Tyres Leave Automobiles Behind

The automobile sector slowed down considerably in FY11-12. The sales of domestic vehicles saw a growth of 12.24 per cent compared to 26.17 per cent in FY10-11. Further, the volume figures have been deteriorating further in the months of Q1 FY12-13 with the growth reducing to around 10 per cent for each of the months compared to the respective months in the previous year. A general perception accounts for judging tyre manufacturers based on these numbers. But how much are the tyre firms affected by these conditions?

Broadly, 70 per cent of the turnover of tyre firms comes from the replacement market which consists of on-road vehicles. Due to increased sales over the last few years, the replacement front is expected to gain slightly, thus providing strong support. This segment usually is competitive and the margins involved are better than sales to original equipment manufacturers (OEMs). The sales to OEMs are directly affected by the volumes of vehicles sold which would slow down on the back of reduced demand.

Considering lower exposure of this category in terms of revenue source, companies that are well set as against the current market factors would be less affected. OEMs contribute 41 per cent to the revenues of Falcon Tyres. Moreover, the company supplies tyres to tractor manufacturers, two-wheelers and three-wheelers with the demand for tractors slowing down through H2 of FY11-12. Since April 2011, the stock prices for the company have declined by 76.49 per cent.

Domestically, truck and bus tyres contribute to about 65 per cent of the industry’s revenues. Over the last few months, we have seen negative growth in the sales of medium and heavy commercial vehicles (M&HCVs). The months of April and May 2012 witnessed a negative growth of more than 11 per cent in this segment. Companies that are highly dependent on domestic markets are bound to face the repercussions of this slowdown.

Tyre firms are increasingly looking at increasing their spectrum of operations in the international markets. Companies that are heavily exporting are currently witnessing exceptional returns over time. Since April 2011, the share price of Balkrishna Industries (BKT Tyres), which has 90 per cent of its revenues derived from exports, has increased by 97.27 per cent. Moreover, firms skewed towards exports benefited due to the depreciating rupee, thus helping boost the revenues.

Moreover, tyre companies were under tremendous pressure due to increasing rubber prices. This raw material accounts for about 50 per cent of the raw material input. The prices have since corrected themselves over time, releasing much of the pressure on the margins. In the month of May 2012, rubber prices saw a reduction of more than 20 per cent.

Source: Rubber Board, Ministry of Commerce and Industry

All these factors on an aggregate show how tyre manufacturers are not largely affected by market conditions in the automobile industry. A recent media report said that tyre companies are cutting production due to fall in sales. It is important to understand that growth is healthy in terms of exports and replacements and that tyre companies would undoubtedly be affected by the auto industry’s slowdown but the gravity of it is lesser than anticipated.

We believe that the input costs, export potential and the replacement market will remain stable and that these companies would continue to grow. The rate of growth can slow down but not as much as those of automobile firms. Though vehicles and tyres are directly related, at the moment, tyres seem to be moving faster than the vehicles.

Share Prices Of Tyre Manufacturers

% Growth In Sales Volume Over The Corresponding Period In The Previous Year