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Analysis of the Tyre Industry

Analysis of the Tyre Industry

Project Report On

Sector analysis of the Tyre Industry

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF DEGREE OF MASTERS OF MANAGEMENT STUDIES (MMS) FROM THE UNIVERSITY OF MUMBAISUBMITTED BY Mukesh R. Gehani

MMS FINANCE

BATCH: 2007-09

Under the guidance of

PROF. P L ARYA

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES & RESEARCH

SHRISHTI, SECTOR 1, MIRA ROAD (E), MUMBAI 401104

CERTIFICATE This is to certify that Mr. Mukesh R. Gehani, student of N.L. Dalmia Institute of Management Studies and Research, has successfully carried out the project titled SECTOR ANALYSIS OF THE TYRE INDUSTRY, under my supervision and guidance as partial fulfilment of the requirements of MMS course, Mumbai University Batch 2007-2009Prof. P.L. Arya

Prof. P.L. Arya Project Guide

DirectorDate: Place: MUMBAIACKNOWLEDGEMENT THE SUCCESS OF ANY PROJECT IS THE RESULT OF HARD WORK & ENDEAVOR OF NOT ONE BUT MANY PEOPLE AND THIS PROJECT IS NO DIFFERENT.

I TAKE THIS AS A PROSPECT TO AVOW THAT IT WAS AN ACHIEVEMENT TO HAVE SUCCEEDED IN MY FINAL PROJECT, WHICH WOULD NOT HAVE BEEN POSSIBLE WITHOUT THE GUIDANCE OF PROF. P. L. ARYA (DIRECTOR N. L. DALMIA INSTITUTE OF MANAGEMENT STUDIES & RESEARCH) MY PROJECT GUIDE AT NLDIMSR.

I ALSO EXPRESS MY APPRECIATION AND GRATITUDE TOWARDS ALL THE FACULTY MEMBERS AT N.L. DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH FOR MAKING THE M.M.S. DEGREE AND THIS PROJECT A MEMORABLE LEARNING EXPERIENCE.

FINALLY I AM THANKFUL TO ALL MY FRIENDS, FACULTY MEMBERS AND STAFF WHO HAVE GIVEN THEIR FULL SUPPORT IN COLLECTING THE REQUIRED INFORMATION AND CONTINUOUS HELP DURING THE PREPARATION OF THE PROJECT.

MUKESH R. GEHANI

MMS FINANCE

Sr. No.TopicsPage nos.

1Executive Summary

1.1 Introduction

1.2 Evolution of the Tyre Industry7

8

2Overview of the Indian Tyre Industry11

3Radialisation12

4Tyre Retreading13

5Statistics

5.1 Total Tyre Production in India

5.2 Categorywise Tyre Production in India5.3 Categorywise Exports of Tyres16

18

19

6Raw material

6.1 Overview

6.2 Raw material availability22

23

7Government Policy24

8Regional Trade agreement25

Table of Contents

Table of Contents

Sr. No.TopicsPage nos.

9Marketing27

10Tyre Technology30

11Factors to be considered in selecting tyre for vehicle36

12Peculiar Features of the Tyre Industry37

13Michael Porters five forces model38

14SWOT Analysis41

15Key Players

15.1 JK Tyres & Industries Ltd.

15.2 MRF Tyres Ltd.

15.3 Apollo Tyres Ltd.

15.4 Ceat Tyres Ltd.43

47

48

50

16Sector Specifics52

17Sector Trends53

18Outlook53

Table of ContentsSr. No.TopicsPage nos.

19Valuation

19.1 Relative Valuation

19.2 FCFF

19.3 FCFE55

56

62

20Results68

21Conclusion69

22Bibliography72

1. Executive Summary

1.1 Introduction

The Indian Tyre Industry produced 736 lakh units of tyres (11 lakh tonnes) garnering Rs. 19000

crores in FY07. MRF Ltd. was the market leader (22% market share) followed closely by Apollo

Tyres Ltd. (21%). The other major players were JK Tyre & Industries (18%) and Ceat Ltd.(13%).The Indian tyre industry is characterized by its raw material intensity (raw material costs account

for approximately 70% of operating income), capital intensity, cyclicality, fierce competition among the top players, low bargaining power and resulting low margins. The top players are now focusing on branding their products and strengthening their distribution network so as to increase their market share.

