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Sector Update

The Indian Tyre Industry


20th September 2006 Rolling on the Drive
Although the tyre industry faces huge competition, price & cost pressures and high entry barriers, the changing
dynamics, with the growing economy and the escalating auto industry, provide a fillip to the industry. The
zooming auto industry, with sales growing at a CAGR of 15.8% during the 2002-06 period, has driven the growth
in the tyre industry, keeping both the OEM and replacement demand buoyant. The demand and growth for the
industry depends on primary factors like overall GDP growth, agricultural & industrial production and growth in
vehicle-demand and on secondary factors like infrastructure development and prevailing interest rates. The total
number of vehicles on the road is constantly swelling, on the back of an increase in road-transportation, which
would gain more momentum once projects like the Golden Quadrilateral and NSEW Corridor project get
implemented.

The Indian tyre industry has witnessed a CAGR of 7.7% over the last decade. Though the replacement market
has driven the industry growth for a long time, the OEM market has seen a robust growth over the last three
years. The truck and bus market is the largest segment of the industry, accounting for approximately 70% of the
industry turnover, in terms of value. Tyre production, in tonnage terms, grew at a healthy rate of 8.7% in 2005-06
against that of 2004-05. The medium and heavy commercial vehicle (MHCV) tyre segment registered a growth of
7.7% while the light commercial vehicle (LCV) and passenger car tyre segments registered a phenomenal
growth of 14.8% and 14.7%, respectively. Exports, on
the other hand, have not grown much, due to the Tyre Production Truck & Passenger
slowdown in MHCV tyre exports and have recorded a ('000) Bus LCV Cars
0.3% growth, in tonnage terms. 2005-2006 11,940 4,528 13,605
2004-2005 11,090 3,944 11,865
A few years back the auto industry was sluggish and Change (%) 7.7 14.8 14.7
so also was the tyre industry, but there has been a Tyre Exports in '000
dramatic shift since the last 2-3 years, as the vehicle
2005-2006 2,408 1,392 1,054
production has considerably gone up. Economic
expansion, investments and road development have all 2004-2005 2,505 1,130 1,026
contributed to this increase in demand for vehicles. Change (%) -3.9 23.2 2.7
This, in turn, has helped the growth in the tyre industry. Source: ATMA
In this article, we have put forward the present tyre industry scenario, its dynamics, current trends, growth drivers
and its way ahead.

However, although the tyre industry grew in terms of sales volumes, profitability has been adversely affected due
to a substantial increase in raw materials costs, which accounted for 62% of the operating income in 2001-02,
soared to over 70% in 2005-2006. Hence, the growth in sales volumes has not really added to the bottom line.

The Indian tyre industry is two tiered; Tier-I players (top Market Share (%)
5 tyre companies), account for over 80% of industry 17% 24%
turnover and have a well diversified product-mix and 6%
presence in all three major segments, i.e., replacement
market, original equipment manufacturers (OEM's) and
exports. Tier-II companies are small in size, mainly
concentrating on production of small tyres (for two/ 14%
22%
three-wheelers, etc.), tubes & flaps and the replacement 17%
market.
MRF Apollo Tyres J K Inds
CEAT Goodyear Others

Source: Cris INFAC

The zooming auto industry, with sales growing at a CAGR of 15.8% during 2002-06, has driven the
growth in the tyre industry, keeping both the OEM and replacement demand buoyant. Tyre production,
in tonnage terms, grew at a healthy rate of 8.7% in 2005-06

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Sector Update

Tyres

The Demand Cycle


Growing Economy

Increase in income level, Increase in demand of Increase in wear &


higher disposable income freight movement tear of tyres

Increase in demand for Increase in Commercial Creates Replacement


Passenger cars Vehicles demand demand for Tyres

Increase in demand for Increase in Tyres Demand


Passenger car tyres from OEMs

Creates Replacement Creates Replacement


demand after about 24-48 demand after about 12-18
months months

Increase in Tyre Sales

Major Sales Segments

Category-wise Tyre sales FY06 (Volume) Sales Segments (Volume)

