Blame it on the rising raw material cost or the inverted duty structure, MRF is now exploring opportunities for acquiring companies outside the country, all to protect shrinking margins and remain profitable. But, is it really the right strategy?
Although MRF, India’s largest tyre manufacturer, entered the business much earlier than most of its competitors, it chose not to invest any money in building plants or acquiring companies abroad. Instead, it has focussed on building its brand in international markets. But not anymore. Blame it on the rising raw material cost or the inverted duty structure, MRF is now exploring opportunities for acquiring companies (as well as rubber plantations) outside the country, all to protect shrinking margins and remain profitable.
While the company is yet to announce full results for the year ended September 30, 2011, Arun Mammen, the Managing Director of MRF took a lot of pride in announcing (at a press meet in Chennai recently) that the company’s turnover has crossed Rs.100 billion mark in FY2010-2011 (the first Indian tyre manufacturer to do so in any financial year) at a growth rate of about 30 % over the previous year on the back of buoyant demand. Though the topline has not posed a serious problem for MRF (the topline of the company has doubled from Rs.50 billion in 2007) so far, the bottomline has taken a dip due to high raw material costs. MRF reported a net profit of Rs.2.2 billion for the nine month ending June 30, 2011 against a net profit of Rs. 2.7 billion during the corresponding period last year, a decline of 19.08%. And not just MRF; in fact, the tyre manufacturing industry, as a whole, has been operating at a margin of 1-1.5% for the last one year or so.
The reason is simple. The rubber prices have gone up from Rs.140 a kg to Rs.235 in the domestic market over the last one year. Although prices have plateaued now, they are still high for an industry that is marred with an inverted duty structure – a scenario where it costs more to import rubber (20% import duty) than importing a brand new tyre by paying just 7% import duty.
Further, the removal of anti-dumping duty by the government on truck and bus radials (TBRs) imported from China and Thailand from August 2011 onwards has only made the situation worse for tyre manufacturers, including MRF, in India. The move is expected to make imported tyres not only cheaper by almost 15-20%, but will also limit the pricing power of domestic players in replacement TBR market thereby further impacting their margins.
Notwithstanding the concerns of relatively lower distribution reach and inconsistency in quality of the imported tyres, the attractive price point is expected to pose a serious threat to domestic tyre manufacturers particularly in the replacement segment where MRF happens to be one of the dominant players, placing large Chinese tyre manufacturers like Giti Tire Company Ltd. and, Weifang City Gunaite Rubber Co. Ltd. in direct competition with it. “It was said that the imports of rubber is being discouraged because of the larger interest of the domestic rubber growing community. But one cannot understand that if this was the intention why there has been a rise in the imports of finished tyres from other countries, how is it going to help the domestic industry?” questions Rajiv Budhiraja, Director General, Automotive Tyre Manufacturers’ Association.
Although MRF, India’s largest tyre manufacturer, entered the business much earlier than most of its competitors, it chose not to invest any money in building plants or acquiring companies abroad. Instead, it has focussed on building its brand in international markets. But not anymore. Blame it on the rising raw material cost or the inverted duty structure, MRF is now exploring opportunities for acquiring companies (as well as rubber plantations) outside the country, all to protect shrinking margins and remain profitable.
While the company is yet to announce full results for the year ended September 30, 2011, Arun Mammen, the Managing Director of MRF took a lot of pride in announcing (at a press meet in Chennai recently) that the company’s turnover has crossed Rs.100 billion mark in FY2010-2011 (the first Indian tyre manufacturer to do so in any financial year) at a growth rate of about 30 % over the previous year on the back of buoyant demand. Though the topline has not posed a serious problem for MRF (the topline of the company has doubled from Rs.50 billion in 2007) so far, the bottomline has taken a dip due to high raw material costs. MRF reported a net profit of Rs.2.2 billion for the nine month ending June 30, 2011 against a net profit of Rs. 2.7 billion during the corresponding period last year, a decline of 19.08%. And not just MRF; in fact, the tyre manufacturing industry, as a whole, has been operating at a margin of 1-1.5% for the last one year or so.
The reason is simple. The rubber prices have gone up from Rs.140 a kg to Rs.235 in the domestic market over the last one year. Although prices have plateaued now, they are still high for an industry that is marred with an inverted duty structure – a scenario where it costs more to import rubber (20% import duty) than importing a brand new tyre by paying just 7% import duty.
Further, the removal of anti-dumping duty by the government on truck and bus radials (TBRs) imported from China and Thailand from August 2011 onwards has only made the situation worse for tyre manufacturers, including MRF, in India. The move is expected to make imported tyres not only cheaper by almost 15-20%, but will also limit the pricing power of domestic players in replacement TBR market thereby further impacting their margins.
Notwithstanding the concerns of relatively lower distribution reach and inconsistency in quality of the imported tyres, the attractive price point is expected to pose a serious threat to domestic tyre manufacturers particularly in the replacement segment where MRF happens to be one of the dominant players, placing large Chinese tyre manufacturers like Giti Tire Company Ltd. and, Weifang City Gunaite Rubber Co. Ltd. in direct competition with it. “It was said that the imports of rubber is being discouraged because of the larger interest of the domestic rubber growing community. But one cannot understand that if this was the intention why there has been a rise in the imports of finished tyres from other countries, how is it going to help the domestic industry?” questions Rajiv Budhiraja, Director General, Automotive Tyre Manufacturers’ Association.
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