The industry derives its demand from the automobile Industry. While OEM market offtake is

dependent on the new vehicle sales, replacement market demand depends on the total population

of vehicles on road, road conditions, vehicle scrapping rules, overloading norms for trucks, average life of tyres and prevalence of tyre retreading.

The main category of tyres produced in the country is that of Truck & Bus tyres. These tyres

accounted for 57% of the total tyre tonnage production in FY07 followed by LCV tyres which

accounted for 9% of the total tyre tonnage production. Approximately 53% of the total tyre

tonnage offtake was by the replacement market, 31% by OEM and 15% by the export market in

FY07.

The industry tonnage production registered a 5 year CAGR of 9.69% between FY 02-07. The largest category of Truck & Bus tyres recorded a 5 year CAGR of 7.85% (slower than the industry) while Light Commercial Vehicle (LCV), motorcycle and car tyre categories grew at 15%, 16% and 14% respectively (faster than the industry). Off the road (OTR) tyre category (customized tyres) which fetch a higher margin compared to other tyre categories, is the fastest growing category. The OTR tyre category has registered a 5 year CAGR of over 20% in the last five years. Most of the top players are increasing their capacity for the production of OTR tyres so as to improve their product mix, this being a high margin product.

The exports from the country clocked a CAGR of 13% in unit terms and 18% in value terms in the period FY 02-07. Most of these tyres that are exported are of cross ply design. With radialisation catching up in some of these markets, the Indian manufacturers will need to graduate to production and export of radial tyres so as to protect their share in the export market.

Radialisation of tyres is still minimal in India. Only the car tyre market has moved to radial tyres

(95%) but in all other categories, cross ply tyres are still preferred. Poor road conditions,

overloading in trucks, higher cost of radial tyres and poor awareness of the tyre users are the main reasons for the non transition of the domestic market to radial tyres. However, going ahead

radialisation in truck & bus tyres may increase due to governments focus on infrastructure

development.

1.2 Evolution of the Tyre IndustryThe achievements of the Indian tyre and rubber industry have been an unheralded success story. It is perhaps the only industry in India to have achieved an average annual 6.5 percent growth rate for almost 44 years, since 1960.aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa

The country's rubber industry got off to a very modest start in Calcutta in 1936 but India is today the world's 4th largest rubber consuming country, with rubber consumption of over 1 million tones (1,065,020 tonnes) including 50 percent of reclaim rubber as pure polymer. China is currently the world's largest consumer followed by the US and Japan. Despite the high volume of consumption, India's per capita rubber consumption is still under 1kg, compared to an average of 12 kilos in Europe and the US and nearly 3kg in China. This underscores the tremendous potential of the rubber industry with the country's increasing prosperity and industrialization.

Another unique factor of the Indian rubber industry is that for the past few years it has been the world's 4th largest producer of natural rubber after Thailand, Indonesia and Malaysia. However, in terms of production efficiency, India is far ahead of the other three major rubber producing countries in terms of yield per acre. This can be attributed to the country's highly skilled research scientists and the outstanding work done by the Rubber Board of India, under the Ministry of Commerce.

Till just three years ago, India was consuming all of the natural rubber it produced and in fact, had to import a quantity of the commodity as well. With an eye on globalization, while expecting increased output from the Indian rubber plantation industry, the Rubber Board decided to establish India's position as a regular exporter of natural rubber. It has succeeded beyond expectations, with the export of nearly 76,000 tonnes in the financial year ending March 2004. Strong natural rubber exports have also helped to stabilize the domestic prices of natural rubber.

