We saw a slowdown in the earnings and revenue growth for the corporate sector in the last two quarters of FY 2014-15. The IT industry has clearly witnessed a slowdown according to the earnings growth reported in Q4FY15. Read our report on Corporate Growth Slowdown. What about other industries? The Tyre industry is one of the most competitive industries in the Indian economy. What is the trend in the earnings and revenue growth for the tyre industry in the current scenario? Are the earnings slowing down or is the revenue growth slowing down or is it an overall slowdown for the Tyre industry. It would be interesting to understand the dynamics of the tyre industry in the context of slowdown in the quarterly earnings for companies in India in the last quarter.
Apollo Tyres reported a 9.18% increase in its consolidated net profit to Rs.3074.8 million for the fourth quarter ended March 31 2015. The company had posted a consolidated net profit of Rs.2816.2 million during the same period of previous fiscal. Revenue however declined 3.5% to Rs.30984.2 million during the same period compared with Rs.32118.1 million in the same period of previous financial year. For the year, the company posted a consolidated net profit of Rs.9776 million, down 2.73% from Rs.10050.5 million in the previous fiscal. Revenue declined 4.5% to Rs.127256.9 million for the fiscal compared with Rs.133103.2 million in 2013-14 fiscal. Despite a healthy volume growth in the passenger car tyre segment in Europe and 30% volume growth in the truck-bus radial segment in India, the topline of the company has not grown. Apollo Tyres stock has declined 23.45% from year to date in 2015. The stock trades a 9.4x its FY15 earnings per share which suggests that the market is giving it lower valuations in comparison to the benchmark indices such as Sensex and Nifty on account of concerns for the industry.
JK Tyre & Industries reported over two-fold rise in the consolidated net profit to Rs.1060 million for the fourth quarter ended March 31, 2015 due to new product launches across categories and improvement in operational efficiencies. The company had posted a net profit of Rs.449.5 million during the same period of previous fiscal. Revenue of the company, however, declined 5.29% to Rs.17894.9 million for the fourth quarter, as against Rs.18956.2 million in the same period of previous fiscal. The company launched nine products last year across various categories including trucks, buses and passenger cars. Softening of commodity prices, especially rubber, also helped the company perform better during Q4FY15. For the year ended March 31, the company posted a net profit of Rs.3296.6 million compared to Rs.2630.2 million in the same period of previous fiscal. Revenue for the company declined 3.68% to Rs.73278.5 million for the year ended March 31, compared to Rs.75990.6 million in the 2013-14 fiscal. The company has undertaken an expansion plan amounting to Rs.14.30 billion in Chennai plant which would be completed by the end of the year 2015. After completion, the plant’s installed capacity for truck and bus radials would go up by 55% to 2.265 million tyres per annum and that of car radials would expand by 28% to 0.98 million tyres per annum. JK Tyre & Industries stock has declined 19.33% from year to date in 2015. The stock trades a 7.7x its FY15 earnings per share which suggests that the market is giving it lower valuations in comparison to the benchmark indices such as Sensex and Nifty on account of concerns for the industry.
The trend observed for the tyre industry is a slowdown in the revenue growth for the industry but a rise in the earnings. Rise in the earnings or profitability is because of the fact that the prices for rubber, the key raw material for the tyre industry, have declined in the recent time period which has enabled companies to report rise in the net profit margin and operating margin. The trend of rise in the profitability would be unsustainable in the long run as downside for rubber prices would be capped at some point of time. The greater concern remains the slowdown in the revenue growth or rather a decline in revenues compared to previous quarter and the previous year due to changing scenario because of Chinese imports into India. Also most of the companies in the industry are adding capacity (for example Apollo Tyres investing Rs.14.3 billion in Chennai) would leave them further grappling with higher costs and lower capacity utilisation in the future.
International Rubber prices rose to 540.50 MYR/Kg (Malaysian Ringgit per kg) in May from 512 MYR/Kg in April of 2015. The Rubber averaged 505.36 from 1990 until 2015, reaching an all-time high of 1743 in February of 2011 and a record low of 194.50 in December of 2001. Rubber prices have declined in the year 2014 and have been range bound year to date in 2015.
The increase in the import duty of natural rubber from 20% to 25% would be another challenge for the tyre industry from now onwards. The change in duty is likely to result in further increase in import of cheap tyres, which can be imported at 10% duty, and will hinder the growth of capacity investments by the domestic tyre industry, in addition to making it uncompetitive.
Chinese tyre imports have grown 31% to Rs.6130 million by late 2014 from Rs.4680 million in 2012-13. The value of Chinese tyre imports in 2014-15 have approximately reached Rs.8000 million. Imports of Chinese tyres into India have surged over several months after the US imposed an anti-dumping duty on them. A basic customs duty of 10% has led to cheaper Chinese tyres flooding the Indian market. There was an antidumping duty levied on the imports till February 2015 but as a result of expiration of the duty imports are rising rapidly.
The Automobile industry is struggling to grow with Commercial Vehicles growth at 6.48% for the April 2015 over April 2014. Passenger Vehicles have reported a growth of 15.83% in the domestic space. The tyre industry is banking on the growth of the commercial vehicles as there remains a lot of scope in the radialisation of tyres within the segment. Exports were strong in the same time period with commercial vehicles at 19.87% and Passenger Vehicles at 20.87%.
Other major companies such as Ceat Tyres and MRF are yet to report their results for the quarter ended March 31 2015 but going by the industry trend the results are likely to show rise in profitability coupled with decline in revenues. The companies would have to find a way out to deal with the changing dynamics to keep posting consistent revenue growth in the time to come.
Now the new challenges to cope up for the tyre industry are rising Chinese imports for tyres leading to the slowdown in the revenues, which can ultimately put pressure on the margins despite improving profitability coupled with expansion of existing capacities along with slowdown in the growth for Automobiles in the domestic space.