analysis of indian tyre industry

1Analysis of Indian

Tyre

Industry

2Industry Overview

size and Categorization

Market Segments

Industry Concentration

Category-wise Market shares

Company wise Product Mix

Cost Structures and Profitability

3Product Segments

Changing Trends

Replacement and Exports

Exports

Break-up of Exports

Export Destination

Export Trends

4Global vs Indian Scenario

Global Market Share

Product Segment Comparison

Radialization

Re-treading

Cost Structure

Break-up of Raw Material Costs

Analysis of Expenses

5Profitability Analysis

Operating Margins

Realizations

Net Profit Margins

Return on Capital Employed

Gearing

Working Capital

Asset Turnover

6Demand Review and Outlook (2008-09 to 2012-13)

Overall Growth Projections

Segment-wise Growth Projections

Radialization and Tubeless Tyres

Supply Outlook

Profitability Outlook

Player Profiles

7 Industry overview

Product Segments

Exports

Global Scenario

Radialization

Retreading

Cost Structure

Profitability Analysis

Demand Review and Outlook (2008-09 to 2012-13)

Player Profiles

8Size

Turnover Rs. 200 billionExports Rs. 30 billionInstalled Capacity 89.2 million nosProduction 81.1 million nosProduction (000 tons) - 1180

Segmentation About 70% of revenue accounted by Commercial vehicles and tractors

INDUSTRY OVERVIEW SIZE AND CATEGORIZATION

Tyre industry is more than Rs. 200 billion in size and more than 3/4th of the revenues is accounted for by commercial vehicles and tractors.

9INDUSTRY OVERVIEW PRODUCT CATEGORIES AND MARKET SEGMENTS

Overall Industry

CommercialVehicles and Buses (73%)

Passenger Vehicle Tyres (23%)

Others (4%)

MHCV -59%

LCV -8%

Tractos -10%

Cars/MUVs -11%

2 - Wheelers 12%

10

Markets

Trucks /Bus Tyre SegmentReplacement 60%, Exports 19%, OE 21%

OverallReplacement 54%, Exports 14%, OE- 32%

INDUSTRY OVERVIEW MARKETS

Replacement is the biggest market segment and account for about 54% of the overall revenues.

11

Players

Market Share of top 7 companies 85% Market Leader Apollo TyresMRFs Market Share 23.5%

INDUSTRY OVERVIEW INDUSTRY CONCENTRATION

Tyre is a highly concentrated industry with top 7 players account for more than 85% market share.

12

INDUSTRY OVERVIEW MARKET SHARE TRENDS

14.113.5Others

2.52.5Falcon

3.53.1TVS Srichakra

6.27.7Goodyear

11.418Ceat Tyres

16.415.1JK Industries

22.419.6MRF

23.520.5Apollo

2007-082001-02

Market Share (in %)Company

Apollo Tyres is the market leader with about 23.5% share.

13

CATEGORY WISE MARKET SHARES

Market Share in %

205000Falcon

281000TVS Srichakra

0251012Goodyear

51031115CEAT

18

20

27

MHCV

23

24

24

LCVs

22

23

18

Cars

6

18

17

Tractors

0

25

0

2-wheelers

JK

MRF

Apollo

Company

Market leadership changes with respect to different segments.

14

COMPANY WISE PRODUCT MIX

Product Mix in %

856133Falcon

952000TVS Srichakra

03021329Goodyear

3531065CEAT

72

53

72

MHCV

9

9

10

LCVs

10

10

8

Cars

3

6

5

Tractors

0

7

0

2-wheelers

JK

MRF

Apollo

Company

Product mix of the top companies differ in terms of their exposure to product categories..

15

Key Costs (All costs as % of Income)

Raw Material Costs 70%Employee Costs 6%Interest and Depreciation 5%

INDUSTRY OVERVIEW COST STRUCTURE AND PROFITABILITY

Raw material costs constitutes about 70% of the revenues and theoperating margins for the industry is about 10%

ProfitabilityOperating Margin 10%Net Profit Margin 4.3%

16

Industry overview

Product Segments

Exports

Global Scenario

Radialization

Retreading

Cost Structure



Player Profiles

17

PRODUCT SEGMENTS

Tyres can be classified into two main types based on vehicle

categories -commercial vehicle tyres and passenger vehicle tyres.

Commercial vehicle tyres include medium and heavy commercial

vehicles (MHCV), light commercial vehicle and tractor tyres.

Passenger vehicle tyres include car, jeep, motorcycle and scooter

tyres.

Share of these vehicle segments in the total tyre market has changed

significantly over the past 15-20 years, with the share of passenger

vehicles increasing, and that of commercial vehicles tyres declining.

Tyre product segment can be broadly classified into CV tyres and Passenger Vehicle tyres.

18

PRODUCT SEGMENTS CHANGING TRENDS

Share of passenger cars and 2 wheelers has gone up significantly in the last 2 decades..

