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Indian Tyre Industry

Indian Tyre Industry

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Published by: api-3738023 on Oct 15, 2008
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03/18/2014

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WAY2WEALTH Securities Pvt. Ltd., 002, Raheja Paramount, 138, Residency Road, Bangalore \u2013 560 025. Ph: (080) 22121512
Research Desk - Mumbai contact no.:022-22671924 / 25 email:content@way2wealth.com website:www.way2wealth.com
Sector\ue000U
p
date

Although\ue000the\ue000tyre\ue000industry\ue000faces\ue000huge\ue000competition,\ue000price\ue000&\ue000cost\ue000pressures\ue000and\ue000high\ue000entry\ue000barriers,\ue000the\ue000changing\ue000 dynamics,\ue000 with\ue000 the\ue000 growing\ue000 economy\ue000 and\ue000 the\ue000 escalating\ue000 auto\ue000 industry,\ue000 provide\ue000 a\ue000 fillip\ue000 to\ue000 the\ue000 industry.\ue000 The\ue000 zooming\ue000auto\ue000industry,\ue000with\ue000sales\ue000growing\ue000at\ue000a\ue000CAGR\ue000of\ue00015.8%\ue000during\ue000the\ue0002002-06\ue000period,\ue000has\ue000driven\ue000the\ue000growth\ue000 in\ue000the\ue000tyre\ue000industry,\ue000keeping\ue000both\ue000the\ue000OEM\ue000and\ue000replacement\ue000demand\ue000buoyant.\ue000The\ue000demand\ue000and\ue000growth\ue000for\ue000the\ue000 industry\ue000depends\ue000on\ue000primary\ue000factors\ue000like\ue000overall\ue000GDP\ue000growth,\ue000agricultural\ue000&\ue000industrial\ue000production\ue000and\ue000growth\ue000in\ue000 vehicle-demand\ue000and\ue000on\ue000secondary\ue000factors\ue000like\ue000infrastructure\ue000development\ue000and\ue000prevailing\ue000interest\ue000rates.\ue000The\ue000total\ue000 number\ue000of\ue000vehicles\ue000on\ue000the\ue000road\ue000is\ue000constantly\ue000swelling,\ue000on\ue000the\ue000back\ue000of\ue000an\ue000increase\ue000in\ue000road-transportation,\ue000which\ue000 would\ue000 gain\ue000 more\ue000 momentum\ue000 once\ue000 projects\ue000 like\ue000 the\ue000 Golden\ue000 Quadrilateral\ue000 and\ue000 NSEW\ue000 Corridor\ue000 project\ue000 get\ue000 implemented.\ue000\ue000

\ue000The\ue000Indian\ue000tyre\ue000industry\ue000has\ue000witnessed\ue000a\ue000CAGR\ue000of\ue0007.7%\ue000over\ue000the\ue000last\ue000decade.\ue000Though\ue000the\ue000replacement\ue000market\ue000

has\ue000driven\ue000the\ue000industry\ue000growth\ue000for\ue000a\ue000long\ue000time,\ue000the\ue000OEM\ue000market\ue000has\ue000seen\ue000a\ue000robust\ue000growth\ue000over\ue000the\ue000last\ue000three\ue000 years.\ue000The\ue000truck\ue000and\ue000bus\ue000market\ue000is\ue000the\ue000largest\ue000segment\ue000of\ue000the\ue000industry,\ue000accounting\ue000for\ue000approximately\ue00070%\ue000of\ue000the\ue000 industry\ue000turnover,\ue000in\ue000terms\ue000of\ue000value.\ue000Tyre\ue000production,\ue000in\ue000tonnage\ue000terms,\ue000grew\ue000at\ue000a\ue000healthy\ue000rate\ue000of\ue0008.7%\ue000in\ue0002005-06\ue000 against\ue000that\ue000of\ue0002004-05.\ue000The\ue000medium\ue000and\ue000heavy\ue000commercial\ue000vehicle\ue000(MHCV)\ue000tyre\ue000segment\ue000registered\ue000a\ue000growth\ue000of\ue000 7.7%\ue000 while\ue000 the\ue000 light\ue000 commercial\ue000 vehicle\ue000 (LCV)\ue000 and\ue000 passenger\ue000 car\ue000 tyre\ue000 segments\ue000 registered\ue000 a\ue000 phenomenal\ue000 growth\ue000of\ue00014.8%\ue000and\ue00014.7%,\ue000respectively.\ue000Exports,\ue000on\ue000

the\ue000 other\ue000 hand,\ue000 have\ue000 not\ue000 grown\ue000 much,\ue000 due\ue000 to\ue000 the\ue000 slowdown\ue000in\ue000MHCV\ue000tyre\ue000exports\ue000and\ue000have\ue000recorded\ue000a\ue000 0.3%\ue000growth,\ue000in\ue000tonnage\ue000terms.\ue000

