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Please refer to important disclosures at the end of the report For private Circulation Only.

Sushil Financial Services Private Limited Member : BSEL, SEBI Regn.No. INB/F010982338 | NSEIL, SEBI Regn.No.INB/F230607435. Office : 12, Homji Street, Fort, Mumbai 400 001. Phone: +91 22 40936000 Fax: +91 22 22665758 Email : [email protected]

March 16, 2012 VIEW: BULLISH HORIZON: LONG TERM

Techno Speak

EQUITY ANALYST

lok Deora | +91 22 4093 4014

[email protected]

EQUITY ANALYST

urabh Jain | +91 22 4093 4004

[email protected]

Sector Coverage

INDI N TYRE SECTOR


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March 16, 2012 2

Indian Tyre Sector

INDEX Executive Summary

Industry Overview

Factors affecting performance of the industry

• Movement in Prices of Key Raw Materials

• Bargaining power of customers Original Equipment Manufacturer (OEM) Market

Replacement Market

Exports Market

• Tyre Retreading

• Radialization Opportunity

Competitive Scenario

Key Growth Drivers for Tyre Sector • Long term positive outlook for Auto Demand

• Recent decline in rubber prices to improve profitability

• Backward integration can help protect margins

• Margins depend on ability to pass on rise in input costs

SWOT Analysis

Outlook

Snapshot • MRF Ltd

• JK Tyres & Industries Ltd

• Ceat Ltd

• Apollo Tyres Ltd


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March 16, 2012 3

Indian Tyre Sector

Smooth Ride Ahead – An Executive Summary

The Indian tyre industry has seen strong demand growth post FY 2009 but huge spike in

Natural rubber prices from CY 2011 have had a severe impact on profitability of the Tyre

Companies. There were price revisions seen by tyre manufacturers across the industry but

they were

not

enough

to

pass

on

the

steep

rise

in

rubber

prices.

However

with

the

recent

decline in rubber prices the medium to long term outlook on the sector remains promising.

Few of the factors that would have an impact on demand for tyres in India have been

summarized below.

Healthy Auto Demand to drive demand for Tyres According to SIAM, Passenger Vehicle (PV) Sales are expected to grow from 2.2 mn units in

2009 to 5.1 mn units in 2015 implying a CAGR of 15.0%. On the other hand Commercial

Vehicle (CV) Sales including Small Medium and Heavy CV’s are expected to grow from 0.47

mn units in 2009 to 1.42 mn units in 2015 implying CAGR of 20.2%.

Auto demand touched new peaks during 2010 after slowdown witnessed in 2009 period.

The effect of this huge growth will be witnessed in replacement market in coming period.

Replacement

markets

enjoy

higher

margins

than

OEM

segment

and

the

increase

in

demand from Replacement would mean higher margins.

Increasing shift towards Radialization Indian tyre industry lags far behind other developed countries when it comes to

Radialization in Trucks and Bus Segment (T&B). The Indian markets are slowly converging

towards radial tyres in CV segment. Tyre Companies are now continuously investing in

radial capacity which is likely to improve turnover and margin performance due to change

in the sales mix.

Branding and Advertising play key role The leaders in the industry are MRF Tyres, Apollo Tyres, JK Tyres and Ceat Ltd together

commanding over

70.0%

of

the

market.

As

there

are

only

these

few

players

who

command

major shares of overall market in India, branding and advertising remains a key.

Huge Entry Barriers and Low Margin business The entry barriers in this business remain very high owing to high initial investment

required. Also high Raw material costs coupled with higher working capital requirements

and high competition tends to keep the industry profitability under check despite strong

tyre demand.

Retreading Business As Companies across tyre industry have raised prices owing to higher input costs, there

could be increase in demand for retreading by customers which could affect demand in

Replacement market

going

forward.

Retreading

can

be

done

2‐3 times

depending

on

tyre

conditions and gives a new life to tyre at almost 25.0% of the new tyre costs. Sharp

increase in retreading has an impact on tyre demand from replacement markets.

Dumping from Foreign Companies Increasing penetration from foreign players particularly Chinese Companies in Indian tyre

markets is likely to impact the profitability of local players. Although Chinese companies

enjoy low market share currently (5‐6%), it can increase going forward on price

competition.


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March 16, 2012 4

Indian Tyre Sector

Industry Overview The Indian tyre industry accounts for approximately 5.0% of the Global tyre demand

generating revenues of approximately ` 30,000 cr for FY 2011. The growth in domestic tyre

industry was negatively impacted by the global slowdown in FY 2009. Nevertheless, the

industry experienced

a remarkable

recovery

in

FY

2010.

This

growth

was

primarily

driven

by strong revival in automobile demand on the back of improvement in macro economy

and easing of interest rates.

Indian Tyre Industry Turnover

Source: Industry Reports, Sushil Finance

The Indian Tyre Industry produced 119.2 mn units of tyres (1.5 mn tonnes) in 2010‐11. On

an average, In India nearly 60.0% of the production is for replacement market, followed by

25.0% sold to OEMs directly and the balance is exported. Globally, the OEM segment

constitutes 30.0% of the tyre market, exports 10.0% and the balance from replacement

market. Exports turnover for India during 2010‐11 stood at ` 3,600 cr.

Segmental Break up (Industry Turnover FY11)

Source: Industry

Reports,

Sushil

Finance

CAGR of 22.3%


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March 16, 2012 5

Indian Tyre Sector

The Indian Tyre industry is characterized by its raw material intensity (Raw material costs

account for approximately 70% of turnover). There exists huge competition among the top

few players who dominate the market and that results in low margins. These players are

constantly focused on advertising, branding their products and strengthening their

distribution network by increasing dealer network so as to increase their market share.

Industry Segment wise Contribution

Source: ATMA, Sushil Finance

The industry derives its demand from the automobile Industry. The OEM market off take is

dependent on the new vehicle sales while replacement market demand depends on the

total population of vehicles on road, road conditions, overloading norms for trucks,

average tyre life and prevalence of tyre retreading. The major category of tyres produced

in the country is of Truck & Bus tyres (nearly 60.0% in value terms).