Segment-wise Share (1988-1989)

75%

4%

2%

4%

9%6%

Trucks andBuses

Passenger Cars

SUVs/MUVs/Jeep

LCVs

Tractors

2 Wheelers

59%

9%

2%

9%

10%

11%

Segment-wise Share (2007-08)

19

PRODUCT SEGMENTS REPLACEMENT,OE AND EXPORTS

Replacement segment constitutes the biggest category for all categories of tyre demand.

Share of Revenues in %

54%

50%

60%

Replacement

32%

43%

21%

OE

14%Overall

7%Passenger Car Tyres

19%MHCV Tyres

Exports

Category

20

Industry overview

Product Segments

Exports

Global Scenario

Radialization

Retreading

Cost Structure



Player Profiles

21

BREAK-UP OF EXPORTS

40%

27%

18%

13%3%

MHCV

LCVs

Passenger Cars

Motorcycle andScooters

Tractors andOthers

About 2/3 rd of the exports belong to MHCVs and LCVs.

22

EXPORTS DESTINATION

Indias export market is well spread out and there is no dependence onany particular country or region.

8% 5%

5%

5%

5%

5%

4%3%

3%3%

52%

UAE

Phiillipines

Iran

Pakistan

Netherlands

Germany

Nigeria

USA

Italy

Kenya

Others

23

EXPORTS TREND (IN VALUE)

Indias export have grown 2.5 times between 2000-01 to 2006-07.

11900

28500

2000-01 2006-07

Exports Value in Rs. million

24

Industry overview

Product Segments

Exports

Global Scenario

Radialization

Retreading

Cost Structure



Player Profiles

25

GLOBAL MARKET-SHARE

17%

17%

16%6%

44%

Bridgestone

Michelin

Goodyear

Continental

Others

Globally top 4 players account for about 55% of the market share.

26

COMPARISON : PRODUCT SEGMENTS

Globally, Cars & SUVs is the biggest product segment whereas in India it is MHCVs

4%2.5%Others

10%6%Tractors and Earthmovers

10%2.5%2-Wheelers

57%28%MHCVs

19%60%Cars & SUVs

IndiaInternationalSegments

27

Industry overview

Product Segments

Exports

Global Scenario

Radialization

Retreading

Cost Structure



Player Profiles

28

RADIALIZATIONRadialisation, an important innovation in tyre technology, was introduced in 1978.

Despite its several advantages like additional mileage, fuel saving and improved

driving, radialisation, did not measure to the expected pace in India.

This could be attributed to several factors: poor condition of Indian roads, older

vehicles produced in India not having suitable geometry for fitment of radial tyres,

misperception that radial tyres are not required for Indian vehicles, unwillingness

etc.

However, the situation has radically changed in recent years, especially for the

passenger car tyre, where radialisation has crossed 97 per cent in 2007- 08 and is

expected to reach 100 per cent level in next few years.

The main reasons restricting growth of radialisation in the commercial vehicle

segment are the fragmented nature of the transport market, which makes it difficult

to educate the transporters on the benefits of radialisation.

Further, radial tyres are priced approximately 40 per cent higher than comparable

cross-ply tyres, reducing the acceptability of the product. Hence, although long term

benefits offset the higher cost, the immediate cash outflow prevents transporters

from shifting to radial tyres.

Though radialization have long term benefits, its penetration levels are different for different segments.

29

RADIALIZATION: PENETRATION LEVELS

Penetration Levels of Radial Tyres in %

9%2%Trucks & Buses

15%10%LCVs

97%70%Passenger Cars

2007-082001-02

Segment

Penetration of radial tyres is almost 100% in passenger cars but it is very less in MHCV segment.

30

Industry overview

Product Segments

Exports

Global Scenario

Radialization

Retreading

Cost Structure



Player Profiles

31

RETREADING

Retreading is a process in which a new tread is applied on the body of the

worn tyres, called casing (A tread is that portion of a tyre, which comes into

contact with the road surface).

Cost of retreading a tyre is around 20 -25 per cent of the cost of a new tyre.

A retreaded tyre lasts for around 60 per cent of the life of a new tyre.

For example, average cost of an MHCV tyres is about Rs. 10,000 to Rs.

11,000, whereas the cost of retreading is only about Rs. 2000 to Rs. 2500

Average life of a new tyre is 60,000-65,000 kms. Life of a retreaded tyre

depends upon the number ofretreads carried on the tyre. Generally, a

retreaded tyre lasts for 30,000-35,000 kms.

A tyre can be retreaded 2-3 times.

Re-treading is highly prevalent in India which can extend the life of the tyre by about 60% with 25% of the cost of the new tyre.

32

RETREADING

Retreading sector is highly fragmented, with over 10,000 players in the

unorganised sector and three players in the organised sector.

There are a number of small retreading outlets in the southern region,

where the retreading sector has been given the status of a cottage industry.

