The ongoing after-effects of the pandemic coupled with the ongoing conflict between Russia and Ukraine, have impacted Indian tyre manufacturers, as high raw material prices continue to hurt their margins and bottomline. For the fourth quarter ended March 31, most of the top tyre companies recorded lower net income and margins from the year-ago period, while on a sequential basis, net margins improved slightly as volumes rose.
The prices of natural rubber (NR) rose by about 20% on-year in fiscal 2022 and that of crude-based inputs such as carbon black and nylon tyre cord surged by 40-50%. These together account for about 70% of the raw materials used in manufacturing of tyres.
“From the impact on availability of raw materials to affecting manpower, tyre manufacturers have had a tough time recovering from the pandemic. The shortfall of raw materials, carbon black and natural rubber, affected the balance in the supply-demand chain and triggered a rise in raw material prices, increasing product prices. This has ultimately led to lower sales and lesser profits in the market,” Samir Gupta, managing director (India and head of Central Asia region) at Continental Tires said.
“Additionally, the Ukraine war also posed challenges to the global tyre industry regarding increased fuel prices and raw materials. This will, in turn, impact the supply chain in the coming months. Another factor that has affected the net profits in Q4 is the consequences of the semiconductor shortage in the automotive industry, which, in turn, has impacted the tyre industry,” Gupta added.
NR accounts for about 30% of the raw material mix in volume terms, followed by carbon black (25%), SR (20%) and fabric (10%) among others. In value terms, the share of NR is about 35%, while that of SR and carbon black is about 20% and 15%, respectively.
“Raw material prices including that of rubber and other inputs linked to crude were on a rising trajectory even before the Russia-Ukraine crisis. NR prices were driven by robust demand from Original Equipment Manufacturers (OEMs), amid supply chain constraints following unseasonal rain in Kerala and high international prices. Shortage of containers due to Covid-19 also led to higher import prices. The Ukraine crisis further accentuated the situation by driving crude oil prices higher, which in turn, impacted synthetic rubber (SR) and other crude-linked inputs,” Naveen Vaidyanathan, director at Crisil Ratings, said.
MRF said in its earnings report that despite its best efforts, the company has been unable to fully recover the raw materials cost increases, which are at an unprecedented level. Market conditions, after the pandemic, are also not favourable to absorb such frequent price increases.
According to Nithya Debbadi, assistant vice president and sector head (Corporate Ratings) at ICRA: “The operating margins of tyre manufacturers have been registering a declining trend since the fourth-quarter of last financial year (FY21) and contracted sharply over the last three quarters. Despite the price hikes taken by the industry players, the sharp inflation in prices of key raw materials such as NR and crude derivatives resulted in the contraction”.
“Going forward, improvement in margins would be subject to stabilisation or softening of raw material prices and industry’s ability to pass on the full extent of increased input costs to customers,” Debbadi added.
Tyre manufacturers are betting on the replacement market, especially from the commercial vehicle (CV) segment, banking on higher government spending for infrastructure that includes plans to expand the national highway network by 25,000 km and improve fleet utilisation.
The demand in the Passenger and Light Truck (PLT) tyre segment has already reached pre-pandemic levels, while the increase in waiting period for new vehicles would prompt customers to opt for used cars, which would also create demand in the replacement market, industry experts said.
The replacement market is a big contributor to the tyre sector, accounting for about 60% of its total volume, while OEMs account for 27% and the balance is from exports.
HIKES IN THE OFFING
However, the tyre industry is not out of the woods yet as the shortage of raw materials and high costs will continue to impact the sector.
“Tyre companies will have to take further price hikes to improve margins from a 10-year low of fiscal 2022. But the quantum will depend on the competitive scenario, demand outlook and prices of inputs among others. We expect a combination of modest price hikes, easing raw material prices and volume growth to drive 200 basis points improvement in operating margins to 12% in fiscal 2023,” Crisil’s Vaidyanathan added.
Tyre manufacturers had hiked prices by 12-15% in FY22, however, they did not pass on the entire rise in input costs to customers. This led to squeezing of margins in fiscal 2022.
According to ICRA’s Debbadi: “Tyre manufacturers continued to take price hikes in the first quarter of FY23 as well. Going forward, improvement in margins would be subject to stabilisation or softening of raw material prices and industry’s ability to pass on the full extent of increased input costs to customers”.
Industry experts expect margin for overall fiscal 2023 to improve, especially in the second-half of the fiscal.