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B. Krishnakumar

Attempting to get a grip on the original equipment market.

AUTOMOTIVE tyre producer, Goodyear India, has reported an improved performance for the year ended December 2003. Unlike its peers in the industry, the company has managed to record a strong growth in earnings. The thrust towards restructuring, along with a pick-up in demand in off-the-road (OTR) and tractor tyres, appears to have yielded dividends for Goodyear India.

To improve profitability, Goodyear India decided to concentrate on companies that are relatively more profitable. This strategy explains the marginal one per cent drop in turnover to Rs 560.3 crore in 2003. While this has resulted in a marginal drop in turnover, it has had a positive impact in terms of improved profitability. The operating profit margin for 2003 improved to 4.7 per cent from 2.8 per cent the previous year. The company revised prices to accommodate the rise in raw material price, and this has insulated the profitability from the rise in prices of raw materials such as natural rubber, carbon black and synthetic rubber.

As with other tyre companies, Goodyear's income from other sources rose sharply on account of the refund of additional excise duty levied earlier. As a result, the income from other sources spurted to Rs 16.2 crore from Rs 3.9 crore. The other elements of cost, such as interest and depreciation, remained almost unchanged.

Despite the soft interest rate regime, the company's interest cost dropped modestly by 14 per cent to Rs 13.3 crore. There is significant scope for savings on interest costs.

Helped by the improved profitability, savings in interest cost and rise in `other income', Goodyear managed a turnaround in 2003. It reported a net profit of Rs 0.05 crore against a net loss of Rs 12.7 crore in 2002.

While the performance for 2003 as a whole may not appear too impressive, the company reported a sharp growth in earnings for the quarter ended December 2003. The turnover rose 10 per cent to Rs 155.6 crore while interest costs dropped 49 per cent to Rs 1.9 crore. The company recorded earnings of Rs 4.3 crore compared to a loss of Rs 6.3 crore for the quarter ended December 2002.

Apart from the turnaround in operations in the December 2003 quarter, the company managed to outperform its industry peers during this quarter. While most of the other tyre majors, including MRF, Apollo Tyres and Ceat, have had to contend with a sharp decline in earnings for this period, Goodyear's performance improved significantly. The prominent presence in the off-the-road (OTR) and farm tyre segments appears to have helped Goodyear record a sharp growth in performance in the quarter-ended December 2003. The economic recovery and increased industrial activity have triggered demand for OTR tyres. With clients such as Mahindra and Mahindra and TAFE, the recovery in the tractor industry has also helped the company.

The tractor and OTR tyres would continue to be key drivers of earnings growth. The restructuring efforts, along with significant scope for effecting savings on interest cost, would be other growth triggers. Any increase in realisation from the original equipment segment would be an added advantage.

Goodyear is focussing on expanding its presence in the replacement market and is trying to firm up its foothold in the original equipment market. The positive impact of these efforts would be reflected over time. The presence across all major segments of the tyre industry is a major positive factor.

From an investment perspective, the lack of liquidity is a major limiting factor. With over 70 per cent of the equity held by the American collaborator, floating stock is low. Besides, the recent slide in the share price makes MRF and Apollo Tyres more appealing due to their inherent strengths. While shareholders can remain invested, fresh buying may be avoided.

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