The auto sector rode ahead of its rolling stock -- the tyre -- which has not derived the benefits from the current boom as various auto parts sectors have. The reason: Too many players chasing the additional pie which is too small to begin with. More than half the demand for tyres comes from the replacement market and the OEMs have ensured that their new generation vehicles are fitted with quality tyres which would not wear off soon.

So the tyre makers will have to wait tirelessly at least for an year or two before the replacement market picks up. But by then, chances are that the existing domestic team of players -- Apollo, MRF, Ceat, Modi, JK, Dunlop and the likes -- will have to take on the foreign team of Continental, Michelin, Bridgestone, Pirelli Spa, Korean Kumho etc. Competition has already heated up and tyre prices have remained rather sticky foiling the bid to push up the margin despite rubber prices easing off e.g the prices of truck tyre have been around Rs 9,500 over the last 2-3 years with an insignificant variance of Rs 200-300 while rubber prices rolled down from around Rs 60,000 during 1995-96 to about Rs 53,000 during 1996-97. Further, tyre prices were slashed by about 5-8 per cent when the current Budget favoured industry by switching over from ad valorem excise duty to specific resulting in a reduction in the effective rate of excise to 13 per cent on 2-wheelers and tractor front wheels, 30 per cent on all other tyres and 25 per cent on tyre flaps.

"The (tyre) market has been sluggish across various segments with none showing any signs of an upward trend" says Kamal Gulati, Mumbai branch manager of Dunlop, observing that the new generation vehicles coming in the market has not translated into increased demand for tyres. Also the per capita vehicle use has remained static since human population taking to road transport has grown faster than addition to the vehicle population implying no growth in the per capita demand for tyres.

"The overall tyre production rose sharply by 21 per cent in 1996 over 1995. Demand, however, failed to keep pace in all segments. In truck and bus tyres, while most companies increased production by 8-10 per cent in '96, demand grew by a marginal 4 per cent. Similarly, in the car tyre segment, demand increased by an estimated 5-8 per cent against the expectation of 15-20 per cent," observes Dimensional Research in its report Industry Outlook 1997.

Poor offtake hit the manufacturers who are sitting on high inventory and cutting down production. The first quarter of 1997 witnessed a 25 per cent drop in sales. In April-May too the market is reportedly down and from June till August-September the rainy season would further restrict movement of goods implying a slack season for tyres. And the outlook for tyres looks rather grim which is reflected in tyre stocks being caught in a tight bear grip.

Except Goodyear, all the tyre scrips continue to skid relentlessly. Apollo Tyre, lost 40 per cent over its high of Rs 168 during January this year and is close to its low at Rs 110 currently. Ceat has seen only southwards and at the current Rs 40 is at a fourth of Rs 165 attained in the 1992 boom.Dunlop at Rs 24 too retraced by 75 per cent from Rs 92 during end-1996. Just within a month JK Industries surged to Rs 50 in January '97 from Rs 31. However, it dropped to Rs 40 as of now after hitting three lows around Rs 33 in the process. Modi Rubber, which surged from Rs 54 to Rs 90 in March '97 over six months, had a steep fall to Rs 61 just within six weeks. MRF suddenly gained more than 25 per cent in three weeks to Rs 3,200 during October '96 on the news of good half-yearly results and has been steadier among the lot at Rs 2,950. Beating the downtrend in the tyre industry, Goodyear consistently climbed up from Rs 70 in November '96 to Rs 110 this month due to hike in stakes by its parent company. Within two months since early March '97, Srichakra Tyres lost all that was gained (25 per cent) between November '96 to March '97—rising from Rs 40 to Rs 49 and declining to Rs 40 now. Vikrant Tyres catapulted five times from Rs 11 to Rs 55 over three months till mid-March '97 to settle at around Rs 35 on account of the take-over news.

Nobody is touching tyre stocks, admit marketpersons. Sector analysts too think on the same lines. "We are not bullish (on tyre sector) at all" says Abhay Shanbaug of HSBC Batlivala & Karani who feels that MNCs entering the fray would increase competition and may not be good for the existing players who already have added a lot of capacity.

