Indian Tyre Industry

Sector Update

The Indian Tyre Industry 20th September 2006

Rolling on the Drive

Although the tyre industry faces huge competition, price & cost pressures and high entry barriers, the changing dynamics, with the growing economy and the escalating auto industry, provide a fillip to the industry. The zooming auto industry, with sales growing at a CAGR of 15.8% during the 2002-06 period, has driven the growth in the tyre industry, keeping both the OEM and replacement demand buoyant. The demand and growth for the industry depends on primary factors like overall GDP growth, agricultural & industrial production and growth in vehicle-demand and on secondary factors like infrastructure development and prevailing interest rates. The total number of vehicles on the road is constantly swelling, on the back of an increase in road-transportation, which would gain more momentum once projects like the Golden Quadrilateral and NSEW Corridor project get implemented. The Indian tyre industry has witnessed a CAGR of 7.7% over the last decade. Though the replacement market has driven the industry growth for a long time, the OEM market has seen a robust growth over the last three years. The truck and bus market is the largest segment of the industry, accounting for approximately 70% of the industry turnover, in terms of value. Tyre production, in tonnage terms, grew at a healthy rate of 8.7% in 2005-06 against that of 2004-05. The medium and heavy commercial vehicle (MHCV) tyre segment registered a growth of 7.7% while the light commercial vehicle (LCV) and passenger car tyre segments registered a phenomenal growth of 14.8% and 14.7%, respectively. Exports, on Truck & Passenger the other hand, have not grown much, due to the Tyre Production Bus LCV Cars slowdown in MHCV tyre exports and have recorded a ('000) 2005-2006 11,940 4,528 13,605 0.3% growth, in tonnage terms. 2004-2005

11,090

3,944

11,865

A few years back the auto industry was sluggish and Change (%) 7.7 14.8 14.7 so also was the tyre industry, but there has been a Tyre Exports in '000 dramatic shift since the last 2-3 years, as the vehicle 2005-2006 2,408 1,392 1,054 production has considerably gone up. Economic 2,505 1,130 1,026 expansion, investments and road development have all 2004-2005 Change (%) -3.9 23.2 2.7 contributed to this increase in demand for vehicles. This, in turn, has helped the growth in the tyre industry. Source: ATMA In this article, we have put forward the present tyre industry scenario, its dynamics, current trends, growth drivers and its way ahead. However, although the tyre industry grew in terms of sales volumes, profitability has been adversely affected due to a substantial increase in raw materials costs, which accounted for 62% of the operating income in 2001-02, soared to over 70% in 2005-2006. Hence, the growth in sales volumes has not really added to the bottom line. The Indian tyre industry is two tiered; Tier-I players (top 5 tyre companies), account for over 80% of industry turnover and have a well diversified product-mix and presence in all three major segments, i.e., replacement market, original equipment manufacturers (OEM's) and exports. Tier-II companies are small in size, mainly concentrating on production of small tyres (for two/ three-wheelers, etc.), tubes & flaps and the replacement market.

Market Share (%) 17%

24%

6%

14% 22% 17% MRF CEAT

Apollo Tyres Goodyear

J K Inds 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

WAY2WEALTH Securities Pvt. Ltd., 002, Raheja Paramount, 138, Residency Road, Bangalore – 560 025. Ph: (080) 22121512 Research Desk - Mumbai contact no.:022-22671924 / 25 email:[email protected] website:www.way2wealth.com

Sector Update Tyres The Demand Cycle 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 Sales Segments Sales Segments (Volume)

Category-wise Tyre sales FY06 (Volume) 18%

0.3%

8.2%

48.7%

47%

21% 1% Truck/Bus LCV Tractor-trailer

2% 2%

Passenger Car Tractor-front Others

7%

2%

Jeep Tractor-rear

42.8%

Replacement

OEMs

Govt.

