Just as MRF surprised the market with a better-than-expected performance for its financial year ended September, 1997, there seems to be hope that yet another tyre company may do the same for the current financial year.For most tyre manufacturers, the decline in the production of heavy vehicles has been a difficult situation to tackle, as Apollo Tyres, the market leader in truck and bus tyres, will testify. But in the case of a tyre manufacturer who is not involved in selling truck and bus tyres, the going may not necessarily be so bad.
Take the case of TVS Srichakra Tyres (TVSS). The company caters to motorcycle and three-wheeler manufacturers, a segment that is expected to close the current financial year with a 22 per cent growth.
In fact, one of Srichakra's biggest customers is group company TVS Suzuki. TVS Suzuki recently commissioned an expansion in its motorcycle capacities which is likely to reflect on the earnings of the tyre company.
TVSS already controls almost 50 per cent of the marketfor motorcycle tyres.
In the past, the returns that Srichakra earned were on par with the best in the industry, which, at a 30 per cent consistent return on capital for the last few years, was second only to MRF's return of 33 per cent.
Despite that, the stock never really attracted the premium valuations that Goodyear Tyres or MRF has been able to command.
The size of operations could have been a major limiting factor for its valuations and the fact that the company has stuck to niche areas of operations rather than diversify and supply tyres to the other automotive segments, thereby increased its business risk.
All other players, with the exception of Elgi Tyres, cater to all or most of the segments of tyre consumers.
Elgi Tyres: reversal in fortune
Elgi Tyres shares a similar trait with TVS Srichakra Tyres, in that it occupies a niche position within the tyre industry, but the similarity ends there.
Elgi Tyres does not actually manufacture tyres itself, rather, it specialises inproducing rubber-based materials which are used to retread worn out tyres. It also manufactures retreading equipment.
Taking this concept further, the company has, over the years, established a network of associates or franchises that buys both the equipment and the raw material from Elgi Tyres and does the retreading for automobile users.
Elgi Tyres controls over half the retreading market in the country besides having a stable presence in the export market, particularly in developing markets, followed by MRF with the balance market share being distributed amongst some of the smaller tyre retreaders.
Essentially, the company's franchises cater to the users of truck and bus tyres which means that the company's fortunes are closely linked to those of the road transport operators.
With truck freight rates falling for much of last year, expenditure of retreading tyres would not be very high on their priority list.
But this trend is an exception, considering that normally truckers would prefer to havetheir tyres retreaded rather than purchase new ones in order to cut costs hence, the immense market potential.
The declining trend in the use of retreaded tyres over the past year is proving to be a very unfortunate development for the company as it had just begun to take advantage of lower raw material prices (mainly natural rubber) and has managed to improve its operating margins and return on capital.
This improvement may be reversed for the current year. Consequently, the stock of Elgi Tyres has been moving in the opposite direction to that of TVS Srichakra and has been hitting new lows.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