\ue000A\ue000 few\ue000 years\ue000 back\ue000 the\ue000 auto\ue000 industry\ue000 was\ue000 sluggish\ue000 and\ue000

so\ue000 also\ue000 was\ue000 the\ue000 tyre\ue000 industry,\ue000 but\ue000 there\ue000 has\ue000 been\ue000 a\ue000 dramatic\ue000 shift\ue000 since\ue000 the\ue000 last\ue000 2-3\ue000 years,\ue000 as\ue000 the\ue000 vehicle\ue000 production\ue000 has\ue000 considerably\ue000 gone\ue000 up.\ue000 \ue000 Economic\ue000 expansion,\ue000investments\ue000and\ue000road\ue000development\ue000have\ue000all\ue000 contributed\ue000 to\ue000 this\ue000 increase\ue000 in\ue000 demand\ue000 for\ue000 vehicles.\ue000 This,\ue000in\ue000turn,\ue000has\ue000helped\ue000the\ue000growth\ue000in\ue000the\ue000tyre\ue000industry.\ue000

In\ue000this\ue000article,\ue000we\ue000have\ue000put\ue000forward\ue000the\ue000present\ue000tyre\ue000industry\ue000scenario,\ue000its\ue000dynamics,\ue000current\ue000trends,\ue000growth\ue000drivers\ue000
and\ue000its\ue000way\ue000ahead.\ue000\ue000
\ue000However,\ue000although\ue000the\ue000tyre\ue000industry\ue000grew\ue000in\ue000terms\ue000of\ue000sales\ue000volumes,\ue000profitability\ue000has\ue000been\ue000adversely\ue000affected\ue000due\ue000

to\ue000a\ue000substantial\ue000increase\ue000in\ue000raw\ue000materials\ue000costs,\ue000which\ue000accounted\ue000for\ue00062%\ue000of\ue000the\ue000operating\ue000income\ue000in\ue0002001-02,\ue000
soared\ue000to\ue000over\ue00070%\ue000in\ue0002005-2006.\ue000Hence,\ue000the\ue000growth\ue000in\ue000sales\ue000volumes\ue000has\ue000not\ue000really\ue000added\ue000to\ue000the\ue000bottom\ue000line.\ue000\ue000
\ue000The\ue000Indian\ue000tyre\ue000industry\ue000is\ue000two\ue000tiered;\ue000Tier-I\ue000players\ue000\ue000(top\ue000

5\ue000 tyre\ue000 companies),\ue000 account\ue000 for\ue000 over\ue000 80%\ue000 of\ue000 industry\ue000 turnover\ue000 and\ue000 have\ue000 a\ue000 well\ue000 diversified\ue000 product-mix\ue000 and\ue000 presence\ue000in\ue000all\ue000three\ue000major\ue000segments,\ue000i.e.,\ue000replacement\ue000 market,\ue000original\ue000equipment\ue000manufacturers\ue000(OEM's)\ue000and\ue000 exports.\ue000 Tier-II\ue000 companies\ue000 are\ue000 small\ue000 in\ue000 size,\ue000 mainly\ue000 concentrating\ue000 on\ue000 production\ue000 of\ue000 small\ue000 tyres\ue000 (for\ue000 two/\ue000 three-wheelers,\ue000etc.),\ue000tubes\ue000&\ue000flaps\ue000and\ue000the\ue000replacement\ue000 market.

Tyre Production
('000)
Truck &
Bus
LCV
Passenger
Cars
2005-2006
11,940
4,528
13,605
2004-2005
11,090
3,944
11,865
Change (%)
7.7
14.8
14.7
Tyre Exports in '000
2005-2006
2,408
1,392
1,054
2004-2005
2,505
1,130
1,026
Change (%)
-3.9
23.2
2.7
Source: ATMA
The Indian Tyre Industry
Rolling on the Drive
20th\ue000September\ue0002006\ue000
Market Share (%)
24%22%
17%
14%
17%
6%
MRF
Apollo Tyres
J K Inds
CEAT
Goodyear
Others
Source: Cris INFAC

The zooming auto industry, with sales growing at a CAGR of 15.8% during 2002-06, has driven the
growth in the tyre industry, keeping both the OEM and replacement demand buoyant. Tyre production,
in tonnage terms, grew at a healthy rate of 8.7% in 2005-06

Page 2 of 11
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\ue000
\ue000Sector\ue000Update\ue000
Tyres
WAY2WEALTH Securities Pvt. Ltd., 002, Raheja Paramount, 138, Residency Road, Bangalore \u2013 560 025. Ph: (080) 22121512
Research Desk - Mumbai contact no.:022-22671924 / 25 email:content@way2wealth.com website:www.way2wealth.com
The\ue000Demand\ue000Cycle\ue000
Growing Economy
Increase in income level,
higher disposable income
Increase in demand of
freight movement
Increase in wear &
tear of tyres
Increase in demand for
Passenger cars
Increase in Commercial
Vehicles demand
Creates Replacement
demand for Tyres
Increase in demand for
Passenger car tyres
Increase in Tyres Demand
from OEMs