Exports

Source: ATMA

Demand for tyres can be categorised under four segments - Replacement Market (RM), the Original Equipment Manufacturers (OEMs), Exports, and the Government. In FY05-06, the replacement market constituted 48.7% of tyre sales (by volume), followed by OEMs at 42.8%. Exports constituted 8.2% and government sales were at 0.3%. According to the products, the maximum tyre sales are in the Truck & Bus segment, followed by Passenger cars and Tractor - trailers. 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 2 of 11 WAY2WEALTH Securities Pvt. Ltd., 002, Raheja Paramount, 138, Residency Road, Bangalore – 560 025. Ph: (080) 22121512 Research Desk - Mumbai contact no.:022-22671924 / 25 email:[email protected] website:www.way2wealth.com

Sector Update Tyres

Analysis: SWOT Strengths

Weaknesses

* Established brand names (key in the replacement * Cost Pressures - The profitability of the industry has high correlation with the prices of key raw materials such as market) rubber and crude oil, as they account for more than 70% of

* Extensive distribution networks - For example, the total costs Apollo Tyres has 118 district offices, 12 distribution * Pricing Pressures – The huge raw material costs have resulted in pressure on the realisations and hence, the centres and 4,250 dealers

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

* Good R&D initiatives by top players

Opportunities

Threats

* Growing Economy Æ Growing Automobile Industry Æ Increasing OEM demand Æ 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

* 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

Analysis: Five Forces Supplier Power - High The demand for most raw materials, especially rubber, has been high, while supply is restricted, resulting in rise in prices

Barriers to Entry - High * Capital-intensive * Distribution Network * Low operating margins * Branding

Competitive Pressures - High Top six players enjoy over 80% of the total market share

Threat of Substitutes - Low Imports, especially from China

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

Page 3 of 11 WAY2WEALTH Securities Pvt. Ltd., 002, Raheja Paramount, 138, Residency Road, Bangalore – 560 025. Ph: (080) 22121512 Research Desk - Mumbai contact no.:022-22671924 / 25 email:[email protected] website:www.way2wealth.com

Sector Update Tyres Growing OEM demand Traditionally, the replacement market has been the main growth driver for the tyre industry, as also the major segment that consumes tyres; however, with the recent escalation in auto sales, OEM demand too, has been on a substantial increase, thus enlarging its share in the sales pie. Auto sales have been growing at a CAGR of 15.8% during 2002-06, which has driven the growth in the tyre industry, keeping the OEM demand buoyant. Going forward, the automobile industry is estimated to grow at double digits. This, in turn, is expected to keep demand, for tyres from OEMs, buoyant. Looking at the global rail-to-road cargo scenario, in Europe, roadways have an 84% share, while in India, currently, the ratio is 35:65, which was 62:38, two decades ago. Also, with growth in roadways and with projects like Golden Quadrilateral and NSEW getting implemented, there would be a further shift in freight movement, from railroad to roadways. This would lead to an increase in demand for automobiles and hence, the OEM demand for tyres. Sales Segments in Truck & Bus

Sales Segments in Passenger Cars

Sales Segments in LCV

8%

20%

48%

31%

2%

17%

Replacement

61%

OEMs

Govt.