18%
0.3% 8.2%
48.7%
47%

21%

2% 42.8%
1% 2% 2% 7%

Truck/Bus Passenger Car Jeep


LCV Tractor-front Tractor-rear Replacement OEMs Govt. Exports
Tractor-trailer Others

Source: ATMA

Demand for tyres can be categorised under four segments - Replacement Market (RM), the Original Equipment
Manufacturers (OEMs), Exports, and the Government. In FY05-06, the replacement market constituted 48.7% of
tyre sales (by volume), followed by OEMs at 42.8%. Exports constituted 8.2% and government sales were at
0.3%. According to the products, the maximum tyre sales are in the Truck & Bus segment, followed by
Passenger cars and Tractor - trailers.
Since the last thee years, the Growing Economy has led to an overall increase in freight movement and
consumption of automobiles, both commercial and passenger, leading to an increase in tyre sales. Currently,
the tyre industry is in the growth phase.

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Sector Update

Tyres

Analysis: SWOT

Strengths Weaknesses
* Established brand names (key in the replacement * Cost Pressures - The profitability of the industry has high
market) correlation with the prices of key raw materials such as
rubber and crude oil, as they account for more than 70% of
* Extensive distribution networks - For example, the total costs
Apollo Tyres has 118 district offices, 12 distribution * Pricing Pressures – The huge raw material costs have
centres and 4,250 dealers resulted in pressure on the realisations and hence, the
players have been vouching to increase the prices, although,
* Good R&D initiatives by top players due to competitive pressures, they have not been able to
pass on the entire increase to the customer
* Highly capital intensive - It requires about Rs 4 billion to
set up a radial tyre plant with a capacity of 1.5 million tyres
and around Rs 1.5-2 billion, for a cross-ply tyre plant of a 1.5
million tyre-manufacturing capacity

Opportunities Threats
* Growing Economy Æ Growing Automobile Industry Æ * Continuous increase in prices of natural rubber, which
Increasing OEM demand Æ Subsequent rise in replacement accounts for nearly one third of total raw material costs
demand * Cheaper imports of Tyres, especially from China, selling at
* With continued emphasis being placed by the Central very low prices, have been posing a challenge. The landed
Government on development of infrastructure, particularly price is approximately 25% lower than that of the
roads, agricultural and manufacturing sectors, the Indian corresponding Indian Truck/ LCV tyres. Imports from
economy and the automobile sector/ tyre industry are China now constitute around 5% of market share
poised for an impressive growth. Creation of road * With crude prices scaling upwards, added pressure on raw
infrastructure has given, and would increasingly give, a material prices is expected
tremendous fillip to road transportation, in the coming * Ban on Overloading, leading to lesser wear and tear of
years. The Tyre industry would play an important role in tyres and subsequent slowdown in demand. However, this
this changing road transportation dynamics would only be a short-term negative
* Access to global sources for raw materials at competitive * Cyclical nature of automobile industry
prices, due to economies of scale
* Steady increase in radial Tyres for MHCV, LCV

Analysis: Five Forces

Supplier Power - High


The demand for most raw materials, especially rubber,
has been high, while supply is restricted, resulting in
rise in prices

Barriers to Entry - High Competitive Pressures - High Threat of Substitutes - Low


* Capital-intensive Top six players enjoy over 80% of Imports, especially from China
* Distribution Network the total market share
* Low operating margins
* Branding

Buyer Power - High


High competitive pressure due to high bargaining
power of OEMs and the wide brand choice in the
replacement market

