Indian Manufacturers Feel Margin Squeeze

Indian business journal Mint asks the question – will the nation’s tyre makers be able to retain their margins during the 2011 fiscal year? The publication comments that, after falling in the March quarter, profit margins are looking set for another battering at the hands of rising rubber prices (up 70 per cent in one year and 150 per cent within the last 18 months, notes Mint) in the following quarter.

Until December, manufacturers were able to pass on these increases in the form of price rises, however in the March quarter cost increases began to outstrip price rises, with rubber going up some 18 to 20 per cent as opposed to tyre price increases in the vicinity of six to eight per cent. As Mint points out, given that rubber accounts for nearly 45 per cent of raw material costs, which in turn account for 70 per cent of net sales, this is bound to affect profitability.

MRF Ltd’s sales in the March quarter grew 26 per cent year-on-year to Rs 17,670,000,000 (₤268.6 million), but operating profit margin dropped from 15.4 per cent in the December quarter to 12 per cent last quarter. Ceat Tyres registered a 31 per cent year-on-year increase in net sales, but its operating margin halved to five per cent. Apollo Tyres has not year announced its quarter results, yet Mint reports analysts as estimating the company’s margin may fall by three percentage points to around 13 per cent.

“Every rupee increase in rubber prices has an Rs 60 crore (Rs 600,000,000, ₤9.1 million) impact on the tyre industry’s profitability,” commented Neeraj Kanwar, Apollo Tyres managing director and chairman of India’s Association of Tyre Manufacturers. According to Mint, analysts say tyre prices have to go up by 22 to 25 per cent for India’s tyre makers to sustain current levels of operating profit margin in the 2011 financial year.