Exports

38% 54% Replacement

OEMs

Exports

21% Replacement

OEMs

Exports

Source: ATMA

Replacement market to see sustainable growth The Replacement Market is one of the more sought-after markets by Tyre players, since the margins are better, compared to those of OEMs (who are relatively few in number and have a huge bargaining power). Replacement demand, which comes from existing automobiles, has been increasing for sometime now and is expected to do the same, going forward. Replacement of tyres varies across categories, due to different life-spans of tyres, which depends on reasons like i. Road conditions ii. Load carried iii. Distance travelled iv. Re-treading The typical life of truck tyres is 40,000-45,000 kms or, on a general basis, around 12 to 18 months. The replacement cycle is relatively longer for two-wheelers and cars, ranging anywhere between 24 to 48 months. However, the demand for radial tyres in cars has further augmented the replacement cycle. Here, it becomes important to talk about Re-treading, which is a phenomenon of repairing the outer surface of the tyre in order to increase its life. The cost of re-treading a tyre is around 20-25% of the cost of a new tyre. A re-treaded tyre lasts for around 60% of the life of a new tyre. Though the quality of tyre deteriorates on retreading, since it is highly economical, it is highly resorted to, especially in the passenger car segment. In the LCV/ HCV (truck) segment, re-treading depends on the type of operator. For instance, for a single truck operator that operates over shorter distances, mainly on inter-city and intra-state routes, re-treading is high. However, the organised or large-fleet operators prefer to replace the tyres after an average usage of 40,000-45,000 kms. These operators do not risk using old or re-treaded tyres on long-distance trips because breakdowns costs are immense. The substantial growth that the auto and tyre industries have seen in the last few years is bound to keep the replacement demand high, in the years to come. Similarly, the current growth in the auto industry and mounting OEM demand would keep replacement demand further buoyant, going ahead. Though the replacement market has driven the industry growth for a long time, the OEM market has seen robust escalation over the last three years. Going ahead, OEM demand is expected to be buoyant while replacement demand would also see sustainable growth. Page 4 of 11 WAY2WEALTH Securities Pvt. Ltd., 002, Raheja Paramount, 138, Residency Road, Bangalore – 560 025. Ph: (080) 22121512 Research Desk - Mumbai contact no.:022-22671924 / 25 email:[email protected] website:www.way2wealth.com

Sector Update Tyres

industry’s incomes. Labour cost is another significant overhead. The Tyre industry has a narrow product range, huge operating overheads and high break-even levels. Raw material costs for the last three years have been rising constantly, especially those of rubber and crude oil-linked raw materials. The steep rise in raw material prices has impacted profit margins of all players. Consistent rise in major raw materials costs (those of natural rubber, nylon tyre cord, carbon black, synthetic rubber), with limited pricing flexibility, has resulted in pressure on margins of tyre companies, despite a good topline growth. Consequently, while the revenues showed a healthy growth, profitability remained depressed. In fact, some of the major tyre companies are operating at break-even situations.

50% 40%

2000

20%

1000

10%

Growth

30% 1500

0% 500

-10% 2005

2006E

2004

2003

2002

2001

2000

1999

1998

1997

-20% 1996

0 1995

Cost Structures, Margin Scenario Raw material costs account for almost 70% of the tyre

2500

1994

In 2004-05, exports witnessed a growth of 26%; however, the estimate for 2005-06 is a growth of 9%, which is a little slowdown from the last 3 years’ growth rates.

Exports

Rs crores

Exports likely to grow Tyre exports are increasing consistently, with tyres being exported to over 65 countries worldwide. Tyre exports grew at a CAGR of 11%, over FY1994 to FY2006. With the government providing various export incentives and with good demand overseas, we expect exports to add to the growth of the tyre companies.