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Sector Update

Tyres

Growing OEM demand


Traditionally, the replacement market has been the main growth driver for the tyre industry, as also the major
segment that consumes tyres; however, with the recent escalation in auto sales, OEM demand too, has been on
a substantial increase, thus enlarging its share in the sales pie. Auto sales have been growing at a CAGR of
15.8% during 2002-06, which has driven the growth in the tyre industry, keeping the OEM demand buoyant.
Going forward, the automobile industry is estimated to grow at double digits. This, in turn, is expected to keep
demand, for tyres from OEMs, buoyant.
Looking at the global rail-to-road cargo scenario, in Europe, roadways have an 84% share, while in India,
currently, the ratio is 35:65, which was 62:38, two decades ago. Also, with growth in roadways and with projects
like Golden Quadrilateral and NSEW getting implemented, there would be a further shift in freight movement,
from railroad to roadways. This would lead to an increase in demand for automobiles and hence, the OEM
demand for tyres.
Sales Segments in Truck & Bus Sales Segments in Passenger Cars Sales Segments in LCV

8%
20%
31% 48%
2%

17% 38%
61%
54%
21%

Replacement OEMs Govt. Exports Replacement OEMs Exports Replacement OEMs Exports

Source: ATMA
Replacement market to see sustainable growth
The Replacement Market is one of the more sought-after markets by Tyre players, since the margins are better,
compared to those of OEMs (who are relatively few in number and have a huge bargaining power). Replacement
demand, which comes from existing automobiles, has been increasing for sometime now and is expected to do
the same, going forward. Replacement of tyres varies across categories, due to different life-spans of tyres,
which depends on reasons like
i. Road conditions
ii. Load carried
iii. Distance travelled
iv. Re-treading
The typical life of truck tyres is 40,000-45,000 kms or, on a general basis, around 12 to 18 months. The
replacement cycle is relatively longer for two-wheelers and cars, ranging anywhere between 24 to 48 months.
However, the demand for radial tyres in cars has further augmented the replacement cycle.
Here, it becomes important to talk about Re-treading, which is a phenomenon of repairing the outer surface of
the tyre in order to increase its life. The cost of re-treading a tyre is around 20-25% of the cost of a new tyre. A
re-treaded tyre lasts for around 60% of the life of a new tyre. Though the quality of tyre deteriorates on re-
treading, since it is highly economical, it is highly resorted to, especially in the passenger car segment. In the
LCV/ HCV (truck) segment, re-treading depends on the type of operator. For instance, for a single truck operator
that operates over shorter distances, mainly on inter-city and intra-state routes, re-treading is high. However, the
organised or large-fleet operators prefer to replace the tyres after an average usage of 40,000-45,000 kms.
These operators do not risk using old or re-treaded tyres on long-distance trips because breakdowns costs are
immense.
The substantial growth that the auto and tyre industries have seen in the last few years is bound to keep the
replacement demand high, in the years to come. Similarly, the current growth in the auto industry and mounting
OEM demand would keep replacement demand further buoyant, going ahead.
Though the replacement market has driven the industry growth for a long time, the OEM market has seen
robust escalation over the last three years. Going ahead, OEM demand is expected to be buoyant while
replacement demand would also see sustainable growth.
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Sector Update

Tyres

Exports likely to grow


Exports
Tyre exports are increasing consistently, with tyres being
2500 50%
exported to over 65 countries worldwide. Tyre exports grew
at a CAGR of 11%, over FY1994 to FY2006. With the 2000
40%

government providing various export incentives and with 30%

Rs crores
good demand overseas, we expect exports to add to the

Growth
1500 20%
growth of the tyre companies. 1000 10%

0%
In 2004-05, exports witnessed a growth of 26%; however, 500
the estimate for 2005-06 is a growth of 9%, which is a little -10%

slowdown from the last 3 years’ growth rates. 0 -20%

2006E
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Cost Structures, Margin Scenario
Raw material costs account for almost 70% of the tyre Source: ATMA

