Ind-Ra-Mumbai,24 August 2018: India Ratings and Research (Ind-Ra)believes input costs would increase for tyre companies over the next two to three quarters,due to a disrupted natural rubber (NR) supply amid severe floods in Kerala. Domestic tyre production of South India based tyre plants is also likely to get impacted in the near term.
NR Imports Likely to Rise Further:Domestic NR production meets over 50% of the requirementsof tyre companies in India and Kerala accounts for close to 90% of the total domestic rubber production. Floods in Kerala will disrupt domestic NR supply and hence tyre companies will resort to higher imports to meet the rising tyre demand. NR imports attract a duty of 25%. Additionally, with a depreciating rupee, imports are likely to be more expensive and thus will hurt margins of tyre companies amid a rise in rubber procurement costs.
Domestic production fell 12%yoyin 1QFY19 compared with a 14% yoyrise in consumption, thus imports saw a rise of 25%yoy.Although local NR production has been falling since January 2018 due to weak prices, a rise in the minimum support price in July 2018 would have encouraged higher domestic production, if not for the floods.
Margins Impact: Ind-Ra expects EBITDA margins of the aggregate tyre industry could fall by 1.5%-2% between 2Q-3Q of FY19, due to a higher cost of production asrubber is amajor raw material in tyre production, forming around 50% of the total raw material costs.
NR prices have been rising since May 2018, amid low domestic production and an increase in MSP for kharif crops in July 2018. Domestic NR price increased to INR133.5/kg on 21 August 2018 from INR129.2/kg in July 2018. Also, tyre companies have been already facing margin pressures due to a rise in carbon black and other crude oil derivatives.
Weak Closing Inventory of NR at end-1QFY19: The weak closing inventories at end-1QFY19 and loss of some inventories at the growers and dealers’ end could further affect rubber availability in the near term. Ind-Ra estimates closing inventory of NR was around 234,000 tonnes at end-June 2018 (March 2018: 292,000 tonnes), of which about 60% could be lying with the growers and dealers, and thus likely to be impacted by floods. Closing stock was low at around 2.3x of the monthly consumption at end-1QFY19 due to the weak domestic production during the quarter and rising consumption.
Tyre Production to Get Impacted in Near Term: Companies such as Apollo Tyres Ltd (IND AA+/Stable), JK Tyre & Industries Limited (IND A+/Negative), TVS Srichakra Limited (IND AA-/Stable) and MRF Ltd could see reduced production during August-October 2018,because their plants are located in the states of Kerala, Tamil Nadu and Andhra Pradesh. Apollo Tyres has three of its four domestic plants located in South India, of which two are in Kerala, and hence its production is likely to be the most impacted.The company has already announced a loss of about 1,500mt of production due to the floods. It has yet to fully re-commence operations and hence the production loss could be higher than estimated.
Plants in South India of Major Tyre Companies
|Tyre Companies||Number of Plants Located in South India||Total Plants in India|
|CEAT Limited (IND AA/Stable)||None||5|
|JK Tyre & Industries||1 in Tamil Nadu, 3 in Karnataka||9|
|Apollo Tyres||2 in Kerala , 1 in Tamil Nadu||4|
|MRF||1 in Kerala, 3 in Tamil Nadu, 1 in Puducherry, 2 in Telangana||8|
|TVS Srichakra||2 in Tamil Nadu||3|
|Source: Company fillings, Ind-Ra|
Strong Liquidity of Tyre Companies:Tyre companies are likely to face higher working capital requirements with the rise in imports during August-October 2018; however,Ind-Ra rated tyre companies have sufficient unused working capital limits and liquidity available to meet such near-term disruptions. Tyre demand is likely to be robust for FY19 and hence Ind-Ra expects production and margins to start recovering by end-3QFY19.