Radialization of tyres is still at extremely low levels in India. In the Passenger Car market,

Radialization has reached 98.0% but in all the other categories, cross ply tyres are still

preferred. Poor road conditions, overloading in trucks, higher cost of radial tyres and poor

awareness of tyre users are the main reasons for the non transition of the domestic

market to radial tyres. However, going ahead Radialization in truck & bus tyres may

increase due to government’s focus on infrastructure development.

Since last few decades, Indian vehicles have been using Cross Ply (Bias) tyres. In these

tyres, the ply cords run across each other or diagonally to the outer surface of the tyre.

Rayon and nylon tyre cords are used as the reinforcing medium. These tyres can be

retreaded twice during their lifetime and are hence preferred by Indian transport

operators who

normally

overload

their

trucks.

On the other hand, Radial tyres have their cords running radially from bead at 90 degrees

angle to the rim or along the outer surface of the tyre. The reinforcing mediums used in

these tyres are polyester, nylon, fiberglass and steel. These tyres are generally 20.0% more

expensive than the Bias Tyres. The tyres have longer life and are more fuel efficient. The

poor road condition of the Indian roads has led to lower penetration of radial tyres in India

(nearly 10.0%) as against global trend of above 60.0%.


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March 16, 2012 6

Indian Tyre Sector

TOTAL TYRE PRODUCTION IN INDIA (Units in ‘000)

Category 2009 ‐ 10 2010 ‐ 11 % Change

Truck & Bus 14,811 15,668 5.8%

Passenger Car 20,047 26,201 30.7%

Jeep

1,402 1,500 7.0%L.C.V 5,739 6,029 5.1%

Tractor Front 2,386 2,595 8.8%

Tractor Rear 1,634 1,777 8.8%

Tractor Trailer 903 1,051 16.4%

A.D.V. 294 311 5.8%

Scooter 13,558 20,140 48.5%

Motor Cycle 35,664 43,118 20.9%

Industrial 538 616 14.5%

O.T.R. 161 191 18.6%

Total 97,137 119,197 22.7% Source:

ATMA,

Sushil

Finance

Factors affecting performance of Tyre Industry

Movement in Key Input Prices (Natural Rubber) The tyre sector consumes approximately 63.0% of the total Natural Rubber (NR) consumed

by the country. The Indian Tyre industry is extremely sensitive to raw material prices which

accounts for major portion of the tyre cost. The key raw materials used in the

manufacturing process are as follows:‐

Industry Raw Material Mix


Synthetic Rubber (SR) can be used as a substitute for NR or along with NR but only to a

limited extent in various industries. Generally NR and SR are used in 80:20 ratios in the

Indian tyre industry. This can vary depending on technical specifications of the tyre.

The other key raw materials consumed by the tyre industry are crude derivatives such as

Nylon tyre cord fabric (NTCF), Carbon black and Rubber chemicals. While NTCF provides

strength to the tyre, carbon black enhances the life span of the tyre. With only two

domestic

manufacturers

for

NTCF,

India

imports

more

than

50.0%

of

its

requirements.

Additionally, about 20% of the rubber chemicals are also imported by India.


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March 16, 2012 7

Indian Tyre Sector

Consumption of Natural Rubber by Tyre Sector


Tyre industry imports raw materials on account of the following factors:

• Duty free imports permitted against export of tyres

• Domestic demand insufficient to meet demand requirement

• Technical and Commercial factors

• Access to multiple sources of supply

Rubber Prices Natural Rubber (RS‐4) Price Trend

Source:

Rubber

Board,

Sushil

Finance

Besides NR, almost all the key raw materials are crude derivatives and are hence linked to

crude oil prices. Crude oil prices have spiked up in recent months due to ongoing political

uncertainty in the Middle East and from medium term perspective, prices are expected to

trend higher on global economic recovery. In this backdrop, prices of SR and other crude

derivatives used in the manufacture of tyres are expected to remain firm over the medium

term.

CAGR of 20.9% (FY04‐FY11);

Grew 65.3% YoY during 2010‐11


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March 16, 2012 8

Indian Tyre Sector

International Scenario India is the world’s fourth largest producer of Natural rubber after Thailand, Indonesia and

Malaysia.

Natural Rubber Global Production in CY10


Thailand is the world’s largest producer of natural rubber in the world with 33.0%

production. Indonesia is the second largest producer contributing around 30.0% of the

world’s total natural rubber production.

In the year 2009‐10, India produced 831,000 tonnes of natural rubber. India

contributes 9.0% of the world natural rubber production. Other producers include China

and Vietnam,

contributing

7.0%

and

3.0%

respectively

to

the

world

production.

According to estimates, World natural Rubber production is estimated to be around 11.42

mn tonnes for 2012, while consumption is projected at 11.49 mn tonnes implying a supply

side deficit of 77,000 MT. By 2020, the Global rubber consumption is expected to reach 36

mn tonnes while consumption is expected to be at 16.5 mn tonnes.


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March 16, 2012 9

Indian Tyre Sector

Bargaining power of customers There are three types of customers for Tyre Manufacturers: ‐

Original Equipment Manufacturers (OEM's)

The

OEM segment

enjoys

the

lowest

margins

reason

being

that

the

OEM’s

always

have

high bargaining power as they buy in bulk from the suppliers. To get a pie of the high

volume business, Tyre manufacturers are forced to sell at lower margins. The benefits are

the commitments given by the OEMs in terms of the volume they would procure from the

tyre manufacturers.

Replacement Market (through dealer network) Replacement segment is generally operated through dealer network and company owned

outlets. The bargaining power for the replacement segment is moderate as the buyers are

not that strong as compared to OEMs. The demand in the replacement market remains

strong due to sharp growth in Auto sector witnessed post 2009. In the replacement

market, Tyre manufacturers are better able to pass on the increase in prices as compared

to the OEM segment. This segment therefore commands the highest margins. Tyre Companies are continuously focusing on replacement market and constantly increasing

dealer and company outlets to increase the business from this high margin segment.

Export Market Export segment generally operates at margins which fall between the margins achieved in

Replacement and the OEM markets. Export business at the industry level currently stands

at nearly 10.0‐15.0% of the industry wide turnover. Exports of Tyres and Tubes are freely

allowed in India. Exports initially comprised mainly of Bias Tyres. However with the global

market moving quickly towards Radialization, the exports of Radial tyres is on the rise.