industry’s incomes. Labour cost is another significant


overhead. The Tyre industry has a narrow product range, Raw Material Costs
huge operating overheads and high break-even levels. Raw
material costs for the last three years have been rising 20%
constantly, especially those of rubber and crude oil-linked 35%
raw materials. The steep rise in raw material prices has 5%
impacted profit margins of all players. Consistent rise in
major raw materials costs (those of natural rubber, nylon 5%
tyre cord, carbon black, synthetic rubber), with limited
pricing flexibility, has resulted in pressure on margins of
tyre companies, despite a good topline growth. 13%
22%
Consequently, while the revenues showed a healthy
growth, profitability remained depressed. In fact, some of Rubber NTC Fabric Carbon Black
the major tyre companies are operating at break-even SBR PBR Others
situations.
Source: ATMA
Rubber Prices Rubber Prices (Rs/Quintal)
In 2005-06, production and consumption of rubber grew by
5.5% and 6.2%, respectively, while exports increased by
51.2% (for the same period), on account of the imbalance
in the global demand-supply position. The average 10000
domestic price of rubber increased by 20.3%, while the
international prices soared by 31.5% in the same period.
In April-June 2006, Domestic-Rubber prices increased
59% y-o-y, while the international prices increased 76.6%. 5000
Natural-Rubber prices have been continuously on the rise
July'05

July'06
Sep'05
May'05

Mar'06

May'06
Jan'06
Nov'05

in the international markets, with weather conditions


playing a major role in disrupting supplies. During FY06, Domestic International
China lost rubber plantations in the Hainan province due to Source: Rubber Board
a typhoon in September 2005, followed by floods in
Thailand and Malaysia in December, the same year. Production suffered in most rubber-producing regions in
India, due to bad monsoons, which in turn led to the soaring of rubber prices. With international natural-rubber
prices ruling high, and India being a part of the global market, exports of rubber from the country affected the
demand and supply positioning in its domestic market. The growth in exports is driving-up average domestic
prices of rubber. With rising demand from the Tyre sector, the supply situation is expected to remain constrained
in the medium term. Currently, rubber prices have depleted to around Rs 80-levels, but there is high level of
volatility and hence, their behaviour is difficult to predict. If current levels persist, it would result in better
profitability for tyre companies.

Raw material costs account for almost 70% of tyre industry’s incomes. In 2005-06, the average domestic price
of rubber increased by 20.3% and in April-June 2006, Domestic-Rubber prices have increased 59% y-o-y.

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Sector Update

Tyres

Nylon Tyre Cord (NTC) Fabric


Nylon tyre cord accounts for around 22% of the total raw material costs. During 2005-06, the production of NTC
fabric declined by 12.2%, while its consumption grew by 9%. This imbalance in the production-consumption
pattern has led to a 7.5% increase in domestic NTC prices in 2005-06. The international prices are much higher
than e domestic rates and have shown a 15.2% increase in 2005-06; the price of caprolactam, the main
feedstock for NTC fabric, increased by 6.2% in the same period. However, the average international and
domestic prices during April-June 2006 were lower by 22% and 18%, respectively, due to carpolactam prices,
which declined by 10.8 %.
Other Raw Materials
The prices of other raw materials like carbon black, styrene butadiene rubber (SBR) and poly butadiene rubber
(PBR) are closely linked to global crude oil prices. The average domestic price of carbon black increased by 7.7
% in 2005-06 and the average international prices of both SBR and PBR increased by 16.9% and 13.4%,
respectively, during 2005-06. During April-June06, the average domestic price of carbon black increased by 27.2
% and this momentum is expected to continue. The average international prices of both SBR and PBR fell by
10% and 1.4%, respectively, during April-June06. The prices are expected to be in line with global oil prices.
Hike in Tyre Prices
The rising raw material prices have been the key concern for the tyre industry, especially due to the lack of
pricing flexibility. Since the tyre industry is highly competitive and price sensitive, players have been very
conservative about increasing the prices. However, after the constant rise in raw material costs, almost every
player has, in different tranches, stepped up their product prices. In 2005-06, the average tyre prices have been
hiked thrice and the cumulative increase in truck & bus tyres is 4.6%, in car nylon is 1.2% and in car radial tyres
is 5.1%, over the same period last year. The price hikes in 2006-07 have resulted in a cumulative price hike of
20% across all categories, by almost all players, with MRF an exception, which did not increased prices in
July06. Combined with the price hikes, if the current price-levels of raw materials persist, it would result in better
profitability for tyre companies. There also exists a possibility of tyre companies rolling back the price hikes,
since the prices of rubber and oil-related raw materials have come down. However, it is very difficult to predict
rubber and other raw material prices.
Level Of Radialisation (%)
90%
Radialisation 90% 75%
80% 85%
70%
Radial Tyres are better, as they offer better fuel efficiency, longer life 80%
70%
65%
51%
and smooth movement on roads, together with working out to be 60% 50%
49%

