Tracking the twists and turns

B. Krishnakumar

THE RS 10,0000-crore tyre industry has been through a rough terrain this fiscal.

The demand for tyres comes from three segments -- original equipment (OE) makers, replacement and exports. The demand from the OE segment depends on automobile production, while the flow of demand from the replacement market hinges on the automobile output in the recent past. The OE segment is a major source of demand in the passenger car market, followed by the two-wheeler and tractor segments. In the passenger car market, the OE segment accounts for about 60 per cent of the total demand, while in the two-wheeler and tractor segments, its contribution is about 50 per cent.

J.K. Industries, Ceat, Bridgestone and Goodyear have a major presence in the OE segment, while MRF and Apollo Tyres are strong in the replacements market.

As for the replacements market, the recent automobile output and the rate of industrial growth are the key proponents of demand. Given the regular usage and the high degree of wear-and-tear, there is a high incidence of tyre replacement in the truck and bus segment.

Over 60 per cent of the demand for the truck and bus tyres is accounted for by the replacements segment. In the passenger car segment, the replacements market contributes about 35 per cent of the demand. The steady demand flow from the replacement market has helped tyre producers stay afloat even with a declining trend in commercial vehicles production in 1997-98 and 1998-99.

In the tyre industry, the replacement market is the primary driver of demand, followed by the OE segment. Exports account for less than 10 per cent of the total demand. As with any other auto-ancillary product, realisation and profitability in the OE segment is relatively lower compared to the replacement market.

This is reflected in the relatively higher operating profit margin enjoyed by MRF and Apollo Tyres, compared to, say, Goodyear which has a major presence in the OE segment. The recent entrant, Bridgestone, with a major presence in the OE segment of passenger car radials, is reeling under losses.

While the demand from the OE segment and the replacement market improved significantly in 1999, the recovery was shortlived. There has not been an across-the-board decline in the automobile sector in the recent past.

When the commercial vehicles output went through a rough patch (in 1997 and 1998), it was offset by a robust growth in the demand from the tractor and passenger car segments. As a result, the tyre producers managed a respectable performance. Moreover, the prices of key inputs such as natural rubber, carbon black and synthetic rubber ruled soft for about two years before 1999.

However, the recent slowdown is across all the segments -- commercial vehicles, passenger cars, tractors and even two-wheelers. This, coupled with a rise in raw material prices, had a major negative impact on tyre companies.

Radials vs bias tyre

Based on the technology, automotive tyres can be broadly classified into the traditional cross-ply tyres and the technically-superior radial tyres. Due to basic differences in construction and technology, radial tyres are superior to the bias tyres in many aspects.

The radial tyre scores over the bias tyre in mileage, road grip, puncture-resistance and longevity. Due to the inherent advantages, the radial tyre costs, on an average, almost 50 per cent more than the bias variant.

Due to the higher cost and poor road conditions, radials have not quite caught the Indian consumer's fancy. However, the recent capacity build-up and the mounting competition have narrowed the price differential between radials and bias tyres.

This has led to a steady `radialisation' in the passenger car segment, from 50 per cent in 1999 to about 63 per cent now. However, the usage of radial tyres is not all that popular in the all-important commercial vehicles segment -- the largest source of demand in the tyre industry.

Aided by robust growth in demand for radials, top tyre producers MRF, Apollo and Ceat recently expanded capacities. Bridgestone's entry has only added to the competitive pressure in the segment.

Though a host of new radial tyre facilities has been set up in the recent past, India is still a major producer of cross-ply tyres. Even in the export market, the cross-ply has been India's forte. Going by the recent trends, the radial tyre's penetration is likely to see a modest growth in the truck and bus segment, while the recent rate of radialisation will continue in the passenger car segment.

Given this backdrop, companies such as MRF, Goodyear, J. K. Industries, Ceat and Apollo (in that order) would stand to benefit from the steady improvement in radialisation.