Industry Export

Revenues


CAGR of 22.3%


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March 16, 2012 10

Indian Tyre Sector

Tyre Retreading Increasing tyre prices to push re‐treading business The Indian tyre‐retreading industry at present is nearly 10.0% of total turnover of the Tyre

Industry. The major segments where retreading is used is in CV and Off the Road (OTR)

tyres. Majority

of

the

Indian

re

‐treading

industry

is

fragmented

and

with

large

number

of

un‐organized participants. Some tyre manufacturers like MRF, JK tyres and some tyre

companies operating through franchise route are the organized players in this segment.

Re‐treading includes replacing the treads and providing a fresh life to the tyre with cost of

nearly 25.0% of a new tyre thereby resulting in huge savings. A Heavy Commercial Vehicle

tyre has the ability to get re‐treaded 2‐3 times in India. The body of the used tyre must

have desirable level of characteristics to enable retreading. Retreading cannot be done if

the tyre has already been over‐used to the extent that the fabric is exposed or damaged.

With tyres being one of the primary costs for Commercial fleet operators, retreading helps

increase the life of tyres and reduce the operating costs for the companies. The increasing

price of

tyres

owing

to

higher

input

costs

for

tyre

manufacturers

is

expected

to

result

in

increased re‐treading especially in the Indian Medium and Heavy Commercial (M&HCV)

industry. Continuous improvement in roads infrastructure and strict overloading

restrictions are expected to improve tyre life and also increase number of times tyre can

be re‐treaded. Increase in re‐treading can have an impact on replacement demand for

tyres in coming years.

Types of Retreading Retreading can be done by the following two processes:

Conventional Process (hot cure process) ‐ In this process an un‐vulcanized rubber

strip is applied on the buffed casing of the tyre. This strip takes the pattern of the

mould during

the

process

of

vulcanization.

Precure Process (cold cure) ‐ During this process a tread strip, where the pattern

is already pressed and precured is applied to the casing. It is bonded to the casing

by means of a thin layer of specially compounded uncured rubber (known as

cushion or bonding gum) which is vulcanized by the application of heat, pressure

and time.

Currently in India the retreading pattern is divided between the above two processes in

equal ratios.

Retreading is acting as a big threat for the tyre industry. Most of the transporters in India

retread their

tyres

twice

during

its

lifetime,

while

a few

fleet

owners

retread

thrice.

Retreading is highly popular in Southern India unlike in the North where the transporters

overload their trucks and buying a new tyre is the best option for them. Though retreading

has penetrated the market in significant way, it has not made much of an impact in the

two‐wheeler and passenger car segments.


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March 16, 2012 11

Indian Tyre Sector

Radialization Opportunity There are two types of tyres

• Cross ply (Bias) tyres

• Radial tyres.

Radial

tyres

were

first

commercially

manufactured

by

Michelin

in

the

late

1940s

and

rapidly gained acceptance in Western Europe, Japan and finally in the USA by the mid

1970s.

Radialization in the Indian passenger car segment has reached almost 98.0%. However it is

extremely low in the T&B segment at 9‐10%, compared to a world average of 68.0%.

However the trends in economies like China, with high industry wide Radialization of

75.0%, points to the prospects of increased radial penetration in the Indian T&B markets.

The radial penetration in China has also been supported by its better quality of road

infrastructure and significant investments made by global tyre majors in building large

capacities.

A

radial

tyre

has

a

longer

life

and

offers

higher

fuel

efficiency

and

hence

is

effectively

cheaper than cross ply tyres over the life of the tyre. However the demand has been slow

to pick up due to following factors

• Initial High Investment required

• Lack of Awareness among operators

• Poor Road Infrastructure

• Overloading in Vehicles

Current Radialization Levels in India

Source:

ATMA,

Sushil

Finance

Future of Radialization

The future of Radialization will be derived from the following factors:

• Cost ‐ Benefit Ratio – The primary driver of switch towards Radialization would

be the Cost benefit ratio that the operators would be able to achieve by the

switch over. The initial cost for Radial Tyre is higher when compared to Bias Tyres

but over the life of the tyre the benefits in terms of fuel efficiency and longer life

provides higher benefits than the extra cost incurred. Going forward if the Cost

benefit ratio remains favorable, only then the demand for Radial tyres would

remain

strong.

Although PV segment has achieved almost

100% Radialization, T&B segment lags way

below world

average

of

nearly

70.0%

offering huge opportunity.


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March 16, 2012 12

Indian Tyre Sector

• Lack of Awareness at user end – The demand for Radial Tyres has been subdued

in India when compared to global countries on account of lack of user education.

Users primarily operating in rural and semi urban areas are not fully aware of the

benefits the radial tyres provide over longer term horizon. The operators are

therefore hesitant to shift the tyre procurement towards radial tyres especially

with the

initial

high

cost

involved.

• Retreading – In tyre manufacturing process, nearly 80.0% of the manufacturing

cost is incurred in tyre body and remaining in the Treading, the portion of the tyre

which meets the road surface. The number of times a tyre can be retreaded is

nearly 3 times in case of Radial Tyres (2 Times in case of Bias Tyres). If Retreading

in India picks up in future, the new tyre demand would be more towards radial

tyres than bias tyres.

• Road Development – Radialization would be beneficial if there is proper Road

Infrastructure in the country. Poor roads would dent the life span of the Radial

tyres and thus lose the benefit it gains when compared to Bias Tyres.

Competitive Scenario

The leaders in the industry are MRF Tyres, Apollo Tyres, JK Tyres and Ceat Ltd which

together command over 70.0% of the market share.

Tyre Industry Market Share (FY11)


As the Indian Tyre sector is significantly dependant on input materials like rubber and

crude derivatives, any increase in these costs directly impacts the profitability for the

industry as a whole. Due to high competitive pressure within the Indian markets and even

from imports, the tyre manufacturers are unable to pass on the increase in input costs to

the end customers completely which impacts the bottomline performance. Tyre sales

especially to the replacement segment are dependent upon the distribution network of

the company. Large companies with extensive distribution manage to generate high

volume which partially offsets the sharp increase in input costs.

With the Tyre industry growing, the manufacturers have been adding up capacities at the

robust pace intending to extend their geographical reach and also focus on higher margin

radialized tyres.