cheaper in the long run. The level of radialisation in passenger cars is 40%
30%
as high as 90%, but for commercial vehicles it is very low; in T&B, it is 20% 1%2% 1%7% 2%8% 2%10% 2%10% 2%11% 2%11% 2%11%
10%
only 2% (globally 65%). This trend has not really picked-up pace, mainly 0%
because of poor road infrastructure, overloading, poor vehicle
1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06
maintenance, high costs involved and the requirement of radial tyres for
regular maintenance, in terms of checking air pressure, balancing and
realignment of wheels. Additionally, the industry believes that vehicles Truck & Bus LC V Passenger C ar
with radial tyres cannot be overloaded to the same extent, as can
vehicles with cross-ply tyres. Radial tyres cost close to 20% more than cross-ply tyres (Rs 2,000 more in the case of
MHCV tyres, and Rs 1,500 more in the case of LCV tyres). Hence, the OEM segment has not pushed radialisation, as
radial tyres mean an elevated cost of around Rs 10,000 for LCVs (5 tyres), Rs 14,000 for single-axle MHCVs (7 tyres),
Rs 22,000 for double-axle MHCVs (11 tyres) and Rs 30,000 for triple-axle MHCVs. However, going forward, with the
improvement in the quality of highways, we expect radialisation to gather some momentum; levels of radialisation in
MHCV is predicted to be 10% in five years time, while in LCV, around 20%.
Ban on Overloading
Industry estimates say that nearly 15% of Commercial Vehicles are overloaded to the extent of 100-150%, which
results in a higher wear and tear of tyres. The recent Supreme Court order, to curb the overloading of trucks, is
expected to affect the demand for MHCV tyres, in both, the replacement and OEM markets. On account of the ban on
overloading, the life of a tyre would increase and also, tyres that are not overloaded would further enable re-treading,
before being replaced. Hence, the replacement demand may come down. However, the curb on overloading is
expected to lead to additional truck sales, as also the demand for multi-axle vehicles would rise. This would lead to
higher OEM demand. So, in the short term, ban on overloading could be a dampener, but in the long run, it is definitely
a positive move. The ban would also provide a fillip to radialisation.
The level of radialisation in commercial vehicles is very low and in T&B, it is only 2%. However, going
ahead, this is likely to improve, with the ban on overloading also providing some fillip. The ban on
overloading of trucks could be a dampener in the short term, but is definitely a positive in the long run.
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Sector Update

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Other Developments
• Tyre industry seeking suspension of rubber exports
The tyre industry has been suffering because of rubber exports that have resulted in vulcanisation of rubber
prices. Hence, the tyre industry, along with ATMA (Automotive Tyre Manufacturers Association), has moved
the Commerce Ministry to put a temporary ban on the export of rubber. The Commerce Ministry, however, has
rejected their proposal and therefore, the players now plan to appeal to the Finance Ministry.

• ISI mark made compulsory


In a move to bring about quality control in the tyre industry, the ISI mark has been made compulsory for tyres.
This would effectively rule-out the sale of foreign tyres and thus result in reduced tyre-imports.

• Imports of tyres
Cheaper imports of tyres, especially from China, South Korea, Japan, Thailand and Indonesia, which sell at
very low prices, have been posing a challenge to the industry. India’s signing of the Bangkok agreement with
ASEAN countries, in October 2003, intensified the import threat, as this agreement provided for preferential
customs duty of 15% for imports from China and South Korea, along with Sri Lanka and Bangladesh, as
against the standard rate of 20%. This led to a gush of imported tyres from these countries. The landed price
is approximately 25% lower than that of the corresponding Indian Truck/LCV tyres. Imports from China now
constitute around 5% of the market share. However, Chinese tyres do not come with any warranty and the life
of these tyres is significantly lower than that of Indian tyres.

