By Sharad P Matade:
Anticipated spurt in automotive production, coupled with new policy initiatives such as increase in the Customs duty on TBR tyres and imposition of anti-dumping duty on Chinese tyres, are expected to have a positive impact on the near-term prospects of the Indian tyre makers
Higher raw material costs and the teething troubles related to the Goods and Service Tax (GST) roll-out negatively impacted the margins of Indian tyre companies in the first half of the financial year 2017-18.
However, improved demand, a rebound in automotive production across the product segments and policy measures such as the increase in Customs duty in the TBR segment and imposition of the anti-dumping duty on cheap Chinese truck/bus radial tyres helped tyre companies to improve their performance from the third quarter of FY2018.
Though most tyre companies are yet to come out with the results for the fourth quarter of FY2018, industry analysts anticipate a decent growth for the industry for the full year.
Steep rise in input costs
In the first quarter of FY2018 (April-June 2017), tyre companies, both top line and bottom line, were hard hit by an unprecedented increase in raw material costs, higher expenses and destocking by traders in anticipation of GST. The raw material costs went up by as high as 30%.
“Tyre volumes across all the commercial segments de-grew during the first half of FY2018 (April-September 2017), due to GST implementation and de-stocking by dealers, which impacted the first quarter of FY2018 demand,” says Subrata Ray, Sr. Group Vice-President, Corporate Sector Ratings, ICRA.
Usually, the first quarter is known for having weak growth due to subdued demand from the rural sector and this year, the implantation of GST further slowed down the demand as stockists preferred to clear their stocks to avoid GST levy. The impact of both weak demand and GST was clearly seen in the first quarter of FY18 of tyre companies.
MRF had a 78.30% plunge in its standalone net profit at Rs 1.07 billion for the quarter ended June 30, 2017 due to a 21% increase in its expenses. During the quarter, Apollo Tyres’ net profit plunged 72% to Rs. 883 million y-o-y, while sales fell by 1% on year.
Commenting on the results, Onkar S Kanwar, Chairman, Apollo Tyres, says: “Raw material prices as a basket jumped more than 30% in the first quarter, as compared to the same period last year, and negatively impacted our margins.” Kanwar also hinted that the company might go for price correction if the prices of raw materials continued to be high.
Destocking by trade partners and higher raw material costs led to a fall of 98% in Ceat’s Q1FY18 net profit, though sales rose 8% to 16.39 billion y-o-y. JK Tyre’s Q1FY18 sales saw a marginal fall of 1% to 19.43 billion as against Rs. 19.58 billion in Q1FY17. The company reported a net loss of Rs. 1.17 billion in the April-June quarter of FY18 compared with a net profit of Rs. 1 billion in the same period of corresponding year.
“We are indeed passing through challenging times. The raw material costs have increased by about 30% over the corresponding quarter. Such steep increase in prices of raw materials without commensurate increase in selling prices has dented our margins,” says Raghupati Singhania, Chairman & Managing Director of JK Tyre.
Two-wheeler major TVS Srichakra’s net profit for the April-June 2018 quarter declined 6%, while sales rose 8% y-o-y.
Impact of GST roll-out
The impact of GST, which came into force on July 1, 2017, and increasing raw material costs continued to hurt tyre companies’ balance sheets in the second quarter of FY18 (July-September 2017). A 22.15% drop was registered in MRF’s standalone net profit to about Rs. 3 billion for the second quarter on account of lower income and higher expenses.
Apollo Tyres’ net profit for the July-September quarter was down by 51% at Rs. 1.40 billion, while sales increased by 11% to Rs. 34.18 billion y-o-y.
“While our revenues have grown, our margins have been under pressure due to the higher raw material prices, up nearly 15% in Q2 FY18 compared to the same quarter of previous year,” says the Apollo Chairman.
Sales of Ceat in Q2FY18 dropped by 5% to Rs. 15.23 billion compared to Rs. 15.97 billion in Q2FY18 and net profits fell 31% to Rs. 730 million y-o-y. “In the early part of Q2, we faced challenges with the channel adjusting to new GST system. I see some stability now and in the long term GST will benefit the CV segment as well as the tyre industry,” says Anant Goenka, MD , Ceat.
