quarter, the firm incurred a loss of about Rs. 12 crore. It had earned a net profit of about Rs. 15 crore in the year-ago period and Rs. 5 crore in the preceding quarter.

What is ironic is that booming sales of automobiles—both commercial and passenger vehicles—have actually buoyed demand substantially. In the March quarter, Ceat’s revenue rose by a robust 28% year-on-year (y-o-y) and 11.8% sequentially.

The rise in volumes was also backed by a 5% rise in tyre prices, but mainly in the replacement market, which comprises a little over three-fifths of the revenue. Passing on price increases in the original equipment maker segment is difficult because customers have better bargaining power.

However, the hike in tyre prices did not compensate for the 11% rise in rubber prices in the last three months. During FY11, while rubber prices soared by 37%, the firm was able to raise tyre prices by just about 18%.

Operating margin for the March quarter plunged to 1.5%, 365 basis points (bps) lower y-o-y, and 300 bps down sequentially. Its operating profit fell by 63.5% from a year ago to Rs. 14.5 crore. One basis point is one-hundredth of a percentage point.

Notwithstanding the cost pressures, Ceat has been expanding capacity to cater to growing demand. During end-March, it inaugurated a 150-tonne-per-day radial tyre plant at Halol; this capacity is under one-third of Ceat’s total tyre capacity.

The plant will cater to the passenger and the truck and bus segments, and enhance the share of radial tyres in Ceat’s product mix. Radial tyres fetch higher prices and, hence, earn better margins compared with bias tyres.

While rising interest costs ate into profitability, higher interest costs are further affecting profits. Interest outgo doubled from a year ago to Rs. 22 crore. “Higher inventory due to sluggish sales in March, working capital and lower interest earnings when compared with the year-ago period were key reasons,” says Anant Goenka, deputy managing director of Ceat.

Consolidated net profit for FY11 dropped 83.4% y-o-y on account of poor operating margins. The firm is hiking prices at consistent intervals—in April, there was a 4.5% hike and a similar hike is expected in May, too.

So far, rubber, which accounts for about two-thirds of the cost of making a tyre, is showing no signs of shedding prices. It is ruling firm at Rs. 235 a kg. Hence, any improvement on the operating margin front does not seem likely, for now.

Perhaps, Ceat’s profitability may improve from the second half of FY12, as higher radial tyre volumes from its Halol plant will translate into better realizations and margins. Commercial production commenced in March. The impact of higher depreciation and interest costs from starting the plant will be felt in the June quarter, too.

Not surprisingly, shares of the firm dipped 6% to close at Rs. 100 apiece. Consolidated earnings per share for FY12 plummeted to Rs. 7.70, a mere one-sixth of the previous year’s level.

On the brighter side, volume growth is robust. If that continues in FY12, a fall in rubber prices should bring investors back to the counter.

(Source: http://www.livemint.com/2011/05/02223957/Rubber-prices-puncture-Ceat8.html)

Rubber Board's spends on labour welfare

KOTTAYAM, MAY 2:

The Rubber Board distributed Rs 2.66 crore for labour welfare in 2010-11, according to a press release at Kottayam. The scheme benefitted 14,561 labourers in the organised and unorganised sectors.

It included medical attendance, housing subsidy and group insurance cum deposit for labourers and educational stipend and merit award for their children.

It was intended for the improvement of basic amenities and working conditions of the rubber plantation workers.

The amount spent for various components are Rs 72,72,890 (educational stipend and merit award), Rs 1,50,87,500 (housing subsidy) and Rs 1,502,730 (group insurance cum deposit. Rs. 1,38,1000 was also paid for 284 beneficiaries under sanitary subsidy component.

(Source: http://www.thehindubusinessline.com/industry-and-economy/agri-biz/article1985919.ece)

Rubber Slumps as China’s Manufacturing Index Declines More Than Forecast

Rubber declined almost to a six-week low after data showed manufacturing in China, the world’s largest consumer, fell more than economists forecast and as a slump in silver spurred selling of industrial commodities.

The October-delivery contract lost as much as 3.7 percent to 374.6 yen a kilogram ($4,615 a metric ton) before trading at 377.7 yen on the Tokyo Commodity Exchange at 11:40 a.m. Futures fell to a six-week low of 372.2 yen set in after-hours trade on April 27, and extended last week’s 7.1 percent drop.

The Purchasing Managers’ Index fell to 52.9 in April from 53.4 in March, China’s logistics federation and the statistics bureau said in an e-mail yesterday. That was below a median forecast of 53.9 in a Bloomberg News survey of 20 economists. The drop indicated that growth may moderate in the world’s second-biggest economy after the government raised interest ratesand allowed faster gains in the yuan.

“The data showing a slowdown in the Chinese economy raised concern that the nation’s raw material demand may weaken,” Kazuhiko Saito, an analyst at broker Fujitomi Co. in Tokyo, said today by phone.