The

huge

capital

investments

required

for

setting

up

new

plant

along

with

building brand through massive advertising creates huge barriers for the new entrants.


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March 16, 2012 13

Indian Tyre Sector

Competitive Scenario of Indian Tyre Industry

The market for Tyres is

price sensitive which

makes it challenging for

Tyre Manufacturers to

pass on increase in input

costs to the end

consumers. Margins

tend to remain under

severe pressure when

input costs rise.

Industry

is

dominated

by few big names

covering more than

70.0% of total Market.

This makes it tougher

for new entrants to

penetrate the market

in any significant way.

Manufacturers have

to rely on rubber

prices and crude

prices which are key

determinants of

input costs. Sharp

increase in these

costs lead to sharp

dent in profitability

of the Industry.

High Barriers to Entry

due to huge Investment

required on new plant

setup, Advertising and

Branding costs and in

setting up of dealer

network. Due to these

high initial investments,

the gestation period

remains very high.

Indian

Tyre

Sector


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March 16, 2012 14

Indian Tyre Sector

Key Growth Drivers for Tyre Sector Long term positive outlook for Auto Demand Auto Industry as a whole registered growth of nearly 45.0% during the two year period

ended 2011. The demand has been impacted during last few quarters impacted due to lot

of factors

which

include

• Higher fuel costs

• Rising interest rates

• Slowing capex growth affecting demand for Commercial vehicles

Higher interest rates and rising oil prices substantially increased the cost of vehicle

ownership for fleet operators. In addition, the flat freight rates on major routes dented

profitability and cash flows of fleet operators. The growth in the LCV is likely to be better

going forward according to industry estimates.

After the M&HCV segment, the PV segment is the second largest contributor to revenues

for the tyre industry contributing nearly 16.0% to the total industry revenues. Domestic

demand

for

passenger

vehicles

reported

strong

growth

during

the

last

two

years.

Inflation has now stabilized and interest rates have almost peaked improving consumer

sentiments. Demand is therefore likely to improve from FY13 onwards. The two wheeler

segment has been relatively less impacted by rising interest rates, owing to its limited

reliance on organized financing.

The slowdown in the auto demand is likely to have negative impact on demand for tyres in

the short term. However, medium to long term growth fundamentals of the industry

remain strong owing to strong replacement demand and growth in OEM segment. Few

other factors which would drive growth is improving road infrastructure resulting in

reduced vehicle turnaround time, restrictions on overloading and investments in

infrastructure which continue to support demand for CVs. Other factors such as favorable

demographics,

rising

disposable

income,

under

penetration

of

vehicles,

strong

demand

from rural markets and availability of financing at competitive rates would drive long term

demand for automobiles.

Recent decline in Natural Rubber prices to improve profitability

Indian Tyre industry is highly raw material intensive industry and margins are highly

correlated to the price movements of raw materials. In simple terms, the movement in

Natural Rubber prices can make or break the fortunes of the Tyre Manufacturers. The

prices of Natural rubber, the key raw material constituting around 44.0% of total raw

material costs, witnessed a sharp rise during FY11. Domestic rubber prices increased from

lows of Rs.100 per kg in mid 2009 to highs of almost Rs.240 per kg in April 2011.

This rise

was

on

account

of

sharp

increase

in

demand

coupled

with

rising

crude

oil

prices

and speculative trading on exchanges in rubber futures. Supply side disruptions by adverse

climatic conditions in key rubber cultivating countries like Thailand, Indonesia, India and

China further added to the increase in prices.

Tyres Companies across India and globally took several prices hikes to counter the sharp

rise in rubber prices during FY 2011. However, the hikes were not enough to cover up for

the entire input cost rise and significantly impacted the margins of the manufacturers.

Nevertheless, the situation started improving from start of FY12 when prices of Natural

Rubber started to decline from the peak. Domestic prices have declined and stabilized at

near Rs.190 per kg levels. Going forward, the removal of anti‐dumping duty against

Chinese and Thailand TBRs with effect from August 2011 may impact the replacement

market for

domestic

tyre

manufacturers.


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March 16, 2012 15

Indian Tyre Sector

Natural Rubber Trend (Production and Consumption)


Domestic Production of Natural Rubber FY11 grew by 3.7% YoY as against the

consumption

growth

of

1.8%.

In

absolute

terms

production

for

FY11

stood

at

0.86

mn

tonnes as against consumption of 0.95 mn tonnes. Imports during the period stood at 0.18

mn tonnes.

According to reports, Domestic Production of Natural Rubber is estimated to be around

0.90 mn tonnes and Consumption estimated at 0.97 mn tonnes for FY12. India is expected

to import around 0.17 mn tonnes to meet the domestic demand and export 0.03 mn

tonnes.

Brent Spot Crude Price Trend

Source:

EIA,

Sushil

Finance

Backward Integration can protect margins going forward The

margins

of

tyre

manufacturers

are

highly

correlated

to

the

movement

in

rubber

prices

as was witnessed during FY11. During FY11, margins declined sharply at industry level

owing to the sharp up move in natural rubber prices and the inability of tyre companies to

fully pass on the rise to the end consumers especially OEMs.

Tyre manufacturers are now increasingly looking out to isolate themselves from

fluctuation in Natural Rubber prices and are now looking at backward integration

measures such as acquiring rubber plantations. Leading Tyre Manufacturers like Apollo

Tyres and JK Tyres are looking out for acquisition of Natural Rubber Plantations globally. As

tyre companies generally do not have medium to long term contracts with rubber

manufacturers, they are exposed to huge fluctuation in rubber prices. The backward

integration would help tyre manufacturers to an extent to reduce exposure to such

fluctuations.


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March 16, 2012 16

Indian Tyre Sector

Margins depend on the ability to pass on input price increases

During 2008‐09, the industry enjoyed decline in key raw material costs of rubber and crude

owing to slowdown in the Global Economy. The benefits of lower input costs were

witnessed in Q4 of FY 2009. The trend of soft input costs was witnessed until Q4 FY10

when

the

raw

material

price

trend

reversed

with

Natural

Rubber

prices

moving

up

by

above 50.0% in the CY 2011. As the spike in the key input material took most by surprise,

the pass on of prices to customers was delayed and restricted due to competitive

pressure.