Considerably higher raw material prices pulled down JK Tyre’s net profit by 90% in Q2FY18. The company has reported a net profit of Rs. 103.4 million in Q2FY18 compared with Rs. 1.05 billion in Q2FY17. JK Tyre incurred Rs. 11.69 billion towards cost of raw materials as against Rs. 10.39 billion in the second quarter of the last fiscal. However, sales remained flat.
TVS Srichakra’s net profit for Q2FY18 declined by 17% to Rs. 400 million y-o-y.
Anti-dumping duty on Chinese tyres
The anti-dumping duty on certain types of truck and bus radial tyres from China imposed by Government of India for five years from September 2017 came as a boon to Indian tyre majors.
Though higher input costs remained a concern for tyre companies in the third quarter (October-December 2017) as well, sales improved on better demand and the increased Custom duty in TBR segment.
MRF had a 18.1% increase in its standalone net profits at Rs 3.41 billion in Q3FY18 compared with net profits at Rs 2.88 billion during the corresponding period of last year. Sales were up 7% to 38.44 billion in Q3FY18.
Apollo Tyres’ top line improved by 17% to Rs. 40.15 billion in Q3FY18; however, the company’s bottom line continued to fall and reported a dip of 17% to Rs. 2.45 billion compared to Rs. 2.96 billion in Q3FY17. Costs of materials for Apollo Tyres for Q3FY18 stood at Rs. 18.86 billion as against Rs. 14.82 billion in Q3FY17.
“While there was growth across all product categories in India, it was primarily led by truck radials. The raw material costs in the third quarter were significantly higher than the previous year,” says Onkar S Kanwar.
Robust volume growth across passenger, two-wheeler and commercial vehicle tyres segments improved Ceat’s top line in the third quarter of FY18. Ceat’s sales inched up by 1% Rs. 15.80 billion in Q3FY18 against Rs. 15.63 billion in Q3FY17. However, the Mumbai-based company’s net profit declined by 1.74% to Rs. 821 million for the quarter ended December 2017. The company had posted a net profit of
Rs 835.6 million during the same period of the previous fiscal.
JK Tyre’s net profit declined by 86.9% at Rs. 113.2 million in Q3FY18 as against a net profit of Rs. 864.6 million for the same period of previous fiscal. Total income of the company, however, increased by 7% to Rs. 21.35 billion for the third quarter as against Rs. 19.92 billion in the same period of the previous financial year.
“Imposition of the much-awaited anti-dumping duty on cheap Chinese truck/bus radial tyres is indeed a welcome step and will further help enhance volumes,” Singhania says.
TVS Srichakra’s net profit increased by 9% in Q3FY18; however, its revenue fell by 1% y-o-y.
Increase in Customs duty
Increase in the Customs duty on imported truck and bus radials to 15% from 10%, announced in the Union Budget 2018-19, has brought some cheer to the Indian majors such as Apollo Tyres, Ceat, MRF and JK Tyre who have been battling competition from cheap Chinese tyres. This longstanding demand of the tyre industry is expected to boost sales of commercial vehicle tyres in India.
Ceat, the first Indian tyre major to announce its Q4 2018 results, posted a 16% jump in its consolidated net profit at Rs. 768.1 million for the quarter ended March 31, 2018, as against Rs. 658.7 million in the same period of last fiscal. The company’s total income stood at Rs. 16.81 billion against Rs. 16.45 billion a year ago.
Though the natural rubber prices remain low, the sudden spurt in crude prices may offset the gains of lower NR prices as crude-linked inputs comprise about a fourth of the raw material cost.
However, the rising demand for automobiles is a bright spot. The Indian automotive industry is forecast to post a strong double-digit sales growth over the next 12-18 months across all major segments — passenger cars, two-wheelers and commercial vehicles. Consequently, demand for tyres is likely to grow both in the original equipment segment and replacement market.
The spurt in automotive production, coupled with new policy initiatives such as increase in the Customs duty on TBR tyres and imposition of anti-dumping duty on Chinese tyres, are expected to improve the fortunes of tyre companies in the forthcoming quarters.