• Excise and Customs Duty


The union budget 2006-07 has reduced the peak customs duty on raw materials, like SBR, Polybutadiene
Rubber and NTC, from 15% to 12.5% and Butyl Rubber and Carbon Black, from 15% to 10%. The cut in
customs duty on key petroleum-based raw materials is likely to moderate their rising prices, to some extent.
The customs duty on tyres has also been reduced, from 15% to 12.5%, and on Caprolactum, a key raw
material for NTC, from 15% to 10%.

Risks and Concerns

• Rising raw material prices - The consistently rising natural-rubber and crude oil prices and the resultant
increase in petroleum-based inputs has been posing a big challenge to tyre operators. In a move to protect
their profitability, the players have increased tyre prices by 20%, across categories. However, it is a little
difficult to predict the raw material prices and it, therefore, remains a key concern.

• Import of tyres – The import of tyres has been posing some threat to the tyre industry in India. Free Trade
Agreements with countries can lead to reduction and eventual elimination of import tariffs, for imports from
those countries. However, the recent move, to make the ISI mark compulsory, would help in this regard.

Outlook
On the positive side, it is estimated that there would be a volume growth of 12-14% in 2006-07. The performance
of the tyre industry is linked to the automobile and infrastructure sectors, the growth of which is dependent on the
performance of the economy. The current estimated economic growth is over 8%. The continuous thrust being
placed by the Government on the development of infrastructure, particularly roads, agriculture and
manufacturing sectors, would lead to an impressive acceleration in the automobile/ tyre sector, generating more
demand for tyres. However, tyre companies face immense competition together with price and cost pressures.
Pricing pressures, from OEMs because of their high bargaining power and in the replacement market due to
huge competition, are existent dampeners. Companies are now giving emphasis to innovation in product and
process technology and operational efficiencies. However, the continuously rising trend witnessed in the prices
of raw materials remains an area of concern. Though rubber prices have come down from their peaks of Rs 115,
to Rs 82; currently, the trend is very volatile. Tyre companies would definitely show improvement in the margins
sequentially, and if prices remain at these levels, profitability would improve. But then, it would be highly
dependent on prices of major raw materials like Rubber, Carbon Black, NTC Fabric, SBR and PBR, which are
highly volatile.
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Sector Update

Tyres

Key players
The Indian tyre industry, comprising of 40 companies (47 Market Share (%)
factories) in the organised and unorganised sectors, can
be divided into two tiers; Tier-I players (top 5 tyre 17%
24%
companies) account for over 80% of industry turnover
containing a well diversified product-mix and presence in 6%
all three major segments, i.e. replacement market,
original equipment manufacturers (OEM's) and exports.
Tier-II companies are small in size, concentrating chiefly
on production of small tyres (for two/ three-wheelers, 14%
etc.), tubes and flaps and the replacement market. The 22%
industry has a negligible market share in the commercial 17%
vehicles tyre category and is around 20% in the two-
wheeler tyre category. MRF Apollo Tyres J K Inds
CEAT Goodyear Others