Elgitread (India) Ltd., Indag Rubber Ltd. and MRF Ltd are the organised

players.

They manufacture and supply tread material to unorganised players who

retread tyres.

Re-treading sector is highly fragmented with more than 10,000 players and only 3 players supply the retread material.

33

Industry overview

Product Segments

Exports

Global Scenario

Radialization

Retreading

Cost Structure



Player Profiles

34

COST STRUCTURE

9093949392Total Operating Expenses

55556Other Overhead Expenses

66677Selling Expenses

66677Salaries and Wages

44.5555Power and Fuel

6972716966Raw Material Expenses

2007-082006-072005-062004-052003-04Parameters (as % of Sales)

Raw material costs is the biggest costs for the tyre industry.

35

BREAKUP OF RAW MATERIAL COSTS

Natural Rubber and NTC fabric are the biggest components of the RM costs and constitutes almost 60% of the overall material costs.

41%

18%

10%

5%

5%

5%

5%

10%

Natural Rubber

NTC Fabric

Carbon Black

RubberChemicals

Butyl Rubber

PBR

SBR

Others

36

ANALYSIS OF RAW MATERIAL COSTS

Most Raw materials for tyres are petro-based and hence their prices are linked to global crude oil prices..

The tyre industry is highly raw material intensive. Materials account for

almost 66 per cent of the industry.s total cost of production as in 2007-08.

Natural Rubber (NR), Nylon Tyre Cord (NTC), Carbon black, Styrene

Butadiene Rubber (SBR), Poly Butadiene Rubber (PBR), rubber

hemicals, Butyl rubber and Zinc Oxide are the key raw materials used,

accounting for around 92 per cent of the total raw material costs.

Other raw materials include aromatic oil, bead wire, process oil, stearic

acid, etc., accounting for balance 8 per cent of raw material costs.

Increase in raw material costs result in a corresponding decline in the

industry.s profitability.

As most of the raw materials used to manufacture tyres are petro-based,

their prices are linked with global crude oil prices.

37

OTHER EXPENSES

Employee expensesEmployee costs of the industry have remained stable at 5-8 per cent of operating income. Employee productivity in the industry is lower because of poor industrial relations. Some of the players in the industry including Apollo Tyres, Dunlop, and Modi Rubber, have a history of lockouts, resulting in production losses.Selling and distribution expensesAlthough tyres have very little product differentiation, the industry incurs selling expenses of around 6 to 8 per cent of the operating income. Freight and distribution account for around one-third of the total selling expenses.The industry also invests in brand building initiatives to compete in the replacement market. (although brand consciousness is low in the truck and bus tyres segment, it is higher in car radials).

Employee costs and S& D costs constitute about 6-8% respectively.

38

OTHER EXPENSES

Interest expenses and depreciation

The industry spent nearly 2.5 per cent of the operating income towards

interest and finance charges on working as well as fixed capital

borrowings in the last 2 years.

Interest costs have shown a declining trend in line with reducing gearing

of the industry and lower cost of borrowings.

In 1998-99, the gearing stood at 1.27 and interest costs accounted for 6

per cent of operating income.

In 2007-08, with gearing coming down to 1.02, interest costs dipped to

2.0 per cent of operating income.

Depreciation has accounted for nearly 2-3 per cent of the operating

income for the last 5 to 6 years; it stood at 2.48 per cent for 2007-08.

Interest and Depreciation constitutes about 2 to 3% of the overall sales respectively.

39

Industry overview

Product Segments

Exports

Global Scenario

Radialization

Retreading

Cost Structure



Player Profiles

40

Operating margins of the Indian tyre industry are directly linked to its raw

material costs, as material costs alone accounted for around 70 per cent of the

operating costs in 2007-08.

It is not possible for manufacturers to pass on the increase in costs fully, to the

end consumers in the form of prices due to the competition and import threat.

During 2007-08, raw material costs as a per cent of operating income registered a

decline of around 300 basis points.

Tyre players, who had been continuously taking a hit on their margins since

2003-04 by keeping tyre prices constant, decided to increase prices, resulting in

increase in margins.

For 2007-08, the industry saw the highest operating profit margin (OPM) of

around 10 per cent over the past 5 years.

OPERATING MARGINS

Operating margins in the tyre industry is greatly influenced by RM costs and it was about 10% in 2007-08.

41

REALIZATIONS

Price realizations are highest for MHCVs and low for 2 and 3 wheeler categories.

Price realisations (in Rs per kg) of tyre companies vary, depending on the

product mix . distribution to MHCV, LCV, passenger car, MUV, tractor, and

two-wheeler tyres.

The MHCV tyre category has the highest price realisation (in Rs per kg);

followed by the motorcycle, car and LCV.

This is because, in the MHCV tyre category, the replacement segment

accounts for larger volume [replacement segment has higher price realisations

than the original equipment (OE) segment.

