Tyre makers at a crossroads, hope for better fourth quarter

Tyre companies seem to be caught in front and centre of an impending deceleration in the auto sector, even as input cost pressure continues to rise and there is a slowdown in the replacement market.

But continuing traction in auto demand is spurring hope that tyremakers may be able to ride the storm with a few price hikes and rebound in replacements.

Analysts said business in the tyre replacement market fell 12-13% during the third quarter ended December 31. So much so, companies which had announced minimal price hikes in January to offset rising raw material prices are now rethinking their decisions.

Gaurav Kumar, group head of corporate strategy at Apollo Tyres, told analysts after the company’s third-quarter results that the company “made a minimal price increase of around 1-2% in January due to the softness in the truck replacement market. Similarly, most companies had announced the increase in prices but the quantum of price increase is not sufficient compared to the increase in raw material prices”.

Analysts said Apollo Tyres witnessed a drop in volumes by 10% year on year during the third quarter.

JK Tyres, the other major player, had increased the price to around 2-3% in January. “Due to the lull in the market during the third quarter, we could not make a bigger price jump and we had no option but to absorb the increasing raw material cost,” said A S Mehta, marketing director of JK Tyres.

Rubber prices are at present quoting at Rs235 per kg. The average cost of rubber was up 6% quarter on quarter at Rs185 per kg.

Prices of other raw materials such as NTC fabric and carbon black have also risen 6% and 25%, respectively, in the last one year.

According to Rajiv Buddharaja, president, Automotive Tyres Manufacturers’ Association, the overall spending on infrastructure projects such as flyovers and monorail is not the same as witnessed in the last 18 months.

“There is less activity on the construction side, perhaps due to project delays. Also, increasing fuel prices is becoming a concern on the commercial vehicles side. All this has affected the overall sentiment for the tyre makers,” he said.

Prolonged monsoons were also one of the reasons for slow growth rate in the replacement market. “States such as Karnataka, Gujarat, Kerala and Maharashtra witnessed rains till October. The ban on iron ore exports and limitations on mining activities also played against the tyre replacement market,” said Mehta.

However, industry experts said demand will pick up in the current quarter. “There is generally a push in the overall economic activity during the last quarter. We expect the replacement market to come back dramatically during the fourth quarter,” said Nikhil Deshpande, analyst, Pinc Research, a brokerage.

As the market ahead looks positive, tyre manufacturers are also planning to hike prices. “As the demand is reviving, we are looking at increasing our prices in February,” said Kumar of Apollo Tyres.

According to Shweta Mungre, analyst from B&K Securities, select players such as Apollo Tyres and MRF might have a better fourth quarter compared with others in the industry.