Similar to the case in all industrialized nations, India's automotive tyre sector is the major user, at 53 percent, of natural rubber. The country's automotive tyre sector has also been a remarkable success. Practically every conceivable type of tyre is manufactured in India today, by almost 40 companies ranging from giants to small-scale enterprises. Today, seven Indian tyre companies feature in the list of the world's top 75 tyre manufacturers. According to the latest rankings based on 2003 sales, MRF (with sales of US $537.3 million) is ranked at No. 15 followed by Apollo at No. 17 (sales of $496 million), J. K at No. 18 ($455 million ), Ceat at No. 24 ($318 million ). They are followed by Birla Tyres at No. 52, Metro Tyres at No. 68 and TVS Srichakra at No. 75. In the fiscal year ending March 2004, the turnover of India's automotive tyre industry was Rs. 13,500 crore (almost $3 billion), with exports of Rs. 1400 crore ($318 million) to over 70 countries, including the US and Europe. The industry's total output of 54.27 million tyres signifies capacity utilization of 85 percent of the installed capacity of 60 million.

Since the mid-1980s, Indian tyre companies have made major efforts to established a presence in overseas markets through their exports. They have thus been able to import duty free raw materials and remain competitive in the international market, while reducing their dependence on the domestic local natural rubber market. While some Indian tyre majors export nearly 30 percent of their total tyre productions, about 20 percent of all locally manufactured tyres are exported in total.

Dunlop Tyres of the UK, through its Indian subsidiary, was the country's first major tyre manufacturer, with a plant in Calcutta. It led the way for Firestone of the US, which established itself in Bombay and later for Goodyear and Ceat of Italy, which were also Bombay-based. It was only in the early 1960's that Indian tyre companies (MRF, Incheck and Premier Tyres) broke the monopoly of the foreign tyre makers. Modi Rubber followed in 1975, after which Apollo Tyres became a serious player. Meanwhile, the Karnataka state government set up Vikrant Tyres in Mysore in technical collaboration with the UK-based Avon Tyres. Since then, Premier Tyres has been taken over by Apollo Tyres and Vikrant Tyres by J. K. Tyres.

With the liberalization of the early 1990's came a short-lived joint venture (South Asia Tyres) between Ceat and Goodyear, after which the Japanese tyre giant Bridgestone Corporation made its foray into the Indian market with the Tata Group. Within five years, Goodyear and Bridgestone took over full control of their joint venture companies, by buying out their local partners Ceat and the Tata Group respectively.

With enormous strides being made internationally by global tyre majors due to their vast R&D expenditure, it is naturally difficult for Indian tyre companies to manage without technology input. While J. K. Tyres has a technical collaboration with Continental AG of Germany (the world's number 4) and Birla Tyres with world No. 5 Pirelli, Apollo decided in November 2003 to enter into an agreement with French tyre giant Groupe Michelin, the world's number 1, to set up a joint venture project near Pune. Michelin has also invested in 26 percent equity in Apollo Tyres. Other Indian tyre companies manage with in-house R & D and by using the expertise of tyre experts from Europe and the US, who have taken early retirement from their earlier jobs.

With the Indian economy set for a growth rate of around 8 percent commencing 2005/2006, and with the massive increase in infrastructure developments and the $18 billion boost for highway and road construction, the Indian tyre industry is set for an average annul growth rate of at least 8 percent. It is mature enough to withstand the threat of cheap imports arising from possible Free Trade Agreements with countries like Thailand. The other challenge facing the Indian tyre industry is the high import duties of raw materials, compared to its competitors in the rest of Asia. But backed by the rising demand of the country's booming automobile sector, which crossed the 1 million sale mark in 2004, the Indian automotive tyre sector, and indeed the rubber industry, is set for an even brighter future.2. Overview of ITI

Financial Year 2007-2008 (Est.)

Turnover of Indian Tyre Industry Rs. 20,000 Crores

Tyre Production (Tonnage)11.35 lakh M.T.

