Rise in input costs may hit margins of tyre cos

A sharp rise in key input costs in the past few months along with poor offtake from OEMs and declining exports are likely to put pressure on the margins of the tyre industry during the current fiscal.

While the topline of firms may rise marginally, the bottomline would come under severe pressure.

?A few players may end up making net losses,? said an analyst with a leading brokerage firm.

?The price hike, which was carried out by tyre makers during the second quarter, was not sufficient to offset the sudden slowdown in the industry,? he added.

Ceat incurred a net loss of Rs 28 crore in the second quarter as against a net profit of Rs 25 crore during the same quarter last year.

Similarly, JK Tyre reported a net loss of Rs 32 crore in the fourth quarter ended September 30, 2008, against a profit of Rs 24.4 crore in the same period last year.

Apollo Tyres posted lower profits at Rs 7.79 crore during the quarter against Rs 51.10 crore during the same quarter in the previous year.

Speaking to FE, Girish Solanki of Angel Broking, said, ?The last two quarters witnessed a substantial increase in the prices of key raw materials such as natural rubber and petroleum-based products. The phenomenal rise in raw materials costs has had a negative effect on the profitability of tyre majors in the country.?

Moreover, the overall slowdown in the auto sector, particularly the commercial vehicles segment, which gives the industry better realisation on prices, has cast its shadow on the profit margins of tyre companies.

?While the replacement market is expected to be active despite the slowdown, we see little progress in the offtake from OEMs and exports, which together contribute more than 35% of the overall sales of the industry,? he said.

He said although prices of raw materials have started falling, the real impact on profitability will be seen after a few months. ?Due to lack of finances and high inventories, we see an overall pressure on the margins of tyre companies and the third quarter will be a difficult period than the previous one,? he added.