Source: ATMA

Raw Material Costs 20%

35%

5% 5%

13%

22%

Rubber

NTC Fabric

Carbon Black

SBR

PBR

Others

Source: ATMA

July'06

May'06

Mar'06

Jan'06

Nov'05

Sep'05

July'05

May'05

Rubber Prices Rubber Prices (Rs/Quintal) In 2005-06, production and consumption of rubber grew by 5.5% and 6.2%, respectively, while exports increased by 51.2% (for the same period), on account of the imbalance in the global demand-supply position. The average 10000 domestic price of rubber increased by 20.3%, while the international prices soared by 31.5% in the same period. In April-June 2006, Domestic-Rubber prices increased 59% y-o-y, while the international prices increased 76.6%. 5000 Natural-Rubber prices have been continuously on the rise in the international markets, with weather conditions playing a major role in disrupting supplies. During FY06, Domestic International China lost rubber plantations in the Hainan province due to Source: Rubber Board a typhoon in September 2005, followed by floods in Thailand and Malaysia in December, the same year. Production suffered in most rubber-producing regions in India, due to bad monsoons, which in turn led to the soaring of rubber prices. With international natural-rubber prices ruling high, and India being a part of the global market, exports of rubber from the country affected the demand and supply positioning in its domestic market. The growth in exports is driving-up average domestic prices of rubber. With rising demand from the Tyre sector, the supply situation is expected to remain constrained in the medium term. Currently, rubber prices have depleted to around Rs 80-levels, but there is high level of volatility and hence, their behaviour is difficult to predict. If current levels persist, it would result in better profitability for tyre companies. Raw material costs account for almost 70% of tyre industry’s incomes. In 2005-06, the average domestic price of rubber increased by 20.3% and in April-June 2006, Domestic-Rubber prices have increased 59% y-o-y. Page 5 of 11 WAY2WEALTH Securities Pvt. Ltd., 002, Raheja Paramount, 138, Residency Road, Bangalore – 560 025. Ph: (080) 22121512 Research Desk - Mumbai contact no.:022-22671924 / 25 email:[email protected] website:www.way2wealth.com

Sector Update Tyres Nylon Tyre Cord (NTC) Fabric Nylon tyre cord accounts for around 22% of the total raw material costs. During 2005-06, the production of NTC fabric declined by 12.2%, while its consumption grew by 9%. This imbalance in the production-consumption pattern has led to a 7.5% increase in domestic NTC prices in 2005-06. The international prices are much higher than e domestic rates and have shown a 15.2% increase in 2005-06; the price of caprolactam, the main feedstock for NTC fabric, increased by 6.2% in the same period. However, the average international and domestic prices during April-June 2006 were lower by 22% and 18%, respectively, due to carpolactam prices, which declined by 10.8 %. Other Raw Materials The prices of other raw materials like carbon black, styrene butadiene rubber (SBR) and poly butadiene rubber (PBR) are closely linked to global crude oil prices. The average domestic price of carbon black increased by 7.7 % in 2005-06 and the average international prices of both SBR and PBR increased by 16.9% and 13.4%, respectively, during 2005-06. During April-June06, the average domestic price of carbon black increased by 27.2 % and this momentum is expected to continue. The average international prices of both SBR and PBR fell by 10% and 1.4%, respectively, during April-June06. The prices are expected to be in line with global oil prices. Hike in Tyre Prices The rising raw material prices have been the key concern for the tyre industry, especially due to the lack of pricing flexibility. Since the tyre industry is highly competitive and price sensitive, players have been very conservative about increasing the prices. However, after the constant rise in raw material costs, almost every player has, in different tranches, stepped up their product prices. In 2005-06, the average tyre prices have been hiked thrice and the cumulative increase in truck & bus tyres is 4.6%, in car nylon is 1.2% and in car radial tyres is 5.1%, over the same period last year. The price hikes in 2006-07 have resulted in a cumulative price hike of 20% across all categories, by almost all players, with MRF an exception, which did not increased prices in July06. Combined with the price hikes, if the current price-levels of raw materials persist, it would result in better profitability for tyre companies. There also exists a possibility of tyre companies rolling back the price hikes, since the prices of rubber and oil-related raw materials have come down. However, it is very difficult to predict rubber and other raw material prices. Level Of Radialisation (%)

90%

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

85% 80% Radialisation 90% 75% 70% 65% Radial Tyres are better, as they offer better fuel efficiency, longer life 80% 70% 51% 49% and smooth movement on roads, together with working out to be 60% 50% cheaper in the long run. The level of radialisation in passenger cars is 40% 30% as high as 90%, but for commercial vehicles it is very low; in T&B, it is 20% 1%2% 1%7% 2%8% 2%10% 2%10% 2%11% 2%11% 2%11% 10% only 2% (globally 65%). This trend has not really picked-up pace, mainly 0% because of poor road infrastructure, overloading, poor vehicle maintenance, high costs involved and the requirement of radial tyres for regular maintenance, in terms of checking air pressure, balancing and realignment of wheels. Additionally, the industry believes that vehicles Truck & Bus LC V Passenger C ar with radial tyres cannot be overloaded to the same extent, as can vehicles with cross-ply tyres. Radial tyres cost close to 20% more than cross-ply tyres (Rs 2,000 more in the case of MHCV tyres, and Rs 1,500 more in the case of LCV tyres). Hence, the OEM segment has not pushed radialisation, as radial tyres mean an elevated cost of around Rs 10,000 for LCVs (5 tyres), Rs 14,000 for single-axle MHCVs (7 tyres), Rs 22,000 for double-axle MHCVs (11 tyres) and Rs 30,000 for triple-axle MHCVs. However, going forward, with the improvement in the quality of highways, we expect radialisation to gather some momentum; levels of radialisation in MHCV is predicted to be 10% in five years time, while in LCV, around 20%.

