Tyre companies will likely see their revenue impacted, thanks to the Extended Producer Responsibility provisions they are now required to make under government policy. For the layman, this is a strategy to add estimated environmental costs associated with a product, in this case tyres, throughout its life cycle to the selling price.
Some companies have reported the provisions as exceptional items in the last quarter of fiscal 2024, as they await clarifications on the regulation.
We take a look at what EPR is and how it's going to impact tyre makers:
Some companies have reported the provisions as exceptional items in the last quarter of fiscal 2024, as they await clarifications on the regulation.
We take a look at what EPR is and how it's going to impact tyre makers:
What Is Extended Producer Responsibility or EPR?
In a bid to push sustainability, on July 21, 2022, the Ministry of Environment, Forest and Climate Change notified regulations on Extended Producer Responsibility for waste tyres. Under these regulations, tyre companies had to meet specified waste recycling targets from the financial year-ended March 31, 2023.
These obligations were to be fulfilled by purchasing certificates from recyclers registered with the Central Pollution Control Board.
Confusion On Provision
Due to lack of necessary mechanisms, there had been confusion on what types of tyre-makers had to fulfill the obligation and to what extent.
As per the clarifications issued, these companies have to fulfill the obligations:
Companies that manufacture and sell new tyres domestically.
Companies that sell domestically under their own brand and new tyres manufactured by other manufacturers or suppliers.
Companies that sell imported new tyres.
Companies that import vehicles fitted with new tyres.
Automobile manufacturers importing new tyres for use in new vehicles sold domestically.
Entities that import waste tyres.
According to the regulation, tyre-makers have to make provisions as follows:
35% of the quantity of new manufactured tyres or tyres imported in year 2020-2021.
70% of the quantity of new manufactured tyres or tyres imported in year 2021-2022.
100% of the quantity of new manufactured tyres or tyres imported in year 2022-2023.
Impact On Revenue
Companies have made provisions in the fourth quarter of fiscal 2024 and have taken provisions for 2023 and 2024 together.
Most players have identified the FY23 provisions as exceptional items and the fiscal 2024 obligations under other expenses.
Ceat Ltd. took a total hit of Rs 108 crore for both the fiscals. While, MRF Ltd. has reported roughly Rs 144 crore of provisions for EPR. Apollo Tyres Ltd. reported Rs 99 crore as total provisions for both fiscals.
What Lies Ahead?
The impact of the EPR will be roughly 1% of total revenue for the next fiscal, according to Ceat's Chief Financial Officer Kumar Subbiah.
The company's revenue stood at Rs 11,943 crore in FY24. Therefore, 1% of this, assuming flat revenue, would be above Rs 100 crore. This is higher than the 60 bps impact of EPR the company reported in FY24.
For MRF, Kotak Securities Ltd. expects Ebitda per kg to decline in FY25E on impact from EPR provisions, RM (raw material) inflation and MRF’s aggressive pricing strategy. MRF has not yet announced any price hike to counter raw material price and EPR impact.
Apollo Tyres announced a price hike of 3% in May, most likely to counter the raw material price impact as well as EPR-related impact. The company could take another price hike of 1-2% in Q2 FY25E to offset raw material impact completely, according to Kotak Securities. In FY24, expense related to EPR had an impact of 30 bps on a consolidated basis, which is likely to increase in FY25E, owing to higher obligation proportion and higher volume in FY23.
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