Tyre Companies’ Margins Resilience to be Short-Lived?
Leading Indian tyre makers managed to expand their margins in the June quarter despite higher input costs, but analysts warn that the performance may be short-lived.
Rising Inputs Costs
Crude oil derivatives and rubber constitute over 60 percentof tyre companies' raw material costs. Crude oil prices increased 33 percentquarter on quarter on average, while rubber prices increased 26 percent.
Despite raw material cost pressures, three of the top fourtyre companies managed to improve earnings before interest, tax anddepreciation margins during the quarter. Speaking to BloombergQuint, Mayur Milak, a research analyst at Anand Rathi Financial Services said the margin performance was boosted by two key factors.
Higher volumes and lower-priced inventories of raw material contributed to strong margin performance of tyre companies in the first quarter.Mayur Milak, Research Analyst, Anand Rathi Financial Services
MRF's EBITDA margin expanded by 342 basis points on a quarter over quarter basis, while Ceat was the only one to report margin contraction, of 70 basis points.
Tyre makers also had to contend with rising imports of cheapChinese tyres, especially in the commercial vehicle segment.
The domestic tyre industry continues to face challenges from imported Chinese tyres that enjoy around 35 percent market share in the truck and bus radial replacement segment.Nishit Zota, Research Analyst, ICICI Direct (Source: Earnings Note on Apollo Tyres)
Margins Pressure in the Second Quarter?
But the margin resilience may not be sustainable. Analysts expectsequential decline in margins in the second quarter, when the impact of higherrubber prices will get fully reflected.
Impact of higher rubber prices are typically reflected inthe tyre companies financial with a quarter's lag.Mayur Milak, Research Analyst at Anand Rathi FinancialServices
Impact of Tyre Price Cuts
Milak adds that tyre companies, lead by MRF, cut prices in the June quarter, and that too may be a drag on margins going forward.
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