Peer Comparison

MRF Apollo Tyres J K Inds CEAT Goodyear Falcon Tyres


Company YE Sept YE March YE Sept YE Mar YE Dec YE Mar
Particulars FY05 FY06 FY05 FY06 CY05 FY06
Net Sales 2,966.2 2,630.1 2,078.6 1,747.4 672.8 221.8
Total expenditure 2,792.3 2,398.9 1,964.0 1,678.0 648.6 214.2
Operating Profit 173.9 231.2 114.6 69.5 24.2 7.5
OPM (%) 5.9 8.8 5.5 4.0 3.6 3.4
PBT before Extra-ordinary 59.5 109.6 -4.8 5.0 10.4 4.4
PBT (%) 2.0 4.2 -0.2 0.3 1.6 2.0
PBT 55.3 120.6 4.2 5.0 10.4 4.4
Profit after Tax 40.3 88.9 17.4 0.4 8.8 2.9
PAT (adj. for extraordinary) 43.0 81.8 8.4 0.4 8.8 2.9
PAT (%) 1.5 3.1 0.4 0.02 1.3 1.3
Equity Share capital 4.2 38.3 37.5 45.7 23.1 5.7
EPS (Rs) 95.1 23.2 4.7 0.1 3.8 5.1
CEPS (Rs) 355.3 42.2 17.8 5.2 9.9 8.8
Adj. EPS 101.5 21.3 2.2 0.1 3.8 5.1
ROCE (%) 6.7 12.8 5.3 9.0 11.2 14.1
RONW (%) 5.5 14.8 4.3 0.1 10.8 10.6

Market Price (Rs) 3,850.0 336 135 116 132 108


P/E (x) 40.5 14.5 29.0 1,432.8 34.6 21.2
P/E Adj. EPS (x) 37.9 15.7 60.1 1,432.8 34.6 21.2
P/E Cash EPS (x) 10.8 8.0 7.6 22.3 13.4 12.3
M cap (Rs crores) 1,632.4 1,288.2 505.7 530.1 304.5 61.3
M cap/Sales (x) 0.6 0.5 0.2 0.3 0.5 0.3
M cap/EBITDA (x) 9.4 5.6 4.4 7.6 12.6 8.1
Debt (Rs crores) 710.0 750.0 831.3 450.6 95.0 26.0
Cash and equivalent 48.7 232.0 314.6 222.0 84.0 6.1
EV (Rs crores) 2,293.7 1,806.2 1,022.3 758.8 315.5 81.2
EV / EBITDA (x) 13.2 7.8 8.9 10.9 13.0 10.8

Note: We have not considered Balkrishna Industries in our peer comparison because it is a diversified player,
with presence in tyres, textiles, paper and wind power.
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Sector Update

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Product Mix
Apollo JK Falcon
(In tonnage terms) MRF Tyres Industries CEAT Goodyear Tyres Overall
MHCV 54.4% 82.4% 78.6% 68.3% 44.9% -- 20.6%
Passenger Cars 6.2% 4.2% 7.2% 5.3% 15.4% 3.5% 18.0%
MUV 4.1% 0.8% 1.7% 2.4% 0.2% 0.7% 2.6%
LCV 7.2% 8.1% 7.1% 8.4% 3.8% 1.5% 5.9%
Tractor - front 2.0% 0.6% 1.0% 1.2% 5.5% 2.4% 2.1%
Tractor - rear 6.2% 3.1% 3.6% 4.6% 25.2% 0.8% 1.5%
Tractor - trailer 0.4% 0.6% 0.1% 1.0% -- 0.1% 0.8%
ADV 0.7% 0.2% 0.2% 0.2% -- 2.4% 0.5%
OTR 3.8% 0.1% 0.6% 2.9% 5.0% 0.1%
Motorcycle 9.1% -- -- 2.6% -- 59.9% 30.2%
Moped -- -- -- -- 2.5% 0.3%