In the OE segment, as the buyers are concentrated, they have more bargaining

power.

Realisations in the two- and three-wheelers tyre categories are lower on

account of high level of competition and large share of the unorganised sector.

42

NET PROFIT MARGINS

Net profit margins of the industry have moved in line with its operating margins.

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

20

03-

04

20

04-

05

20

05-

06

20

06-

07

20

07-

08

OperatingMargins (%)

Net Margins(%)

43

RETURN ON CAPITAL EMPLOYED (ROCE)

The return on capital employed (RoCE) of the Indian tyre industry touched the 10-year high for 2007-08 and reached the level of 20.4 per cent.

14%

8%9%

13.00%

21.00%

0%

5%

10%

15%

20%

25%

2003-04 2004-05 2005-06 2006-07 2007-08

The industry witnessed a sharp decline in RoCE between 2003-04 and 2004-05 and came down to 7.6 per cent from the previous level of 13.7 per cent. Declining trend of realisationshad resulted in a falling RoCEover these 2 years. However, increase in tyreprices, during 2006-07 and further in 2007-08, led to an improvement in the overall profitability of the industry; hence, the RoCE also moved up.

44

GEARING

The industry has not witnessed any major capacity expansion in the last 5 years; hence, borrowings were stable-keeping the capital structure of the industry steady till 2007-08..

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2003-04 2004-05 2005-06 2006-07 2007-08

45

WORKING CAPITAL

The industry operates with overall inventory (RM+FG) of about 50to 60 days.

7469728288Creditors period

3641454649Debtors period (Days)

2521211825FG Inventory (Days)

3632354032Raw Material Inventory (Days)

2007-082006-072005-062004-052003-04Parameters

The Indian tyre industry enjoys some bargaining power with respect to raw material such as natural rubber and carbon black as tyre industry accounts for a major share of their total consumption. This can be seen in the favourable working capital mix for the industry where creditor days are higher than debtor days as sales in replacement market (the largest market) are mostly done on cash basis.

46

ASSET TURNOVER

Asset utilization has been steadily increasing for the five year period between 2003-04 and 2007-08.

11.1

1.21.3

1.4

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

AssetTurnover

47

Industry overview

Product Segments

Exports

Global Scenario

Radialization

Retreading

Cost Structure



Player Profiles

48

GROWTH PROJECTIONS

8.17.8

6.97.16.5

6

0

1

2

3

4

5

6

7

8

9

OEM Total

2002-03 to2008-09

2008-09 to2012-13

Overall growth of the industry is expected to grow at about 6% between 2008-09 to 2012-13 compared to 7% in the preceding 5 years.

Tyre industry is expected to grow from Rs. 220 bn in 2008-09 to Rs. 315 bnin 2013-14

49

SEGMENT-WISE GROWTH PROJECTIONS

Growth is expected to slowdown in all the product segments.

7-8%10%Tractors

11%13%2 wheelers

7.2%12.1%Passenger Cars and UVs

8.8%11.8%LCV

4%4.6%MHCV

CAGR (2008-09 to 2013-14 in %)

CAGR (2003-04 to 2008-09 in %)

Segment

50

GROWTH ANALYSIS - MHCVS

Lower offtake from OEMs, weak global demand and increase in radialiation will slowdown the growth in the coming years.

The subdued growth over the next 5 years is in line with the fall in 2008-

09 and 2009-10 with continued slower off-take from OEMs.

Growth would also be muted due to lower replacement frequency with

lesser utilisation of fleet over the medium term, in tandem with the

estimated lower industrial production and decline in exports.

Weak global automobile demand has led to lower capacity utilisation for

countries like China.

This will lead to tough price competition over the medium term in the

global markets, impacting exports.

Further, with estimated increase in radialisation in the truck and bus

segment, the replacement cycle is estimated to become longer on account

of the longer life of radial tyres.

51

GROWTH ANALYSIS - LCVs

Though LCV segment will grow faster than the MHCV segment, its growth between 2008 to 2013 would be slower than the previous 5 years.

LCV tyre offtake is expected to slow down to a single-digit CAGR

growth of 8-9 per cent for 2008-09 to 2013-14 in comparison with a 12

per cent CAGR growth for 2003-04 to 2008-09.

The reason for slower growth is lower offtake from the OEM

segment in line with the expected decline in LCV production.

Going forward, the industry is expected to register single-digit

growth over the next 5 years on account of tough export competition

and slower growth in LCV production.

The LCV segment is expected to reach a size of Rs 22 billion by

2013-14from Rs 18.2 billion in 2008-09.

52

GROWTH ANALYSIS CARS AND SUVs

Cars segment is expected to slowdown due to increase use of tubeless tyresand slower exports.

CAGR of the car segment off-take is expected to reduce from 12 per cent

in 2003-04 to 2008-09 to 7-8 per cent from 2008-09 to 2013-14.