Notwithstanding the current woes of tyre makers because of huge capacity build-up, high inventories and sluggish demand, the industry is on a massive investment spree. Reportedly, fresh funds of Rs 3,679 crore are lined up for 21 tyre projects which would raise the capacity by 16 million tyres to about 53 million tyres per annum, according to a CMIE report. MRF is setting up a Rs 100-crore 12 lakh radial tyre plant near Pondicherry to be commissioned by December '97. JK is implementing a Rs 450-crore plan to expand its Banmora (MP) plant capacity from 20 lakh to 35 lakh tyres and is planning to set up a Rs 500 crore 15,000 car radial tyres plant jointly with Continental Aktiengesellschaft of Germany. Dunlop is going through a Rs 217-crore renovation plan and Chhabria's another tyre company MRC Rubber is planning a tie-up with Pirelli Spa of Italy for a Rs 540-crore steel radial tyre plant. Besides a Rs 32-crore modernisation plan, Apollo Tyres has planned a Rs 400-crore 47 lakh new tyre unit at Pune in collaboration with Continental scheduled to commence in June '98.

Bridgestone ACC India Ltd. is setting up a Rs 300-crore 19 lakh steel radial tyre plant in Gujarat and is expected to commence operations by 1998. Kumho Tyres of Korea is setting up a plant in Tamil Nadu and Trac Tyres of the US is planning a Rs 400-crore 15 lakh tyre project near Kanyakumari.

The logic behind the future capacity build-up is to be ready for the world auto manufacturers who will be setting up shop in India. The latest Exim policy allows free imports of tyres albeit only those which are not manufactured in India and also second-hand tyres which will increase retreading for cars. Observers, however, feel that only tubeless tyres will be imported but these kinds won't withstand Indian weather conditions. Even radial tyres are not meant for Indian roads where only a low tech cross-ply has remained faithful. Still if the radial tyre capacity is being added by MNCs, it is perhaps looking at the export market making India as their base. Michelin launched the radial truck tyre in India and claims that it has double the life of cross-ply and saves 8 per cent fuel.

The Rs 7,500-crore tyre industry has grown significantly in the 2/3-wheeler segment which comes almost on par with 4-wheelers and others in terms of volume. Yet 80 per cent of revenue comes from the bus and truck tyre segment. The replacement market is dominant at 52 per cent followed by OEMs at 39 per cent and exports at 10 per cent. The industry is characterised by low margins—around 2-3 per cent—and is high capital and raw material-intensive. Raw materials account for 60 per cent of the costs and natural rubber (25 per cent), synthetic rubber (13 per cent), nylon tyre cords (34 per cent) and carbon black (14 per cent) are the main ingredients.

Apollo Tyres

Belonging to the Raunaq Singh group of companies, Apollo Tyres has a dominant share—23 per cent—in the truck and bus tyres replacement market which is 90 per cent of the total market for this segment of tyres which in turn accounts for 80 per cent of the total tyre market. Apollo is expected to notch up a turnover of Rs 1,425 crore during 1996-97, up 14 per cent, maintaining a 3 per cent net margin. The company projects a 15 per cent growth in sales volume to 1.24 lakh tyres but only 8 per cent growth in value terms to Rs 1,535 crore. Assuming a 3 per cent net margin and no dilution in equity, the EPS would be Rs 15 during that year which discounts the current price 7 times.

Says Narendra Nagpal in the BZW report "Apollo's prospects in the near term are dependent on the health of the economy which we expect will recover strongly in FY98. Aggregate freight in the economy should increase sharply and with railway capacity lagging behind demand, a major portion of the incremental freight will be transported by roads leading to increased demand for truck tyres in the replacement market. Apollo, the market leader in the replacement market, will be the largest beneficiary of this increase in demand."

A 5 per cent rise in GDP implies a 10 per cent rise in the volume of road traffic in the country and Apollo will get a 23 per cent share in this increased road traffic volume, according to company sources.

MRF

Celebrating the Golden Jubilee with a whopping 140 per cent dividend—the highest in Indian corporate history—MRF figured in the top 10 Indian companies and among the top 200 in Asia for four consecutive years in the Far Eastern Economic Review. The sole supplier of radial tyres to Opel Astra, Ford Escort and Fiat Uno, it is a major supplier to Maruti and Telco and will achieve the same for Hyundai, Ford Fiesta and Mitsubishi Lancer.

Built on strong brand, both in the tyre and stock market, the company is highly geared due to restrained access to equity funds. Recently, HSBC Batlivala and Karani downgraded this stock from a strong buy to a sell recommendation. "With Continental talking to local manufacturers for equity stakes, Goodyear increasing its stake in the Indian company to 74 per cent from 51 earlier and Pirreli joining hands with the Birlas, the days ahead are likely to be tough for MRF and the tyre industry may go the consumer durable way" says Abhay Shanbaug.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.