Scooter (2/3 wheeler) 5.7% -- -- 3.1% -- 26.3% 16.8%


Industrial -- -- -- 0.1% -- 0.5%

MRF
MRF is the market leader among tyre manufacturers in India, with a 24% share in terms of revenues. Its
leadership position, coupled with its strong brand recall and high quality, MRF commands the price-maker status.
MRF has a strong presence in the T&B segment, the largest segment of the tyre industry, and commands
around 19% market share in the segment. It is the leader in the two/ three-wheeler segment (including
motorcycles) and tractor front tyres, and holds second place in the passenger cars and tractor - rear tyres.
Exports account for around 12% of the gross sales in MRF. The Company has a distribution network of 2,500
outlets within India and exports to over 65 countries worldwide.
Apollo Tyres (ATL)
Apollo Tyres is the second largest player in the Indian tyre industry, with a market share of 22%, in terms of
revenues, and the largest player in the T&B segment, with around 22% market share and 82% of its product mix
coming from this segment. It also enjoys a strong brand recall. ATL derives 80% of its revenues from the
replacement market, where the EBITDA margins are higher; hence, at operating levels, Apollo Tyres has better
margins compared to those of its peers. ATL is a strong player in the domestic market, with just 2% of sales
coming from exports.
JK Industries
JK Industries has a 17% market share, in terms of revenue, making it the third largest player in the industry. The
Company ranks first in the MHCV and Passenger Car tyre segments, with 79% and 7% of its product mix coming
from these segments, respectively. Exports account for approximately 17% of its gross sales.
CEAT
CEAT has a 14% market share, in terms of revenues, and is an average player across categories. 68% of its
product mix comes from the MHCV segment. Its leading brands in the T&B segment are Lug XL, Mile XL and Rib
XL, Secura in two-wheelers and Formula-1 in passenger radials. In terms of profitability, CEAT has lower
margins compared to its peers, in spite of deriving 60% of its revenues from the replacement market.
Goodyear India
Goodyear India, with presence across the globe, has a market share of 6% in the Indian Tyre industry, in terms
of revenues. It has a significant market share in the tractor tyres segment, with 22% share in tractor - front tyres
and a 30% share in tractor - rear tyres. It derives 45% of the product mix from the MHCV segment and 31% from
the tractor tyres segment.
Falcon Tyres
Falcon Tyres has a 2% market share in the tyre industry, and is the third largest player in the two & three-
wheeler (including motorcycle) tyres segment. 86% of the Company’s product-mix accounts for motorcycles and
the two/ three-wheeler segment.
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Sector Update

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Conclusion and Investment Argument

The industry is definitely set to grow, with an estimated volume growth of 12-14% in 2006-07. Both, OEM and
Replacement demand would drive growth, with exports also adding-in. The growing economy and the
infrastructure sectors provide the much-needed impetus. However, tyre companies face immense competition,
together with price and cost pressures. Pricing pressure, from OEMs because of their high bargaining power and
in the replacement market due to huge competition, is a substantial dampener. Companies are now giving
emphasis to innovation in product and process technology and to operational efficiencies. However, the
continuously rising trend witnessed in the prices of raw materials remains an area of concern. Though the rubber
prices have come down from their peaks of Rs 115, to Rs 82 currently, the trend is very volatile. Tyre companies
would definitely show improvement in the margins, sequentially, and if prices remain at these levels, profitability
would improve. But then, it is highly dependent on the prices of major raw materials like Rubber, Carbon Black,
NTC Fabric, SBR and PBR, which are highly volatile. However, with surging automobile sales, if demand for
tyres increases without the supply catching up with it, then, prices of tyres are likely to increase. This may
provide some benefit to the tyre companies.

If we view the financial performance of various tyre-manufacturing companies, most of them are operating at
wafer-thin margins and any substantial increase in costs would hurt the business adversely. Also, reviewing the
balance sheet, the ROCE and RONW are at very low levels. The industry leader, MRF, has an ROCE of 6.7%
and an RONW of 5.5%. Apollo is a little better off, with ROCE and RONW at 12.8% and 14.8%, respectively.
Hence, we do not find tyre stocks attractive, from an investment perspective.

At current levels, all tyre stocks look fairly valued. One can invest at lower levels, keeping in mind the view on
rubber prices. When rubber prices fell from their highs, all tyre stocks performed well on the bourses, giving good
returns; nevertheless, they should be looked-at only from a trading perspective.

The industry is definitely set to grow, but the huge competition, huge buyer power, pricing inflexibility and
cost pressures prove as detriments. Tyre companies are operating at very thin margins and their return
ratios are also not attractive. One can look at tyre stocks but only from a trading perspective

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