This slowdown is mainly attributed to slower growth inreplacement,

which is expected to grow at a CAGR of 4.1 per cent between 2008-09 and

2013-14 as compared to a growth of 10.7 per cent between 2003-04 and

2008-09.

With increasing penetration of tubelesstyres, which are more durable,

replacement period is expected to increase, resulting in lower growth in

replacement demand.

The off-take from exports is also expected to witness a slower growth in

line with weak global automobile demand and tough price competition

from other countries like China with large spare capacities.

The cars segment is expected to be valued at Rs 34 billion by 2013-14.

53

GROWTH ANALYSIS 2 - WHEELERS

2-wheelers and tyres segment are expected to grow at 11% and 7-8% respectively.

The off-take from the motorcycles segment formed around 8-9 per cent of

the total tyre off-take.

With lower growth in the OEM segment, motorcycle offtake is expected to

grow at a CAGR of 11 per cent over the next 5 years as against 13 per cent

over the past 5 years.

Further, motorcycle exports which grew at a CAGR of 56 per cent over the

past 5 years, are expected to see a single-digit growth of 3-5 per cent over the

next 5 years,dragged down by high base and lower competitiveness.

The segment is thus estimated to reach a size of Rs 34 billion by 2013-14.

Tractor tyres are also expected to grow at a CAGR of 7-8 per cent over the

next 5 years in tonnage terms over a 10 per cent growth in the past 5 years.

This is attributable to a 6 per cent CAGR growth in OEM offtake against a

12 per cent growth over the past 5 years until 2008-09.

The segment is thus estimated to reach a size of Rs 23 billion by 2013-14.

54

Radialisation

55

100% 96%

48%

56%65%

9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Western

Europe

Asia World

LEVEL OF RADIALIZATION IN MHCV TYRES

US South America

India

Level of radialization is very low in MHCV segment in India compared to other regions.

56

RADIALIZATION PASSENGER CARS AND MHCVs

Radialization is quite high in passenger cars but very low in MHCV segment.

While passenger car radialisation crossed 97 per cent in 2007-08, it

continues to remain low at 9-10 per cent in the truck and bus segment.

Therefore, while radialisation in the passenger cars segment has reached

levels comparable to other developed countries, the levels of radialisation

in the truck and bus segment are one of the lowest in comparison.

Radialisation levels have been low in the truck and bus segment in India

due to lack of initiative from both, tyre and automobile manufacturers in

promoting them.

With increased player initiatives to augment radial capacities, we

expect radialisation to increase from 9 per cent in 2007-08 to 15 per cent

by 2010-11 in the truck and bus segment

57

RADIALIZATION CHANGING TRENDS

Radialization is expected to reach 15% in MHCV and 100% in Passenger Cars by 2010-11.

10097959087Passenger Cars

2015121111LCV

159532MHCV

2010-112007-082006-072005-062004-05Segment

58

TubelessTyres

59

TUBELESS TYRES PENETRATION : CARS

Penetration of tubeless tyres has been increasing in passenger cars and has reached a level of 20% in 2009.

10

11

15

18

20

0 10 20 30

2003-04

2004-05

2005-06

2007-08

2008-09

Tubeless TyrePenetration inPassenger Cars(%)

60

TUBELESS TYRES PROJECTIONS

Penetration of tubeless is expected to reach 40-42% in passenger cars by 2013-14.

The demand for tubeless tyres to grow by 15-20 per cent in line with

expected growth in the high-end car segments and higher penetration

in the compact segment.

A number of players are taking initiative to introduce tubeless tyres

across other segments.

For instance, newer models like Hyundai i10 and i20 have launched

their entire range with tubeless tyres.

Penetration of tubeless tyres to increase from 20 per cent in 2008-09 to

40-42 per cent by 2013-14 mainly on account of high penetration in the

small car segment

61

Supply Review and Outlook

62

CAPACITY UTILIZATION LEVELS

92

86 86

90 90

83

84

85

86

87

88

89

90

91

92

93

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

The industrys capacity utilisation

rates have remained above 85 per

cent over the past 5 years, as

capacity additions have been low

while production growth has

been healthy, backedby healthy

growth in demand.

Capacity utilization has been more than 85% over the last 5 years.

63

CAPACITY EXPANSION PLANS OF MAJOR PLAYERS

Players are expected to go slow on capacity expansion as the growth is expected to slowdown.

Tyre companies are looking to set up some greenfield plants and

implement brownfield expansion to cater to demand.

The players have announced their plans of setting up some

greenfield units which are expected to materialise only in the next

2-3 years.

The total capex planned by these companies ranges between Rs 35

40 billion, which as per industry sources, would be deferred by 15

20 per cent on account of slower demand.

64

IMPORTS

Imports account for almost 6% of the tyre consumption in 2008-09 up from just 1% in 2003-04.

Imports have always been a potential threat for the domestic tyre industry.

