Revenue mix change, softer rubber prices to help tyre ind

Battling pressures of an economic slowdown and high input costs, the Indian tyre industry grew by 5.3% (volumes) during 2011-12. Hidden in the numbers are the decline in replacement demand (volume) by around 0.2%, the subdued OEM demand growth of around 11.0% (volume) and a healthy export growth of around 23% (volume-albeit on a low base). The robust growth of ~28% in revenues during 2011-12 was largely propelled by the hike in realisations of over 20% and the sharp depreciation in the INR (vs. the USD) which drove export revenues for the industry by a robust 46%.
2011-12 started on a challenging note for tyre companies, with natural rubber (NR) prices peaking at around Rs. 240/- per kilogram during April-2011. The situation improved shortly thereafter with NR prices cooling to around Rs. 195/- per kilogram by November-2011, and staying range bound between Rs. 185-200/- per kilogram since then. Synthetic rubber (SR) prices however continued unabated on their upward trajectory, increasing by 30-45% (different elastomers) during 2011-12. Despite the weak demand in the price conscious replacement markets, tyre manufacturers were forced to push through multiple price hikes of over 20% during the last fiscal. Inability to completely neutralise cost escalations resulted in contraction of operating margins across several players like MRF , Apollo , Goodyear and JK Tyres , by around 180 bps. Price hikes in the industry continued during Q1, 2012-13 in an attempt to neutralise the hike in cost of crude derivatives.
We expect the demand for tyres from the OEM segment to be relatively muted at 8-9% during 2012-13, despite anticipated revival in replacement volume, driven by vehicles (particularly Truck and bus tyres) sold post the recessionary dip of 2009. Revenue growth for tyre companies is also expected to be supported by price revisions of around 5-8% and continued export thrust to SE Asian countries. Benign NR prices, falling crude derivatives, benefits of sales mix (higher sales from the replacement segment) coupled with higher proportion of radialisation are expected to support industry wide operating margin expansion; we expect industry wide operating margins to expand during Q1, 2012-13. Net margins and profitability indicators (return on capital employed) are however expected to face heightened pressure as tyre manufacturers commercialise large radial capacities.
Mr. Subrata Ray, Sr. Group Vice President & Head-Corporate Sector Ratings, ICRA, says, “In line with the sombre outlook for the automotive industry, we expect OEM tyre demand to be muted, however we expect replacement demand and exports to support industry volumes. The softer input costs would however pay dividends during the current year, with operating margins set to expand during H1, 2012-13.”
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