Ban on Overloading Industry estimates say that nearly 15% of Commercial Vehicles are overloaded to the extent of 100-150%, which results in a higher wear and tear of tyres. The recent Supreme Court order, to curb the overloading of trucks, is expected to affect the demand for MHCV tyres, in both, the replacement and OEM markets. On account of the ban on overloading, the life of a tyre would increase and also, tyres that are not overloaded would further enable re-treading, before being replaced. Hence, the replacement demand may come down. However, the curb on overloading is expected to lead to additional truck sales, as also the demand for multi-axle vehicles would rise. This would lead to higher OEM demand. So, in the short term, ban on overloading could be a dampener, but in the long run, it is definitely a positive move. The ban would also provide a fillip to radialisation. The level of radialisation in commercial vehicles is very low and in T&B, it is only 2%. However, going ahead, this is likely to improve, with the ban on overloading also providing some fillip. The ban on overloading of trucks could be a dampener in the short term, but is definitely a positive in the long run. Page 6 of 11 WAY2WEALTH Securities Pvt. Ltd., 002, Raheja Paramount, 138, Residency Road, Bangalore – 560 025. Ph: (080) 22121512 Research Desk - Mumbai contact no.:022-22671924 / 25 email:[email protected] website:www.way2wealth.com

Sector Update Tyres

Other Developments • Tyre industry seeking suspension of rubber exports The tyre industry has been suffering because of rubber exports that have resulted in vulcanisation of rubber prices. Hence, the tyre industry, along with ATMA (Automotive Tyre Manufacturers Association), has moved the Commerce Ministry to put a temporary ban on the export of rubber. The Commerce Ministry, however, has rejected their proposal and therefore, the players now plan to appeal to the Finance Ministry. • ISI mark made compulsory In a move to bring about quality control in the tyre industry, the ISI mark has been made compulsory for tyres. This would effectively rule-out the sale of foreign tyres and thus result in reduced tyre-imports. • Imports of tyres Cheaper imports of tyres, especially from China, South Korea, Japan, Thailand and Indonesia, which sell at very low prices, have been posing a challenge to the industry. India’s signing of the Bangkok agreement with ASEAN countries, in October 2003, intensified the import threat, as this agreement provided for preferential customs duty of 15% for imports from China and South Korea, along with Sri Lanka and Bangladesh, as against the standard rate of 20%. This led to a gush of imported tyres from these countries. The landed price is approximately 25% lower than that of the corresponding Indian Truck/LCV tyres. Imports from China now constitute around 5% of the market share. However, Chinese tyres do not come with any warranty and the life of these tyres is significantly lower than that of Indian tyres. • Excise and Customs Duty The union budget 2006-07 has reduced the peak customs duty on raw materials, like SBR, Polybutadiene Rubber and NTC, from 15% to 12.5% and Butyl Rubber and Carbon Black, from 15% to 10%. The cut in customs duty on key petroleum-based raw materials is likely to moderate their rising prices, to some extent. The customs duty on tyres has also been reduced, from 15% to 12.5%, and on Caprolactum, a key raw material for NTC, from 15% to 10%.