The Indian tyre industry has witnessed a huge increase in imports,

especially in the truck and bus tyre segments in the last 5 years.

Moreover, higher imports put pressure on the pricing flexibility of domestic

companies, thus affecting operating margins.

Tyre imports accounted for 1 per cent of total domestic consumption in

2003-04. Import levels have since increased to account for 5.8 per cent of total

domestic consumption in 2008-09.

Of the total imports, tyre imports for the truck and bus tyre segment in 2008-

09 constitute 76.9 per cent.

Imports have grown at an estimated CAGR of 54.3 per cent from 2003-04 to

2008-09

65

IMPORTS : CHINESE THREAT

Chinese tyre imports account for more than 90 per cent of the total truck

and bus tyre imports.

Chinese tyre manufacturers have been traditionally able to quote lower

prices for tyres than the MRPs in India.

These low prices have resulted from a combination of cost

competitiveness and government/state subsidies.

While raw material prices and lower employee costs contribute to

marginally favourable cost economics, subsidies on power and fuel cost,

capital cost, interest expenses and tax exemptions have led to the cost

differentials.

A typical Chinese imported tyre of truck and bus radial segment is sold at

a 5-10 per cent lower rate in India as compared to prices quoted by Indian

tyre manufacturers.

Chinese imports constitute almost 90% of Indias tyre prices and this is mainly due to their cost advantage.

66

Profitability Review and Outlook

67

OPERATING MARGINS

Raw material costs, which accounted for 73 per cent of the total cost of production

in 2007-08, continue to maintain an inverse relationship with operating margins.

Limited bargaining power with OEMs has restricted the ability of tyre

manufacturers to pass on the increase in raw material costs both in the replacement

and OEM segments.

The basic raw material price (weighted average) for a typical MHCV tyre is

estimated to increase by 18 per cent in 2008-09, translating into an 11 per cent

increase in raw material costs for a typical tyre manufacturer.

Although,prices are estimated to have increased by 8-10 per cent across auto

segments, a part of this would be offset by deterioration in the product mix with

sharper decline in offtake of MHCV tyres.

All this would translate into a decline of 300-400 bps in operating margins in the

next 3 to 5 years.

Operating margins are expected to decline by 300 to 400 basis points in the next 3 5 years.

68

IMPORT THREAT

Import of tyres from destinations like China and Thailand have been

historically cheaper in India, leading to antidumping duties being levied on

cross-ply tyres and radial tyres for specific segments being classified under

restricted list.

Tyre imports now account for 7 per cent of total domestic consumption for

the overall tyre industry.

Imports is expected to reach between 9 to 10% by 2012-13.

The threat of imports is expected to continue with weak capacity

utilisation across majorglobal tyre producing companies due to continued

weak global auto demand.

Increasing threat of imports is expected to depress the profitability for the tyre industry.

69

ROCE

Leading players have announced a capital expenditure of around Rs 35

40 billion during 2008-09 to 2010-11.

However, considering the demand condition, after taking into account

likely deferrals or reduction in outlay, this is expected to be around 25-30

billion.

The estimated capacity utilisation of the six companies that constitute

around 60 per cent of the industry was 88 per cent in 2007-08 and is

expected to drop to around 80 per cent in 2008-09.

Lower growth along with new capex is expected to bring down the ROCE.

ROCE is expected to go down due to drop in growth and additionalcapex.

70

Industry overview

Product Segments

Exports

Global Scenario

Radialization

Retreading

Cost Structure



Player Profiles

71

MRF

72

MRF is India`s largest tyre manufacturer, having a 22% market share. The company derives over 95% of its revenues from its core business i.e. tyres, the rest comes from its presence in toys and paints. This focus on tyres has enabled it to constantly increase capacities, and maintain market leadership and profitability in mostsegments. MRF exports its products to over 75 countries.The company signed the memorandum of understanding (MoU) with government of Tamil Nadu for the new MRF plant to be located at Perambulur, Trichy and also for expansion of its existing plants in Tamil Nadu. This will be MRF`s third plant to be established in Tamil Nadu.MRF will invest Rs 1.25 billion in production facility of the tyres the product is produced after three years of in house research. The companys Net sales and PAT are expected to grow at a CAGR of 11% and 32% over FY08 to FY11E.

SYNOPSIS

73

PEER GROUP ANALYSIS

74

FINANCIALS

18181919ROCE (%)

5544NPM (%)

13%131313OPM (%)

3319301725301445Net Profit

9230839171674471Operational Profit (Rs. Mn)

68641624015672850469Sales (Rs. Mn)

FY-11 EFY-10 EFY-09FY-08Parameters

MRF is expected to touch a revenue of about Rs. 7000 crs in 2011 with a healthy ROCE of close to 20%.

75

PRODUCT MIX MATRIX

MHCVs constitute about 53% of the overall revenues of MRF.