The Companies with strong presence in the replacement market are in a better position to

pass on increase in Raw Material prices to the end consumers. As replacement markets

function through Company owned outlets and Franchise model, the price changes can be

implemented faster when compared to supplying to OEM’s. The pricing power in the

replacement markets, however, has been curbed to an extent, especially in the T&B

segment, due to competition from lower‐priced Chinese imports.

The pricing power when it comes to dealing with OEMs remains weak leading to low

profitability. This disadvantage in pricing is however partially compensated by assured

orders in heavy volumes by the OEMs. Generally, many tyre manufacturers are unable to

have raw material escalation clauses with OEMs to offset the impact of any steep cost

increases. Despite the fact, having decent presence in the OEM segment is equally

important for tyre manufacturers to establish their brand in the retail market as first

replacement of tyre is preferred to be of same model which was fitted by the OEM.

Indian tyre manufacturers have undertaken price hikes of over 10.0‐15.0% during the past

12 months. The price hikes have partially compensated for the overall cost increases in

prices of key raw materials. With rubber prices having cooled off since last few months,

further price hikes are very unlikely.

International participants

making

India

a hub

for

radial

tyre

manufacturing

Indian tyre industry currently is dominated by domestic participants catering to over 85%

of the domestic requirement. The imported tyres are priced at a premium over domestic

tyres. In an extremely price sensitive market like India, buyers are hesitant to pay any kind

of premium for relatively superior products. Also the imported tyres lose their edge over

Indian tyres owing to poor road conditions which limit the benefits of higher durability,

lower emissions and safety. The Indian market was also dominated by Cross Ply tyres

especially in T&B space which also discouraged global majors from entering into domestic

markets. As a result, investments in India by international players have been relatively

modest in the past.

However with Indian consumers shifting more towards Radialization and constant

improvements in road infrastructure taking place, the demand for premium tyres is on the rise. Global OEMs are increasingly picking India as manufacturing hub and the demand for

high quality radial tyres in the Indian market is set to grow at a robust phase over the

medium term.


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March 16, 2012 17

Indian Tyre Sector

SWOT ANALYSIS

STRENGTHS WEAKNESS

•

More

than

70.0%

of

Industry turnover is from top 4 Companies.

The brand name plays a critical

role especially in the replacement

market.

• Well established brand names and

distribution network by existing

players and high capex required for

setting up plant create huge entry

barriers for new players to

penetrate the

market.

•

The

fortunes

of

the

industry

are highly dependent on prices of key

raw materials such as rubber and

crude oil and any sharp rise can

impact profitability significantly.

• The Tyre Industry is unable to pass

on majority of price hike to end

consumer due to high competitive

pressure which impacts the

margin performance.

OPPORTUNITIES THREAT

• Automobile Industry growth has

been strong in last few years which

would lead to rise in replacement

demand going forward.

• With ongoing development of

infrastructure, particularly roads,

the

automobile

and

tyre

industry

are expected to capitalize on this

opportunity.

• Increase in shift towards

Radialization especially in T&B

segment likely to improve industry

profitability in coming future.

• Biggest threat for tyre companies

is increase in prices of Natural

rubber, which accounts for

majority of total raw material

costs.

• Imported Tyres from China, has

been

a

challenge

for

Indian

manufacturers. Imports from

China now constitute around

5‐6.0% of market share.

• Majority of other input costs for

tyre manufacturing are crude

derivatives. With crude prices

scaling upwards, added pressure

on raw material prices can prove

to be a threat.

• Cyclical nature of automobile

industry impacts demand for tyres.


18/23

March 16, 2012 18

Indian Tyre Sector

Outlook

The tyre industry registered growth of nearly 25.0% in revenues backed by healthy

demand from OEM and Replacement segments. The huge demand was supported by

capacity ramp‐up by major players. The growth was driven by strong domestic OEM

demand from the T&B, PV and two‐wheeler segments which saw sharp increase in volume

growth during the year.

The demand for M&HCV segment is largely driven by demand from the replacement

market, which accounts for more than 80.0% of total demand. The Passenger and two

wheeler segments are major constituents of the OEM segment. M&HCV segment accounts

for bulk of tyre industry revenues accounting for nearly 60.0% share in value terms. The

price increases imposed by most tyre manufacturers in line with rising rubber prices led to

a decline in demand from the M&HCV segment.

Higher input costs especially that of natural rubber led to a sharp decline in operating

profits for

the

industry.

Companies

which

had

sales

mix

of

higher

presence

in

the

relatively

high margin radial passenger car segment and higher presence in the replacement market

segment which offers better pricing ability have been able to post relatively better

performance. On the other hand players having high presence in OEM segment were

unable to pass on price increases in input costs beyond an extent and faced pressure on

margin performance.

For FY13, automotive OEM tyre demand is expected to revive owing to expected decline in

interest rates leading to higher demand for Automobiles. The strong growth in OEM sales

during the last two years is expected to translate into higher replacement demand,

especially in the passenger car segment. In the M&HCV segment, the growth is expected

to remain muted in short term as macro economic factors may dampen demand in the

OEM

and

the

price‐sensitive

replacement

segments.

However

the

long

term

growth

prospects for CV segment as a whole remains promising.

Removal of anti‐dumping duty on TBR imports Growth in the T&B segment has been robust during last two years led by rising shift

towards Radialization, lower cost of imported T&B tyres and capacity constraints in the

domestic markets. In February 2010, anti‐dumping duty was imposed on TBRs imported

from China and Thailand to protect domestic market.

However effective August 2011, the duty has been removed after strong opposition from

Global tyre companies like Bridgestone and from domestic OEM’s like Tata Motors Ltd.

This is expected to make imported TBRs cheaper thus limiting the pricing power of

domestic players

in

replacement

tyre

market

thereby

impacting

industry

margins.


19/23

March 16, 2012 19

Indian Tyre Sector

MRF Tyres Ltd. (CMP 9981)

Originally established as Madras Rubber Factory, a small toy balloon manufacturing unit in

1946 in Madras (Now, Chennai), MRF has evolved as a leading tyre manufacturer. Besides

tyres, MRF has business interests in Pretreads, Paint & Coats and Toys. The company now

stands

as

the

largest

tyre

manufacturer

in

the

country

and

one

of

the

leading

tyre

manufacturers worldwide. The company became the first Indian company to export tyres

to USA (the birthplace of tyre technology) in 1967 and now exports to over 65 countries in

USA, Europe, Middle East, Japan and Asia Pacific.