Zhang Liqun, a senior researcher at the State Council’s Development Research Center, said in a statement yesterday that the data show an increased likelihood that growth will slow. China’s gross domestic product expanded 9.7 percent in the first quarter from a year earlier and theWorld Bank last week forecast a full-year expansion of 9.3 percent.

Premier Wen Jiabao’s government aims to counter the fastest inflation since 2008 and cool a real-estate market that has been at risk of price bubbles. Credit Suisse Group AG says the nation’s fifth increase in benchmark rates since the global financial crisis may come as early as today, a Chinese holiday, less than a month after the previous move.

Silver Plunges

Rubber was also sold as silver futures on the Comex in New York plunged as much as 13.2 percent, spurring investor sales of industrial raw materials, Saito said. The precious metal slumped as CME Group Inc., the Comex parent, increased the minimum amount of cash that traders must deposit for speculative trades.

Silver for July delivery dropped to $42.2 an ounce before trading at $44.735 an ounce at 10:46 a.m. Tokyo time. The CME increased the so-called initial margin by 13 percent to $14,513 per contract from $12,825 after the close of business on Friday. Margins were $4,250 a year ago.

Rubber also declined amid speculation that supply from Southeast Asian producers will expand, Saito said. Natural rubber output will increase in the coming weeks as farmers resume harvesting after the traditional low-production season, easing a “tightness” in global supplies, theAssociation of Natural Rubber Producing Countries said in a report last week.

Production from its member countries, representing 92 percent of global supply, may climb 10.5 percent to 2.3 million tons in the three months through June, the group said in a monthly bulletin. Output in the first quarter is estimated to have advanced 6.1 percent to 2.27 million tons, the group said.

(Source: http://www.bloomberg.com/news/2011-05-02/rubber-slumps-as-china-s-manufacturing-index-declines-more-than-forecast.html)

Global rubber output likely to be at 10.025 million tonnes

Singapore  (may 01, 2011) : global natural rubber production for 2011 may come in at 10.025 million tonnes, lower than an earlier forecast of 10.060 million tonnes due to output revisions in member countries, the anrpc said on thursday. despite the revision, the global output for the commodity mainly used in tyre was still higher than 9.473 million tonnes in 2010, according to the association of natural rubber producing countries (anrpc).
"the anrpc's total supply would rise this year by 5.8 percent, slightly slower than the previously-expected 6.2 percent rate," the group said in a report. output in thailand, the world's main rubber producer, was revised down to 3.375 million tonnes in 2011 from an earlier forecast of 3.430 million tonnes, still higher than 3.252 million tonnes in 2010. second-largest producer indonesia's output forecast was raised to 2.972 million tonnes from a prior estimate of 2.955 million tonnes. last year, indonesia produced 2.736 million tonnes.
anrpc members include thailand, indonesia, malaysia as well as cambodia, china, india, papua new guinea, the philippines singapore, sri lanka and vietnam, accounting for 92 percent of global output. the group also accounts for 92 percent of global exports and 48 percent of global consumption of natural rubber.
prices of tyre grade rubber have dropped more than 10 percent since striking a record above $6 per kg in february, as economic concerns triggered by the middle east unrest and worries about the impact of a deadly earthquake and tsunami in japan on demand spurred selling on the tokyo commodity exchange.

(Source: http://www.brecorder.com/news/agriculture-and-allied/world/1184153:global-rubber-output-likely-to-be-at-10-025-million-tonnes.html?hl=rubber)

With Rubber out of reach, Synthetic Rubber consumption hots up

COCHIN (Commodity Online): Any rubber consumer will vouch for Natural Rubber but when the prices gets beyond their purchase limit, they have to either raise their product cost or rely on Synthetic rubber.
This is what India has witnessed in the first quarter of this year as synthetic rubber consumption increased close to 6 per cent.
The trend was visible in the month of January as the consumption of Synthetic Rubber went up to 35,260 tones, a 5 per cent increase compared to last January.
Not only has the rubber prices sky rocketed but even the production declined putting the consumers in big dilemma. According to Rubber Board, the production declined due to various factors, including that of unreasonal rains.

(Source: http://www.commodityonline.com/news/With-Rubber-out-of-reach-Synthetic-Rubber-consumption-hots-up-38654-3-1.html)