53%

10%

11%

9%

5%

12%MHCV

LCV

Passenger Carsand MUVs

Tractors

2/3 wheelers

Others

76

KEY INITIATIVES

MRF is expanding its capacities in Tamil Nadu and also entering into aviation tyre segment.

Signing of MOUThe company signed the memorandum of understanding (MoU) with government of Tamil Nadu for the new MRF plant to be located at Perambulur, Trichy and also for expansion of its existing plants in Tamil Nadu. This will be MRF`s third plant to be established in Tamil Nadu. The other factories in Tamil Nadu are located at Tiruvottiyurand Arakonam. MRF is acquiring nearly 290 acres of land for its new facility in Perambulur.

MRF to foray into aviation tyresThe company has announced entry in production of aviation tyres. The company will invest Rs 1.25 billion in production facility of the tyres the product is produced after three years of in house research. The production will start at its Medak facility in Andhra Pradesh.

77

KEY INITIATIVES

MRF to foray into aviation tyres

The company has announced its foray into the aviation tyre space

with the unveiling of Aero Muscle, a product born out of in-house

research and perfected over the last threeyears.

The tyres were subjected to ground and flight trials. Upon

completion of these, MRF had been given provisional certificate for

the commercial production of the approved prototype aviation tyre.

This step according to the company will help India by achieving

self-sufficiency in such an import-substitute product is always good

for the country.

MRF is expanding its capacities in Tamil Nadu and also entering into aviation tyre segment.

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Apollo Tyres

79

Apollo Tyres is one of India's leading manufacturers of tyres with presence in

the commercial vehicle OEM segment. It has market leadership in the truck

tyre replacement segment.

The company also supplies to car and tractor OEM majors.

It also exports its products to South America, Pakistan, South East Asia,

Middle East countries and Africa.

The company expects its Chennai facility to start commercial production of

truck, bus and passenger car radial tyres beginning February-March this year.

The company would start exporting tyres to Saudi Arabia and Australia in

Q4FY10.

The company would increase production capacity in the country by over 50%

as it looked to enter the top-10 global tyre maker's club in the next five years.

The company is also looking to almost double its exports in the next year.

The company is planning to invest about Rs 10 billion for setting up an IT park

and a hotel complex in Kerala.

SYNOPSIS

Apollo tyres is planning to expand the capacity by 50% and will become one of the top 10 global trye manufacturer in the next 5 years.

80

PEER GROUP COMPARISON

Apollo tyres is planning to expand the capacity by 50% and will become one of the top 10 global trye manufacturer in the next 5 years.

81

FINANCIALS

25271215ROCE (%)

8836NPM (%)

1616812OPM (%)

4578405110812193Net Profit


57717515334071536939Sales (Rs. Mn)


Apollo tyres is expected to reach about Rs. 5700 crores in FY-11 and its ROCE is expected to be around 25%

82

PRODUCT MIX

Apollo tyres is mainly into MHCVs with very little presence in 2-wheelers and tractors.

72%

10%

8%

10%

MHCV

LCV

Passenger Cars

Others

83

KEY INITIATIVES

The company has set up a new plant in Chennai which will produceradial tryes for domestic and exports.

CHENNAI PLANTThe company has expanded its capacity in Chennai for the production of truck, bus and passenger car radial tyres .Plans are also afoot to enter the European markets with Apollobranded tyres in the first quarter of 2010-11.The commissioning of the Chennai facility is going ahead as per schedule. The plant is expected to start commercial production this quarter. Production is expected to peak to the full capacity of 8,000 car radials a day (2.4 lakh a month) and 1 lakh truck radials amonth by December 2010 and April 2011 respectively. A part of the production from the Chennai facility will be marketed in Europe.

84

KEY INITIATIVES

The company plans to expand capacities by 50% and double exports n the next 5 years.

Increase Production Capacity by over 50% in the Next Five Years

The company would increase production capacity in the country by

over 50% as it looked to enter the top-10 global tyre maker's club in the

next five years. The company is also looking to almost double its

exports in the next 2-3 years.

The company's production capacity will go up by over 50% to around

1,600 tonnes a day after the Chennai plant reaches terminal capacity by

first quarter of next year's.

The company has started to export the Apollo brand of tyres to

Europe from 2010.

85

KEY INITIATIVES

The company has recently acquired a Dutch company to gain foothold in the European market.

Apollo Tyres completes acquisition of Dutch Company

The company has successfully concluded the acquisition of 100%

shareholding of Dutch company `Vredestein Banden BV` (VBBV) .

The acquisition will provide Apollo entry into Europe with

manufacturing facility and market and distribution network of VBBV as

well as access to high end technology.

VBBV is a premium Tier-I, tyre manufacturer with a portfolio of high

end, high speed rated passenger car tyres, having its manufacturing plant

near Amsterdam with an annual production capacity of 5.5 million tyres.