The Company has 6 manufacturing units each at Puducherry, Kottayam, Tiruvottiyur,

Arkonam, Medak & Goa and a diversified Sales Network across the country. A new plant at

Perambalur, near Tiruchirapalli in Tamil Nadu will be operational in 2012 with an initial

capacity of 3.5 Lac Trucks and Car Radials. The Company’s Product offerings include Tyres,

Conveyor Belts, Pretreads and Paints & Coats. The Company is a leading manufacturer of

tyres in almost all the segments.

The

tyres

offered

by

MRF

are

for

Passenger

Cars,

Two

Wheelers,

Trucks

&

Buses,

OTR

and

Farm Services Vehicles. The Company also manufactures and sells Tubes and Flaps. MRF

also manufactures conveyor belts under its brand MUSCLEFLEX for Mining, Quarries, Ports,

Thermal Power Plants, Cement Plants, Steel Plants, Fertilizer Plants, Paper Manufacturing,

Fertilizer Industries and also exports to more than 15 countries.

During FY11, the Company produced 34.77 mn Automobile tyres and 31.38 mn

Automobile tubes running at maximum utilization rates. The Company also manufactured

1,056 MT of Tread Rubber, 7,683 MT of Pre‐cured Treads, 2,042 MT of Conveyor Belts and

1,484 KL of Specialty Surface Coatings through outsourced production.

During FY11, the net sales registered a robust growth of 31.6% from ` 74,587.3 mn in FY

2010 to ` 97,439.8 mn in FY 2011. In addition, the company experienced a substantial

improvement at

the

net

level

as

the

reported

net

profit

increased

from

` 3,575.1

mn

in

FY

2010 to ` 6,187.8 mn in FY 2011. The net margin improved from 4.8% in FY 2010 to 6.4%

in FY 2011.

Going forward, we expect MRF to benefit on back of its leadership position in the Tyre

industry. The Company is market leader in the PC segment and holds the 2nd

position in

the M&HCV segment which generates nearly half of the volumes for MRF. It has been

able to maintain its operating margins at decent levels even during rising input costs.

The Margins are expected to improve on increasing shift towards Radialization in the CV

segment and declining trend in natural rubber prices. As the demand from CV segment is

likely to be robust from OEM and Replacement market, the Company would be able to

increase its overall margin performance.

Although we remain optimistic about long term growth prospects of MRF, we believe the current valuations discount the positives. We therefore recommend investors to

HOLD the stock at current levels and we would review the Company performance in

coming quarters and review our ratings accordingly.

Snapshot HOLD

SHARE HOLDING (%)

Promoters

27.03 FII 2.44

FI / MF 12.01

Body Corporates 23.75

Public & Others 34.77

STOCK DATA

Reuters Code

Bloomberg code MRF.BO

MRF IN

BSE Code

NSE Symbol

500290

MRF

Market

Capitalization*

` 42,319 mn

US$ 846 mn

Shares

Outstanding* 4.24 mn

52 Weeks (H/L) ` 10336/6200

Avg. Daily

Volume (6m) 4,547 Shares

Price Performance (%)

1M 3M 6M

2

42

42

200 Days EMA: ` 7624

*On fully diluted equity

shares

KEY FINANCIALS (Cons.)

Y/E

Sep.

Revenue

( ` mn)

EBITDA

( ` mn)

EBITDA

Margin

(%)

PAT

Margin

(%)

P/E

(x)

P/Sales

(x)

ROE (%) ROCE

(%)

FY09

56,682.9 7,156.1 12.6 4.4

17.0

0.7

20.4

21.2FY10 74,587.3 8,627.2 11.6 4.8 12.0 0.6 23.2 23.7

FY11 97,439.8 12,344.4 12.7 6.4 6.9 0.4 17.5 15.0


20/23

March 16, 2012 20

Indian Tyre Sector

JK Tyres and Industries Ltd. (CMP 72)

The company belongs to the renowned JK Group of Rajasthan based Singhanias’ who have

business interests in Cement, paper, textile, sugar, insurance, fairy foods, Agri‐products

and many other businesses. Incorporated in February 1951 in West Bengal, the company

was

originally

meant

for

managing

agency

business.

In

February

1972,

the

company

obtained the letter of intent for manufacturing automobile tyres and tubes. Since then the

company has evolved to become one of the leading tyre manufacturers of the country.

The company has 5 manufacturing plants in the country strategically located in Karnataka,

Madhya Pradesh and Rajasthan. The company has 3 tyre manufacturing plants in Mysore,

Karnataka, 1 in Banmore, Madhya Pradesh and 1 in Kankroli, Rajasthan. The company also

forayed into the overseas markets by acquiring Tornel, a Mexico based tyre manufacturing

company which has 3 tyre manufacturing plants in Mexico.

The company manufactures tyres for more than 15 Passenger Car OEMs including Honda,

Maruti, Tata Skoda, Toyota, Ford, Fiat and Mitsubishi. The company offers both Bias and

Radial

tyres

for

Trucks

and

Buses.

The

company’s

product

offerings

include

tyres

for

light

trucks, farm based and OTRs as well. The company's products are marketed under the JK

Tyre and Vikrant brands.

During FY11, the company produced 8.598 mn of automotive tyres, 5.462 mn of

automotive tubes and 2.447 mn of automotive flaps. During FY11, the net sales registered

a robust growth of 30.1% from ` 45,705.8 mn in FY 2010 to ` 59,454.4 mn in FY 2011.

However, the bottom‐line experienced a significant fall as the reported net profit declined

from ` 2,197.4 mn in FY 2010 to ` 625.5 mn in FY 2011. The net margin contracted from

4.8% in FY 2010 to 1.1% in FY 2011 primarily due to increase in Materials and

Manufacturing costs, as a percentage of revenues.

JK Tyres & Industries Ltd is one of the leading players in the TBR & PCR segment. With

interest rates

expected

to

decline,

the

PV

&

CV

segments

are

likely

to

witness

recovery.

The Company faced pressure of higher commodity prices, labor unrest and currency

impact which impacted its performance during last few quarters thus dented margins.

