INDIAN TYRE INDUSTRY

The Indian tyre industry has witnessed a CAGR of 8.3% over the last decade mainly fuelled by the strong growth in the domestic auto industry. Though the replacement market has driven the industry growth for long time, the OEM market has seen a robust growth over the last couple of years. The industry is highly capital intensive, as it requires around Rs4bn to setup a radial tyre plant with a capacity of 1.5mn tyres and around Rs1.5-2bn for a cross ply tyre plant of a capacity to manufacture 1.5mn tyres. The profitability of the industry has high correlation with the prices of key raw materials such as rubber and crude oil as they account for more than 70% of the total costs. The raw material to sales ratio in the industry is around 65%.

Dominant Industry Players

The industry is dominated by four players viz MRF, Apollo Tyres, JK Industries and Ceat and enjoys more than 70% of the total market share.

Natural Rubber Prices Have Corrected Sharply In The Recent Weeks, But Volatility Remains

Sharp price correction of natural rubber (NR) in recent weeks cannot be taken as a long term trend. Therefore, producers have not passed on the price reduction to the end customers. Domestic NR price has averaged at Rs 87.5 per kg from April'07. For the quarter ended March '07, domestic NR prices averaged Rs94.8 per kg. Presently, it is trading around Rs81 per kg. With peak tapping season on, arrivals have increased from Thailand thereby leading to a price softening in international markets. The average NR price expectation for H1FY08 has slipped from Rs92 per kg to Rs90 per kg.

Replacement Market (RM) Picking Up As Imports Ease

Commercial Vehicles tyres OEM sales are expected to marginally come down as the slowdown is considered to be temporary. OEM producers have not asked for price reduction as yet. On the other hand, CV tyres' RM demand has picked up. This is expected to compensate the slowdown in OEM segment. Demand for imported T&B tyres has slowed down in the recent months, which is leading to improved T&B RM sales. Percentage of imported T&B tyres, which stood at 6.9% for the period April-November 2007 is around only 5% in recent months. The latest available data (provisional) is for April 2007 where the same has accounted for only 4.3%.

Less Correlation Between Tyre Production And OEM Vehicle Sales

In the past, we find less correlation between domestic CV tyre production and domestic CV vehicle production. The same trend is expected to continue in the current year too. In FY04 and FY07, when CV production growth was on the upside, domestic CV tyre production growth fell, whereas in FY06 when CV OEM sales growth was lower, domestic CV tyre production was higher. Domestic CV tyre production in FY07 fell sharply due to rising imports. With imports coming down and RM sales improving, we expect CV tyre demand to improve by 6% for FY08 and total domestic tyre demand to grow around 8% as per our earlier expectations.

Future Outlook OF Tyre Industry

We are positive on the sector as imports are coming down and rubber price is easing. The OEM demand slowdown will not substantially affect total tyres off take. We retain the volume growth outlook of 8% for the sector. Our top pick continues to be Apollo Tyres and remain positive on JK Tyres and CEAT as the sensitivity towards rubber price easing is high for both these companies. Apart from this, positive developments for CEAT like unlocking of land value and possibility of Octroi scrapping is gaining momentum. This can lead to substantial savings for the company and thereby lead to further upsides for the stock.

Financials Of Dominant Players

STOCKS TO WATCH UNDER TYPE INDUSTRY

Appolo Tyres
CEAT Tyres
MRF
JK Tyre and Industries
Goodyear

BUY

CEAT Tyres Ltd. at Current Market Price Rs. 166
MRF Tyres Ltd. at dips around Rs.3900