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CEAT

87

FINANCIALS

121312ROCE

46-16NPM (%)

8.7101.87.9OPM (%)

14611542-1611486Net Profit


32552277282513723,300Sales (Rs. Mn)


CEAT is expected to reach about Rs. 5700 crores in FY-11 and its ROCE is expected to be around 12-13%.

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PRODUCT MIX

About 75% CEAT tyres Product Mix is mainly composed of MHCVsand LCVs.

66%

10%

3%

7%

3%

11%

MHCV

LCV

Passenger Cars

Tractors

2-3 wheelers

Others

89

KEY INITIATIVES

Capacity expansion to aid volume growth:

CEAT is ramping up its production facilities to benefit from the

uptrend in the automobile industry.

The company has a current capacity of 400 tonnes per day (TPD) in the

Bias tyres. Bhandup plant has a capacity of 240 TPD, whereas Nashik

plant has a capacity of 160 TPD.

The company is looking at expanding its Nashik capacity by 35 TPD .

At the same time, CEAT is looking at a new Radial tyre capacity at

Baroda of 145 TPD.

The capex slated for the Radial capacity is Rs500 crores spread over the

next two years.

CEAT is planning for capacity expansion for both radial and crossplytyres..

90

KEY INITIATIVES

CEAT is planning to increase the proportion of Replacement segment which is of high margin compared to OE segment.

Better revenue mix augurs well for margin profile: Growth in the tyre industry always mirrors growth in the road transport sector which is expected to grow at a pace of 8-9% for the next 3-5 years. CEAT, with a market share of 12%, is a major tyre maker in India and offers wide range of tyres to all the user segments, including the heavy duty truck and bus (T&B), LCV, tractor, trailers, PCs, motorcycles and 3-wheelers. The company currently manufactures over 7m tyres every year and has a strong presence in the replacement market. The current revenue mix stands at 79:08:13 as of Q1FY10 in favour of Replacement: OE: Exports segment compared to 70:10:20 in FY09. With a shift in the product mix towards the replacement market which is a better margin product, the margin profile is expected to be better than the average 6-7% in the last 4-5 years.

91

KEY INITIATIVES

CEAT is trying to reduce the interest cost through deploying its surplus cash in steady income financial instruments.

Low interest cost to aid profitability growth

CEAT has a total debt of Rs645 crores as of FY09 and surplus cash

(cash & cash equivalents) of Rs240 crores as of FY09.

The company has deployed Rs95 crores in fixed deposits at 12% p.a.

This is likely to reduce the net interest cost for the company.

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JK Tyre

93

FINANCIALS

18191312ROCE

5513NPM (%)

131369OPM (%)

19401743190665Net Profit (Rs. Mn)


38348348614922128140Sales (Rs. Mn)


JK Tyres is expected to reach about Rs. 3800 crores in FY-11 and its ROCE is expected to be around 18-20%.

94

PRODUCT MIX MATRIX

MHCVs constitute about 71% of the overall revenues of JK Tyres..

71%

10%

10%

9%

MHCV

LCV

Passenger Carsand MUVs

Others

95

KEY INITIATIVES

JK tyres is setting up a huge facility in Tamil Nadu with an investment of about Rs.1600 crores.

JK Tyre to set up a new production facility in Tamil Nadu

JK Tyres proposal for setting up a new production facility in

Tamil Nadu has been cleared by state government.

The new facility would attract around Rs 1,600crore of

investments and is expected to generate around Rs 2,000crore of

revenue during the financial year 2013-14.

96

KEY INITIATIVES

The company is also setting up facilities in karnataka and is also looking for inorganic growth by acquiring a Mexican company.

JK Tyre announces Rs 1,200crore expansion planThe company is planning to invest Rs 1,200crore over the next three-four years for capacity expansion, which includes setting up a new plant in Karnataka with an investment of Rs 800crore to fulfill the demand for quality tyres.Recently, the company completed a Rs 315-crore expansion project to increase truck and bus radial tyre capacity from 4 lakh to 8 lakh tyres per annum. The company's new investment in Karnataka is for the manufacture of truck, bus and car radials to cater to both domestic and international markets as part of its long-term growth strategy.Earlier, the company was planning to take the inorganic route for expansion in the global markets. Last year, JK Tyre had expanded its presence in the Mexican market by acquiring Tornel for Rs 270crore.

97

KEY INITIATIVES

The company is planning to increase its share of OEM business which is only 5% of their total business till recently.

JK Tyre & Industries is planning to triple direct supply of truck and bus

radial tyres to OEMs

The company is planning to triple direct supply of truck and bus radial

tyres to major companies like Tata Motors and Ashok Leyland in the coming

two years.

The companys sales to original equipment manufacturers (OEMs) are only

around 5% of its annual total production, while the rest goes to the after

sales market.

The company intends to increase this to 15% within the next 24 months.

The company aims to take the opportunity to tap the market offered by

OEMs with companies like Tata Motors and Ashok Leyland increasing the

use of radials.

analysis of indian tyre industry

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