Creates Replacement
demand after about 24-48
months

Creates Replacement
demand after about 12-18
months

Increase in Tyre Sales
Major\ue000Sales\ue000Segments\ue000
\ue000
Source: ATMA

Demand\ue000for\ue000tyres\ue000can\ue000be\ue000categorised\ue000under\ue000four\ue000segments\ue000-\ue000Replacement\ue000Market\ue000(RM),\ue000the\ue000Original\ue000Equipment\ue000 Manufacturers\ue000(OEMs),\ue000Exports,\ue000and\ue000the\ue000Government.\ue000In\ue000FY05-06,\ue000the\ue000replacement\ue000market\ue000constituted\ue00048.7%\ue000of\ue000 tyre\ue000sales\ue000(by\ue000volume),\ue000followed\ue000by\ue000OEMs\ue000at\ue00042.8%.\ue000Exports\ue000constituted\ue0008.2%\ue000and\ue000government\ue000sales\ue000were\ue000at\ue000 0.3%.\ue000 According\ue000 to\ue000 the\ue000 products,\ue000 the\ue000 maximum\ue000 tyre\ue000 sales\ue000 are\ue000 in\ue000 the\ue000 Truck\ue000 &\ue000 Bus\ue000 segment,\ue000 followed\ue000 by\ue000 Passenger\ue000cars\ue000and\ue000Tractor\ue000-\ue000trailers.\ue000

Sales Segments (Volume)
42.8%
8.2%
48.7%
0.3%
Replacement OEMs Govt. Exports
Category-wise Tyre sales FY06 (Volume)
18%
21%
2%
7%
2%
47%
2%
1%
Truck/Bus
Passenger Car
Jeep
LCV
Tractor-front
Tractor-rear
Tractor-trailer
Others

Since the last thee years, the Growing Economy has led to an overall increase in freight movement and
consumption of automobiles, both commercial and passenger, leading to an increase in tyre sales. Currently,
the tyre industry is in the growth phase.

Page 3 of 11
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\ue000
\ue000
\ue000
\ue000Sector\ue000Update\ue000
Tyres
WAY2WEALTH Securities Pvt. Ltd., 002, Raheja Paramount, 138, Residency Road, Bangalore \u2013 560 025. Ph: (080) 22121512
Research Desk - Mumbai contact no.:022-22671924 / 25 email:content@way2wealth.com website:www.way2wealth.com
Analysis:SWOT\ue000
Analysis:\ue000Five\ue000Forces\ue000
\ue000
Barriers to Entry - High

* Capital-intensive
* Distribution Network
* Low operating margins
* Branding

Supplier Power - High

The demand for most raw materials, especially rubber,
has been high, while supply is restricted, resulting in
rise in prices

Threat of Substitutes - Low
Imports, especially from China
Competitive Pressures - High
Top six players enjoy over 80% of
the total market share
Buyer Power - High

High competitive pressure due to high bargaining power of OEMs and the wide brand choice in the replacement market

Strengths
*Established brand names (key in the replacement
market)

* Extensive distribution networks - For example, Apollo Tyres has 118 district offices, 12 distribution centres and 4,250 dealers

* Good R&D initiatives by top players
Weaknesses
* Cost Pressures - The profitability of the industry has high

correlation with the prices of key raw materials such as rubber and crude oil, as they account for more than 70% of the total costs

* Pricing Pressures \u2013 The huge raw material costs have resulted in pressure on the realisations and hence, the players have been vouching to increase the prices, although, due to competitive pressures, they have not been able to pass on the entire increase to the customer

* Highly capital intensive - It requires about Rs 4 billion to set up a radial tyre plant with a capacity of 1.5 million tyres and around Rs 1.5-2 billion, for a cross-ply tyre plant of a 1.5 million tyre-manufacturing capacity

Opportunities

* Growing Economy\ue000 Growing Automobile Industry\ue000 Increasing OEM demand\ue000 Subsequent rise in replacement demand

* With continued emphasis being placed by the Central Government on development of infrastructure, particularly roads, agricultural and manufacturing sectors, the Indian economy and the automobile sector/ tyre industry are poised for an impressive growth. Creation of road infrastructure has given, and would increasingly give, a tremendous fillip to road transportation, in the coming years. The Tyre industry would play an important role in this changing road transportation dynamics

* Access to global sources for raw materials at competitive
prices, due to economies of scale
* Steady increase in radial Tyres for MHCV, LCV
Threats
* Continuous increase in prices of natural rubber, which
accounts for nearly one third of total raw material costs

* Cheaper imports of Tyres, especially from China, selling at very low prices, have been posing a challenge. The landed price is approximately 25% lower than that of the corresponding Indian Truck/ LCV tyres. Imports from China now constitute around 5% of market share

* With crude prices scaling upwards, added pressure on raw
material prices is expected

* Ban on Overloading, leading to lesser wear and tear of tyres and subsequent slowdown in demand. However, this would only be a short-term negative

* Cyclical nature of automobile industry

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