Tyre Production All Categories (Nos.)811 Lakh

Tyre Export from India (Value) :Rs. 3000 (est) crores

Number of tyre companies:43

Industry Concentration10 Large tyre companies account for over 95% of total tyre production.

Radialisation Level - Current (as a % of total tyre production) Passenger Car tyres: 95% Light Commercial Vehicles: 12%Heavy Vehicles ( Truck & Bus ): 3%

Calendar Year 2007 (Est.)

Turnover of Indian Tyre Industry US $ 4600 Million

Installed Capacity (Nos.)85 Million

Capacity Utilitsation87%

Total Tyre Production (Nos.) 78 Million

Total Tyre Import (In 000 Nos.)2077

Government Policy

Tyre Industry Delicenced since 1987

Export (of tyres and tubes)Freely allowed

Import (of new tyres and tubes)Freely allowed Since 2001 except Truck / Bus (Radial Tyres), which is in the Restricted List from 24th Nov. 2008 onwards.

Import Policy for Used / Retreaded tyres: Restricted Since April, 2006

3. Radialisation'Radialisation' in India - Current Status & Future Trends "Rate of radialisation is actually an index of the status of road development, vehicle engineering and the economy in general". Notwithstanding the problem areas, constraints and limitations, the tyre companies have kept pace with the technological improvements that radialisation signifies and offer state-of-the-art product (tyres), comparable to the best in the world.

Radialisation can be aptly classified as the most important innovation in tyre technology. Despite its several advantages (additional mileage; fuel saving; improved driving) radialisation in India earlier did not catch on at a pace that was expected, since its introduction way back in 1978. This could be attributed due to several factors, viz. Indian roads generally not being suitable for ideal plying of radial tyres; (older) vehicles produced in India not having suitable geometry for fitment of radial tyres (and hence the general, and wrong, perception that radial tyres are not required for Indian vehicle; unwillingness of consumer to pay higher price for radial tyres etc. However, the situation has radically changed in recent years, especially for the passenger car tyre segment where radialisation has crossed 97% mark and is expected to reach 100% in two to three years. In the Medium and Heavy Commercial vehical segment current level of radialisation is upto 4%, and that in the LCV segment is estimated at 15%.

A few years back a beginning was made in Radialisation of truck and bus and LCV tyres and this process is gaining momentum.

Future of Radialisation

The future of radialisation will be governed by the following factors:

Cost - Benefit Ratio

Road Development

Overload Control

User Education

Retreading Infrastructure.

4. Tyre RetreadingRETREADING INDUSTRY IN INDIA

In the manufacture of a new tyre, approximately 75%-80% of the manufacturing cost is incurred in tyre body and remaining 20%-25% in the TREAD, the portion of the tyre which meets the road surface. Hence, by applying a new TREAD over the body of the worn tyre, a fresh lease of life is given to the tyre, at a cost which is less than 50% of the price of a new tyre. This process is termed as 'tyre retreading'.

However, the body of the used tyre must have some desirable level of characteristics to enable retreading. Retreading cannot also be done if the tyre has already been over used to the extent that the fabric is exposed/damaged. Retreading could be done more than once. Types of Retreading

Retreading can be done by the following two processes:

1. Conventional Process (also known as 'mould cure' or 'hot cure' process) - In this process a un-vulcanized rubber strip is applied on the buffed casing of the tyre. This strip takes the pattern of the mould during the process of vulcanization;

2. Precure Process ( also known as 'cold cure')- in this process a tread strip, where the pattern is already pressed and precure is applied to the casing. It is bonded to the casing by means of a thin layer of specially compounded uncured rubber (known as cushion or bonding gum) which is vulcanized by the application of heat, pressure and time.

The present all India pattern, by type of retreading, is as follows:

Precured - 50%, Conventional 50%.

Retreading is primarly done in the Truck and Bus trye segment. On an average a Truck/Bus trye is retreaded 1.5 times.

At present only 3-4 large companies are in the organized sector of tyre retreading .Organized sector is classified as that comprising of companies which operate through the franchisee route.