Rising rubber prices could impact MRF's earnings in coming quarters

The Chennai-based MRF Tyre has posted a strong double-digit sales growth in each of the last three quarters. This is due to robust demand for tyres boosted by higher automobile sales . But rising raw material costs due to rising rubber prices have put its operating profit under pressure, besides eroding its net earnings. The demand scenario of the tyre sector is positive due to expectations of a sustainable growth in the automobile sector, and MRF looks to be its major beneficiary.
BUSINESS: MRF is the largest domestic tyre manufacturer in tonnage terms with capacity to churn out 3.17 lakh metric tonnes spread across six plants in South India. Although Apollo Tyres has become a large firm by revenue due to its overseas acquisition, MRF has a strong presence in India and a good brand image. Its product portfolio comprises auto tyres, pretreads and conveyor belts , with 95% its revenue coming from tyre and tubes. MRF derives a large chunk of its business from commercial vehicles . More than half of its business comes from the replacement market followed by sales to automakers as an original equipment manufacturer, or OEM. MRF will invest Rs 1,300 crore to expand its capacity expansion in Andhra Pradesh and Tamil Nadu by the end of 2011. The total installed domestic tyre capacity is projected to increase to close to 180 million tyres by 2012-2013 from 122 million tyres in 2009-10, according to rating and research firm ICRA.
FINANCIALS: The company's consolidated net sale has grown at a compounded annual growth rate (CAGR) of 14% since FY07 to reach Rs 7,458 crore in FY10. But net profit grew 20% in the same period due to better average realisation. For the first half of the current fiscal ended March 2011, net sales grew 35% to Rs 4,967 crore while net profit declined 10% due to a sharp rise in raw material costs due to rubber prices. Raw material costs account for over two-thirds of total operational expenses for tyre makers. Natural rubber prices have gone up 20% in the last six months to Rs 24/kg, which has dented the profitability of tyre companies. Although most tyre makers have raised prices 5-6% in the last six months, it has not been adequate to counter cost-push inflation. Its strong position in the domestic market has helped MRF post an average return of equity of 20% in the last three years, higher than its peer group which includes Apollo Tyre and JK Tyre. The firm also has a consistent dividend payment record.
VALUATIONS: With the rise in input costs impacting profitability, the MRF stock has lost almost a third of its value from its peak last October. The margin contraction due to high rubber prices provides an element of risk in the near term, but its brand value and its sustainable business model makes it an attractive investment bet. At the last traded market price of Rs 7,210, the scrip is trading at nine times its stand-alone profit for the last 12 months, which looks attractive, when compared with the industry average of 12.With an assumption of 15-20% increase in revenue in the next two years, we expect the company to close FY13 with consolidated net profit of Rs 500 crore. This means MRF is trading with a 2-year forward earnings multiple of close to seven, which makes it reasonably valued. An investor willing to bear the risk of rising rubber prices which could further dent MRF's earnings in coming quarters can take an exposure with a horizon of at least 2-3 years.

(Source: http://economictimes.indiatimes.com/features/investors-guide/rising-rubber-prices-could-impact-mrfs-earnings-in-coming-quarters/articleshow/8128529.cms)

Modi Rubber plans re-entry into tyre market

When Modi Rubber closed an agreement with German tyre manufacturer Continental for outright sale of Modi Tyre Company Ltd (MTCL) last month, the exit led to speculation of the group foregoing interests in the segment.
Modi Rubber is, however, looking at regaining possession of the company's Modinagar factory, to re-enter the market for motorcycle, tractor and light commercial vehicle (LCV) tyres.
"This plant (at Modinagar) was leased to us by a company called Modi Export Process. This company defaulted and the Uttar Pradesh [ Images ] liquidator put a seal on the plant. We have approached the Allahabad High Court, seeking possession of the plant," said Alok Modi, director, Modi Rubber.
Adding: "After we get possession, we will make a business plan. While technology has changed for car tyres with the introduction of radials, we can still produce motorcycle, tractor and LCV tyres, since there is huge demand for these.
This plant has a capacity to process 30-35 tonnes of rubber per day. While this option is open to us, marketing products for a small plant may not be competitive. Therefore, we may also consider contract manufacturing at this unit."
In 2010-11, as many as nine million motorcycles and 350,000 LCVs were sold in the domestic market.
The segments saw growth rates of a little over 22 per cent. With rising sales, big opportunities have opened up for auto component and tyre manufacturers.
The Modinagar plant in Ghaziabad district, 45 km from here, used to manufacture tyres for scooters, motorcycles, cars, tractors and light commercial vehicles.
It was shut in 2001, when Modi Rubber went to the Board for Industrial and Financial Reconstruction (BIFR), following financial and labour disputes.
In 2008, when Modi Rubber came out of BIFR, this plant was, with the ones at Modipuram and Partapur (both in Meerut district), given to the company. But Modinagar was soon taken over by the state liquidator.
Along with the plant, there is land that runs into several acres. This can be used for real estate development.
Said Modi, "We may go for a service model in housing for the industrial plants around Modinagar."
Last week, Modi Rubber announced an agreement to sell all its stake in subsidiary company MTCL to Continental Corporation.
Upon completion of the transaction, MTCL would become a wholly-owned subsidiary of Continental, the world's fourth largest tyre manufacturer.
Continental would roll a million units of truck and bus tyres and tubes annually from MTCL's plants in Modipuram and Partapur.

(Source: http://www.rediff.com/business/report/modi-rubber-plans-re-entry-into-tyre-market/20110502.htm)