Risks and Concerns • Rising raw material prices - The consistently rising natural-rubber and crude oil prices and the resultant increase in petroleum-based inputs has been posing a big challenge to tyre operators. In a move to protect their profitability, the players have increased tyre prices by 20%, across categories. However, it is a little difficult to predict the raw material prices and it, therefore, remains a key concern. • Import of tyres – The import of tyres has been posing some threat to the tyre industry in India. Free Trade Agreements with countries can lead to reduction and eventual elimination of import tariffs, for imports from those countries. However, the recent move, to make the ISI mark compulsory, would help in this regard.

Outlook On the positive side, it is estimated that there would be a volume growth of 12-14% in 2006-07. The performance of the tyre industry is linked to the automobile and infrastructure sectors, the growth of which is dependent on the performance of the economy. The current estimated economic growth is over 8%. The continuous thrust being placed by the Government on the development of infrastructure, particularly roads, agriculture and manufacturing sectors, would lead to an impressive acceleration in the automobile/ tyre sector, generating more demand for tyres. However, tyre companies face immense competition together with price and cost pressures. Pricing pressures, from OEMs because of their high bargaining power and in the replacement market due to huge competition, are existent dampeners. Companies are now giving emphasis to innovation in product and process technology and operational efficiencies. However, the continuously rising trend witnessed in the prices of raw materials remains an area of concern. Though rubber prices have come down from their peaks of Rs 115, to Rs 82; currently, the trend is very volatile. Tyre companies would definitely show improvement in the margins sequentially, and if prices remain at these levels, profitability would improve. But then, it would be highly dependent on prices of major raw materials like Rubber, Carbon Black, NTC Fabric, SBR and PBR, which are highly volatile. Page 7 of 11 WAY2WEALTH Securities Pvt. Ltd., 002, Raheja Paramount, 138, Residency Road, Bangalore – 560 025. Ph: (080) 22121512 Research Desk - Mumbai contact no.:022-22671924 / 25 email:[email protected] website:www.way2wealth.com

Sector Update Tyres

Key players The Indian tyre industry, comprising of 40 companies (47 factories) in the organised and unorganised sectors, can be divided into two tiers; Tier-I players (top 5 tyre companies) account for over 80% of industry turnover containing a well diversified product-mix and presence in all three major segments, i.e. replacement market, original equipment manufacturers (OEM's) and exports. Tier-II companies are small in size, concentrating chiefly on production of small tyres (for two/ three-wheelers, etc.), tubes and flaps and the replacement market. The industry has a negligible market share in the commercial vehicles tyre category and is around 20% in the twowheeler tyre category.

Market Share (%) 17%

24%

6%

14% 22% 17% MRF

Apollo Tyres

J K Inds

CEAT

Goodyear

Others

Peer Comparison

Company Particulars Net Sales Total expenditure Operating Profit OPM (%) PBT before Extra-ordinary PBT (%) PBT Profit after Tax PAT (adj. for extraordinary) PAT (%) Equity Share capital EPS (Rs) CEPS (Rs) Adj. EPS ROCE (%) RONW (%) Market Price (Rs) P/E (x) P/E Adj. EPS (x) P/E Cash EPS (x) M cap (Rs crores) M cap/Sales (x) M cap/EBITDA (x) Debt (Rs crores) Cash and equivalent EV (Rs crores) EV / EBITDA (x)

MRF YE Sept FY05 2,966.2 2,792.3 173.9 5.9 59.5 2.0 55.3 40.3 43.0 1.5 4.2 95.1 355.3 101.5 6.7 5.5

Apollo Tyres YE March FY06 2,630.1 2,398.9 231.2 8.8 109.6 4.2 120.6 88.9 81.8 3.1 38.3 23.2 42.2 21.3 12.8 14.8

J K Inds YE Sept FY05 2,078.6 1,964.0 114.6 5.5 -4.8 -0.2 4.2 17.4 8.4 0.4 37.5 4.7 17.8 2.2 5.3 4.3

