Not on a roll

B. Krishnakumar

GIVEN the recent capacity build-up, the sluggish demand and the rising imports, the near-term outlook for tyres does not appear positive.

To counter the impact of the dry-up of demand in the local market, the domestic producers have often resorted to exports. Exports account for about Rs 850 crore of the total industry size of Rs 10,000 crore. More than 60 per cent of the tyre exports is accounted for by the truck and bus tyres.

However, export growth has also slowed down in recent months. In October 2000, export of truck and bus tyres declined to 1.28 lakh units from 1.99 lakh units the previous month and 1.61 lakh units in August. The rising price of inputs has raised the cost of production, which appears to have discouraged companies from pursuing exports.

Any further relaxation of import norms would spell trouble for local producers. Global majors such as Goodyear, Bridgestone, Kumho and Hankook have set up huge production capacities in the South-East Asian region and may tap the Indian market to push volumes. For the domestic producers, maintaining the floor price at the present levels is important.

While the threat from imports looms large, there is speculation that Continental AG of Germany may buy a stake in Modi Rubber. Similarly, there are indications that the Korean major, Pirelli, would acquire a stake in Birla Tyres. If both Pirelli and Continental manage to acquire stakes in the Indian outfits, it would foster a competitive environment in the industry.

The recent entry of Bridgestone (through a joint venture with ACC) has already affected the prospects of companies with a presence in the passenger car radials. The entry of Pirelli and Continental could intensify competition for the local producers.

On the stock market, the share prices of almost all tyre companies have been hit badly in recent months. Though the broad market declined by over 30 per cent from the peak of 6,151 points on the Sensex, the lacklustre financial performance and the mounting competition from local producers and imports have resulted in a sense of scepticism among the investors.

From an investment perspective, there is no compelling reason to take exposure in the tyre sector. Given the present industry scenario and the duty structure, the prospects for the domestic tyre producers are not likely to improve in a hurry.

Given this backdrop, the recent recovery in the share prices of top tyre stocks such as MRF, Goodyear and Apollo Tyres is an opportunity for shareholders to cut exposure in tyre companies. Unless there is some recovery in the automobile sector, the commercial vehicle segment, in particular, the prospects for tyre producers do not appear promising.

From the long-term perspective, companies with a strong presence across various segments, including radials, would have an edge over the others. Taking into account the operational efficiency, the aggressive marketing strategy and the widespread distribution network, the market leader MRF deserves a closer look from an investment perspective. Apollo and Goodyear could also contend for a place in the portfolio if the tyre industry makes some sort of a recovery.