International vs. Indian Experience in Tyre Retreading : Similarities & Differences

Similarities As is the experience in other parts of the world, tyre retreading in India has gained greater acceptance in the commercial segment, especially truck/bus and light commercial vehicle (LCV) tyres, due to operational savings.

The share of passenger car tyre retreading is on the decline due to several factors, viz. fitment of radial tyres as OE fitment giving increased mileage (encouraging owners to go in for new radial tyres at the time of replacement, strong preference of improved aesthetics of new generation of passenger cars (and hence new tyres) and above all, a growing concern for safety (due to driving at increased speeds. DifferencesIn the developed countries retreading, by and large, is only through precured methods, whereas the share of hot/conventional retreading in India is high 50%, with the share of hot/conventional retreading in select segments, like farm tyres, being considerably higher.

Expected Future Trends in Tyre Retreading in India

Tyre retreading in the commercial vehicle segment is poised for growth in the future. This growth will be aided by the following favourable factors and major developments taking place:

Increased level of Radialization in the commercial vehicle segment (due to reduced incidence of overloading of commercial vehicles);

Growth in and increased share of multi-axle trucks (with the catching up of the concept of 'hub & spoke' transportation, long distance movement of road freight will be by multi-axle trucks whereas distances within and around the cities will be catered by smaller commercial vehicles);

National Highway Projects, especially Golden Quadrilateral Project and Highways connecting North-South and East -West corridors (coupled with reduction in overloading and improved condition of road network, higher level retreading will offer added financial benefits).

5. StatisticsPast TrendsTOTAL TYRE PRODUCTION IN INDIA

F.Y. 1994 - 95 T0 2007 - 08 (in 1000s)

CATEGORY1994 - 951995 - 961996 - 971997 - 981998 - 991999 - 20002000 - 01

Truck & Bus7309769680958095791389698612

Passenger Car3283332438884263457160546813

Jeep78088110981342124712831155

Light Comml. Veh. (L.C.V.)1133117718331903191719802108

Tractor Front93397610401075108512031186

Tractor Rear562663683785839903852

Tractor Trailer608686360214223295277

A.D.V.759673581528593589511

Scooter879198539545957710975101409385

Motor Cycle34103788445755827277927511196

Moped771833795400234516119

Industrial899566143137172219

O.T.R.39363037373638

Aero18700000

TOTAL28485306883247133907370484141542471

CATEGORY2001 - 022002 - 032003 - 042004 - 052005 - 062006 - 072007 - 08

Truck & Bus847498631082111092119411236713137

Passenger Car74818544995911862136051426416437

Jeep1247138414401462127213681467

Light Comml. Veh. (L.C.V.)2352284432713945452948205320

Tractor Front1150112511481311138317541814

Tractor Rear7858258421096113412961234

Tractor Trailer320470415408596823886

A.D.V.488456295197325381409

Scooter85479875927499929519964311604

Motor Cycle12275156541668818127210532607927921

Moped135185168124550*0*

Industrial214309295377514635733

O.T.R.46517489106115141

Aero0000000

TOTAL435145155855469060082660327354581103

*wef April 2006 Moped tyre production included in Scooter Category

Current StatisticsCategorywise Tyre Production in IndiaFinancial Year 2007-08 & 2008-09(April-September)

(In Lakh Nos.)

Tyres for:2007-082008-09% Change

Truck & Bus65.5767.934

Passenger Car80.0688.3610

Jeep7.407.380

Light Commercial Vehicle25.1727.8611

Tractor Front9.1710.3213

Tractor Rear6.307.2816

Tractor Trailer4.424.29-3

Animal Drawn Vehicle1.491.511

Scooter / Moped 55.6550.95-8

Motor Cycle134.11153.4914

Industrial3.313.444

Off the Road (OTR)0.690.7712

Total393.34423.588

Categorywise Export of TyresFinancial Year 2007-08 & 2008-09(April-September)

(in Nos.)