The performance during Q3 FY12 has shown reversal trend and with rubber prices below

200 per kg levels, margins are likely to improve in coming quarters.

We have a positive outlook on the long term growth prospects of the auto industry and

expect the revenues to improve with labor issues resolved. With recent correction in

rubber prices we expect margins to expand in coming quarters. We recommend

investors to BUY the stock at current levels for initial upside of 20.0% from current

levels.

Snapshot BUY

SHARE HOLDING (%)

Promoters

47.35

FII 16.42

FI / MF 4.91

Government 0.7



STOCK DATA

Reuters Code

Bloomberg Code JKIN.BO

JKI IN

BSE Code

NSE Symbol 530007

JKTYRE

Market

Capitalization*

` 2,952 mn

US$ 59 mn

Shares


52 Weeks (H/L) ` 113/54

Avg. Daily

Volume (6m) 24,578

Shares


1M

3M

6M

(16) 17 (9)

200 Days EMA: ` 82

*On fully diluted equity shares


Y/E

March.

Revenue

( ` mn)

EBITDA

( ` mn)

EBITDA

Margin

(%)

PAT

Margin

(%)

P/E

(x)

P/Sales

(x)

ROE (%) ROCE

(%)

FY09

55,227.0

1,892.5

3.4

(2.0)

NA

0.05

3.1

NA FY10 45,705.8 5,209.2 11.4 4.8 1.3 0.06 31.7 23.2

FY11 59,454.4 3,262.7 5.5 1.1 4.6 0.05 10.1 10.2


21/23

March 16, 2012 21

Indian Tyre Sector

Ceat Ltd. (CMP 87)

Ceat Tyres of India Ltd was established in the year 1958, in collaboration with TATA Group.

Subsequently, the RPG Group took over the company in 1982 and renamed it as CEAT Ltd

in 1990. Company caters to various segments which includes tyres for heavy duty trucks

and buses

(T&B),

light

commercial

vehicles

(LCVs),

passenger

cars

(PC),

earthmovers

and

forklifts (Specialty segment) and 2‐wheelers.

The Truck & Bus segment is the largest contributor to the company’s topline, covering

61.0% of the product portfolio. The other segments like 2‐3 wheelers, Passenger vehicles

and Off the Road vehicles contributes almost equally towards the sales however the

contribution from the Industrial vehicles segment still remains low.

The contribution from the Replacement market to the topline was about 75.0% last year

and with the robust growth witnessed in the Auto sector the replacement market will

remain buoyant going forward. As the company enjoys relatively higher margin in the

Replacement segment, it will remain to be the highest contributor to the topline.

Ceat

Ltd

has

recently ramped

up

its

production

facilities

to

cash

in

on

the

huge

growth

expected in the Auto industry. Ceat has invested in a Greenfield radial manufacturing

facility at Halol in Gujarat with a capacity of 150 TPD for Truck and Buses, Light trucks &

passenger car radials. Post expansion the total capacity increased from 410 TPD to 595

TPD.

The Company procured 50 acre land at Ambernath in Thane, Maharashtra and will be

shifting its Bhandup facility to that plant. Currently the finished goods produced at

Bhandup face heavy Octroi duty as applicable in Mumbai. The Bhandup plant is Ceat’s

oldest manufacturing facility and has now become less Energy efficient. As the Company

shifts its facility to Ambernath, it would significantly save on Octroi duty and energy costs

which would improve its overall margins going forward. During FY11, the consolidated net

sales registered

a robust

growth

of

26.4%

from

` 28,504.3

mn

in

FY

2010

to

` 36,023.9

mn

in FY 2011. However, the bottom‐line experienced a significant fall and the net profit

declined from ` 1,642.0 mn in FY 2010 to ` 319.3 mn in FY 2011. The net margin

contracted from 5.8% in FY 2010 to 0.9% in FY 2011 primarily due to increase in Materials

costs.

We have a positive outlook for the Company on the back of strong topline growth, rising

exports, increasing capacity in high margin radial segment. The Company also

commenced commercial production from its new Halol facility for Radial Tyres. The

capacity of the plant is 150 TPD where Ceat expects to produce 50.0% TBR and 50.0% of

PCR tyres. The total capacity of 150 TPD would be commercialized only by April 2012

even though initial manufacturing has started. Radial Tyres being high margin products,

margins improvement

is

likely

going

forward

owing

to

the

shift

in

its

product

mix.

Ceat’s profitability has been under pressure to labor related strikes and spike in rubber

prices during last few quarters. However outlook for coming quarters remain promising

and profitability is likely to expand. We have detailed initiation coverage on Ceat Ltd for

target price of 141. We maintain our BUY rating on the stock at current levels for

target price of 141.

Snapshot BUY

SHARE HOLDING (%)

Promoters

51.29

FII 1.81

FI / MF 14.28

Government 0.00



STOCK DATA

Reuters Code

Bloomberg Code CEAT.BO

CEAT IN

BSE

Code

NSE Symbol 500878

CEATLTD

Market

Capitalization*

` 2978.9 mn

US$ 60 mn

Shares


52 Weeks (H/L) ` 120/66

Avg. Daily

Volume (6m) 49,195 Shares


1M 3M 6M

(9) 17 5

200 Days EMA: ` 89



Y/E

March.

Revenue

( ` mn)

EBITDA

( ` mn)

EBITDA

Margin

(%)

PAT

Margin

(%)

P/E

(x)

P/Sales

(x)

ROE (%) ROCE

(%)

FY09

25,136.9 860.4 3.4 (0.9)

NA

0.12

NA

2.5FY10 28,504.3 3,451.0 12.1 5.8 1.8 0.10 25.8 23.2

FY11 36,023.9 1,798.2 4.9 0.9 11.7 0.08 5.2 6.9


22/23

March 16, 2012 22

Indian Tyre Sector

Apollo Tyres Ltd. (CMP 81)

Apollo Tyres Ltd (ATL) is one of India’s leading tyre manufacturer based at Gurgaon,

Haryana with operations across Asia, Africa and Europe. Apollo has eight manufacturing

facilities across these three geographies. Recently the company has started operations

from its

Chennai

facility

and

is

expecting

to

reach

full

production

of

500

TPD

by

FY

2013.