CEAT YE Mar FY06 1,747.4 1,678.0 69.5 4.0 5.0 0.3 5.0 0.4 0.4 0.02 45.7 0.1 5.2 0.1 9.0 0.1

Goodyear YE Dec CY05 672.8 648.6 24.2 3.6 10.4 1.6 10.4 8.8 8.8 1.3 23.1 3.8 9.9 3.8 11.2 10.8

Falcon Tyres YE Mar FY06 221.8 214.2 7.5 3.4 4.4 2.0 4.4 2.9 2.9 1.3 5.7 5.1 8.8 5.1 14.1 10.6

3,850.0 40.5 37.9 10.8 1,632.4 0.6 9.4 710.0 48.7 2,293.7 13.2

336 14.5 15.7 8.0 1,288.2 0.5 5.6 750.0 232.0 1,806.2 7.8

135 29.0 60.1 7.6 505.7 0.2 4.4 831.3 314.6 1,022.3 8.9

116 1,432.8 1,432.8 22.3 530.1 0.3 7.6 450.6 222.0 758.8 10.9

132 34.6 34.6 13.4 304.5 0.5 12.6 95.0 84.0 315.5 13.0

108 21.2 21.2 12.3 61.3 0.3 8.1 26.0 6.1 81.2 10.8

Note: We have not considered Balkrishna Industries in our peer comparison because it is a diversified player, with presence in tyres, textiles, paper and wind power. Page 8 of 11 WAY2WEALTH Securities Pvt. Ltd., 002, Raheja Paramount, 138, Residency Road, Bangalore – 560 025. Ph: (080) 22121512 Research Desk - Mumbai contact no.:022-22671924 / 25 email:[email protected] website:www.way2wealth.com