Apollo’s topline is contributed mainly by the T&B segment (75%) while cars contribute 14%

of revenues. At the same time, replacement is the biggest revenue segment for Apollo.

Apollo derives 65% of its revenues from the replacement markets, 24% from OEMs and

the rest from exports.

The company currently produces 960 TPD of tyres from the domestic operations. It

acquired the South African operations of Dunlop in CY 06. In May 2009, Apollo acquired

Vredestein Banden B. V. based at Netherlands which is a manufacturer of niche high end

passenger car and specialty tyres with strong distribution network across Europe.

The company has 3 production units in India – Limda in Gujarat and Kalamassery and

Perambra in

Kerala

which

collectively

produce

850

TPD

tyres,

Chennai

facility

with

150

TPD

capacity while South Africa and Europe producing 180 TPD and 150 TPD of tyres

respectively.

Recently the Company announced its plans to invest around 400 mn Euros (more than Rs

2,500 cr) to set up two new facilities in East Europe and Brazil in the next 3‐4 years. This

would help the company expand its global footprint. The proposed facility is expected to

have an initial capacity of 7‐10 mn units per year. The company is also keeping its options

open to acquire a tyre firm in the Latin American market to commence its operations

During FY11, the consolidated net sales registered a growth of 9.2% from ` 81,207.4 mn in

FY 2010 to ` 88,677.2 mn in FY 2011. However, the bottom‐line experienced a significant

fall as the net profit declined from ` 6,533.5 mn in FY 2010 to ` 4,401.6 mn in FY 2011.

The adjusted

net

margin

contracted

from

8.0%

in

FY

2010

to

5.0%

in

FY

2011

primarily

due

to increase in Materials costs, as a percentage of revenues.

ATL holds the second largest market share (19.0%) after MRF. It has very strong presence

in domestic CV segment. It generates majority of the consolidated business from

Replacement segment. The company is increasing its radial capacity at its Chennai plant.

As the demand from replacement market remains robust on back of good OEM demand

witnessed in FY10, ATL would be able to use the additional capacity for replacement

market which would drive volume growth. Margins are also likely to improve due to

increasing contribution from high margin radial segment and recent decline in natural

rubber prices.

Although we remain optimistic on the outlook of the Company, we recommend

investors to

HOLD

the

stock

at

current

levels

as

we

believe

near

term

positives

are

priced

in. We will send a detailed update on the stock once the Company releases its FY12

results.

Snapshot HOLD

SHARE HOLDING (%) Promoters 46.39

FII

23.16

FI / MF 10.32

Government 1.98



STOCK DATA

Reuters Code

Bloomberg

Code

APLO.BO

APTY IN

BSE Code

NSE

Symbol

500877

APOLLOTYRE

Market

Capitalization*

` 40,824.0 mn

US$ 816 mn

Shares


52 Weeks (H/L) ` 86/51

Avg. Daily

Volume (6m) 346,940

Shares


1M 3M 6M

(4)

26

33

200 Days EMA: ` 68



Y/E

March.

Revenue

( ` mn)

EBITDA

( ` mn)

EBITDA

Margin

(%)

PAT

Margin

(%)

P/E

(x)

P/Sales

(x)

ROE (%) ROCE

(%)

FY09

49,840.7

4,536.7

9.1

2.8

30.2

0.82

10.3

16.0 FY10 81,207.4 13,025.7 16.0 8.0 6.3 0.50 33.2 35.5

FY11 88,677.2 10,173.5 11.5 5.0 9.4 0.46 18.2 17.4


23/23

Indian Tyre Sector

Peer Comparison (Consolidated)

Apollo Tyres Ltd 201103 201003 200903 200803 200703

Price / Earning (P/E) 8.0 5.5 6.8 7.6 11.4

Price / Book Value ( P/BV) 1.5 1.8 0.7 1.7 0.1

Price

/

Cash

EPS

(P/CEPS) 5.0 4.0 3.5 5.1 0.6

EV / EBIDTA 5.7 3.8 3.2 3.7 4.5

Price / Sales (P/S) 0.4 0.4 0.2 0.4 0.3

CEAT Ltd 201103 201003 200903 200803 200703

Price / Earning (P/E) 13.8 3.2 NA 2.6 12.9


Price / Cash EPS (P/CEPS) 5.7 2.7 12.5 2.1 7.1

EV / EBIDTA 7.5 3.0 7.8 2.7 5.8

Price / Sales (P/S) 0.1 0.2 0.1 0.1 0.2

MRF Ltd* 201109 201009 200909 200809 200709

Price / Earning (P/E) 4.5 10.5 9.8 9.3 9.4

Price

/

Book

Value

(

P/BV) 1.2 2.2 1.8 1.2 1.6Price / Cash EPS (P/CEPS) 3.2 6.0 4.9 4.2 4.9

EV / EBIDTA 4.1 5.8 4.3 5.5 5.1

Price / Sales (P/S) 0.3 0.5 0.4 0.3 0.4

JK TYRE** 201103 201003 200903 200709 200609

Price / Earning (P/E) 6.0 3.6 NA 5.7 26.0


Price / Cash EPS (P/CEPS) 2.3 2.5 11.6 2.8 4.8

EV / EBIDTA 5.6 3.5 6.8 4.8 8.5

Price / Sales (P/S) 0.1 0.2 0.0 0.1 0.2

SOURCE: CAPITALINE; *Apollo Tyres Year ending Sept;** JK Tyre 2009 period consist 18 months

Note ‐

The above

multiples

are

based

on

historical

valuations

and

not

based

on

the

current

market

price.

Please Note that our technical calls are totally independent of our fundamental calls.

Additional information with respect to any securities referred to herein will be available upon

request.

Sushil Financial Services Private Limited and its connected companies, and their respective directors, Officers and

employees (to be collectively known as SFSPL), may, from time to time, have a long or short position in the securities

mentioned and may sell or buy such securities. SFSPL may act upon or make use of information contained herein

prior to the publication thereof.

This sheet is for private circulation only and the said document does not constitute an offer to buy or sell any

securities mentioned

herein.

While

utmost

care

has

been

taken

in

preparing

the

above,

We

claim

no

responsibility

for

its accuracy. We shall not be liable for any direct or indirect losses arising from the use thereof and the investors are

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