Sector Update Tyres

Product Mix (In tonnage terms) MHCV

Apollo Tyres

MRF

JK Industries

CEAT

Goodyear

Falcon Tyres

Overall

54.4%

82.4%

78.6%

68.3%

44.9%

--

20.6%

Passenger Cars

6.2%

4.2%

7.2%

5.3%

15.4%

3.5%

18.0%

MUV

4.1%

0.8%

1.7%

2.4%

0.2%

0.7%

2.6%

LCV

7.2%

8.1%

7.1%

8.4%

3.8%

1.5%

5.9%

Tractor - front

2.0%

0.6%

1.0%

1.2%

5.5%

2.4%

2.1%

Tractor - rear

6.2%

3.1%

3.6%

4.6%

25.2%

0.8%

1.5%

Tractor - trailer

0.4%

0.6%

0.1%

1.0%

--

0.1%

0.8%

ADV

0.7%

0.2%

0.2%

0.2%

--

2.4%

0.5%

OTR

3.8%

0.1%

0.6%

2.9%

5.0%

Motorcycle

9.1%

--

--

2.6%

--

59.9%

30.2%

--

--

--

--

2.5%

0.3%

5.7%

--

--

3.1%

--

26.3%

16.8%

--

--

--

0.1%

--

Moped Scooter (2/3 wheeler) Industrial

0.1%

0.5%

MRF MRF is the market leader among tyre manufacturers in India, with a 24% share in terms of revenues. Its leadership position, coupled with its strong brand recall and high quality, MRF commands the price-maker status. MRF has a strong presence in the T&B segment, the largest segment of the tyre industry, and commands around 19% market share in the segment. It is the leader in the two/ three-wheeler segment (including motorcycles) and tractor front tyres, and holds second place in the passenger cars and tractor - rear tyres. Exports account for around 12% of the gross sales in MRF. The Company has a distribution network of 2,500 outlets within India and exports to over 65 countries worldwide. Apollo Tyres (ATL) Apollo Tyres is the second largest player in the Indian tyre industry, with a market share of 22%, in terms of revenues, and the largest player in the T&B segment, with around 22% market share and 82% of its product mix coming from this segment. It also enjoys a strong brand recall. ATL derives 80% of its revenues from the replacement market, where the EBITDA margins are higher; hence, at operating levels, Apollo Tyres has better margins compared to those of its peers. ATL is a strong player in the domestic market, with just 2% of sales coming from exports. JK Industries JK Industries has a 17% market share, in terms of revenue, making it the third largest player in the industry. The Company ranks first in the MHCV and Passenger Car tyre segments, with 79% and 7% of its product mix coming from these segments, respectively. Exports account for approximately 17% of its gross sales. CEAT CEAT has a 14% market share, in terms of revenues, and is an average player across categories. 68% of its product mix comes from the MHCV segment. Its leading brands in the T&B segment are Lug XL, Mile XL and Rib XL, Secura in two-wheelers and Formula-1 in passenger radials. In terms of profitability, CEAT has lower margins compared to its peers, in spite of deriving 60% of its revenues from the replacement market. Goodyear India Goodyear India, with presence across the globe, has a market share of 6% in the Indian Tyre industry, in terms of revenues. It has a significant market share in the tractor tyres segment, with 22% share in tractor - front tyres and a 30% share in tractor - rear tyres. It derives 45% of the product mix from the MHCV segment and 31% from the tractor tyres segment. Falcon Tyres Falcon Tyres has a 2% market share in the tyre industry, and is the third largest player in the two & threewheeler (including motorcycle) tyres segment. 86% of the Company’s product-mix accounts for motorcycles and the two/ three-wheeler segment. Page 9 of 11 WAY2WEALTH Securities Pvt. Ltd., 002, Raheja Paramount, 138, Residency Road, Bangalore – 560 025. Ph: (080) 22121512 Research Desk - Mumbai contact no.:022-22671924 / 25 email:[email protected] website:www.way2wealth.com

Sector Update Tyres

Conclusion and Investment Argument The industry is definitely set to grow, with an estimated volume growth of 12-14% in 2006-07. Both, OEM and Replacement demand would drive growth, with exports also adding-in. The growing economy and the infrastructure sectors provide the much-needed impetus. However, tyre companies face immense competition, together with price and cost pressures. Pricing pressure, from OEMs because of their high bargaining power and in the replacement market due to huge competition, is a substantial dampener. Companies are now giving emphasis to innovation in product and process technology and to operational efficiencies. However, the continuously rising trend witnessed in the prices of raw materials remains an area of concern. Though the rubber prices have come down from their peaks of Rs 115, to Rs 82 currently, the trend is very volatile. Tyre companies would definitely show improvement in the margins, sequentially, and if prices remain at these levels, profitability would improve. But then, it is highly dependent on the prices of major raw materials like Rubber, Carbon Black, NTC Fabric, SBR and PBR, which are highly volatile. However, with surging automobile sales, if demand for tyres increases without the supply catching up with it, then, prices of tyres are likely to increase. This may provide some benefit to the tyre companies. If we view the financial performance of various tyre-manufacturing companies, most of them are operating at wafer-thin margins and any substantial increase in costs would hurt the business adversely. Also, reviewing the balance sheet, the ROCE and RONW are at very low levels. The industry leader, MRF, has an ROCE of 6.7% and an RONW of 5.5%. Apollo is a little better off, with ROCE and RONW at 12.8% and 14.8%, respectively. Hence, we do not find tyre stocks attractive, from an investment perspective. At current levels, all tyre stocks look fairly valued. One can invest at lower levels, keeping in mind the view on rubber prices. When rubber prices fell from their highs, all tyre stocks performed well on the bourses, giving good returns; nevertheless, they should be looked-at only from a trading perspective. The industry is definitely set to grow, but the huge competition, huge buyer power, pricing inflexibility and cost pressures prove as detriments. Tyre companies are operating at very thin margins and their return ratios are also not attractive. One can look at tyre stocks but only from a trading perspective

Page 10 of 11 WAY2WEALTH Securities Pvt. Ltd., 002, Raheja Paramount, 138, Residency Road, Bangalore – 560 025. Ph: (080) 22121512 Research Desk - Mumbai contact no.:022-22671924 / 25 email:[email protected] website:www.way2wealth.com

Sector Update Tyres

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