Category2007-082008-09% Change

Truck & Bus12809391061929 -17

Passenger Car540745530372 -2

Jeep23206018 159

Light Commercial Vehicle803280924642 15

Tractor Front78104307 -45

Tractor Rear3076123233 -24

Tractor Trailer865017064 97

Motor Cycle164105193466 18

Scooter22650625081511

Implements2009 309054

Industrial7704 4285-44

OTR22634227420.5

ADV300-100

Antique000

Total30974933041963-2

Exports

Export Realisation/Value

YearValue (Rs./crores)% ChangeCAGR

1993-946062211%

1994-9568012

1995-967196

1996-9783216

1998-989079

1998-99808(-)11

1999-008647

2000-01119038

2001-021100(-)8

2002-03125014

2003-04146017

2004-05183426

2005-06238329

2006-07 285020

2007-08 (Est.)30005

Average Annual Compound growth rate in exports during last one decade is 11%.

Categorywise Tyre Exports -2000-01 to 2007-08

[ Nos.]

CATEGORY2001 - 022002 - 032003 - 042004 - 052005 - 062006 - 072007 - 08

Truck & Bus180520321414382231552503956240875922760492431545

Passenger Car287547364514591494102456110528749660461091715

Jeep40 2022039188514207461

Light Commercial Vehicle6106927008689629721130908139081415992301621880

Tractor Front23431206981899018202134081107817072

Tractor Rear51218722638975884684988075618666644

Tractor Trailer444852144836863833866517468

Motor Cycle3301934088473336271084908151677322630

ADV17020000030

Scooter433914996612072520265628998432053645338

Implements15758914365582096244740455637

Industrial155702071610702988573031154312777

OTR21468290792116823375334804308545919

Antique2894000000

TOTAL2910845344366541029235067038538750254495606094116

6. Raw Material6.1 Raw Materials of Tyre Industry - Overview (FY 2007-08)Tyre Industry is highly raw-material intensive. Raw materials cost accounts for approx. 62% of tyre industry turnover and 70% of production cost

Given below is the composition of raw-materials as a percentage (%) of Total Raw Material Cost:

Natural Rubber

41%

Nylon Tyre Cord Fabric

18%

Carbon Black

10%

Rubber Chemicals

5%

Butyl Rubber

5%

PBR

6%

SBR

5%

Others

10%

57% of total Natural Rubber consumption is by the Tyre Sector, balance by rubber based non-tyre industries.

Total weight of raw-materials consumed by tyre industry 13.39 Lakh M.T.

Total Cost of Raw Materials consumed by tyre industry Rs.12,500 Crores

6.2 Raw Material Availability

No domestic Production of Butyl Rubber, Polyester Tyre Cord and Styrene Butadiene Rubber of tyre grades, i.e., 1502 and 1712.Production of Nylon Tyre Cord Fabric, Polybutadiene Rubber, Rubber Chemicals, Steal Tyre Cord insufficient to meet domestic demand.Tyre industry imports raw materials on account of the following factors:duty-free imports permitted against export of tyres; domestic demand not sufficient to meet complete requirement; technical and commercial considerations; business strategy to have multiple sources of supply.

7. Government PolicyTrade Policy - Tyres & Raw Materials

All categories of tyres can be exported freely

All categories of new tyres can be imported freely except Truck / Bus (Radial Tyres), which is in the Restricted List from 24th Nov. 2008 onwards.

No WTO Bound Rates for Tyres & Tubes

All raw materials required for the manufacture of tyres can be imported freely (OGL) except Carbon Black, which is in the Restricted List from 24th Nov. 2008 onwards.

Custom Duties : Tyres

Normal rate of Basic Customs Duty (MFN)10%

Preferential/ concessional Customs Duty under Trade Agreements

* Asian Pacific Trade Agreement (formerly known as Bangkok Agreement) 8.60%

* Indo Sri Lanka Free Trade AgreementNil

* SAPTA ( SAARC Preferential Trading Agreement)Nil*5%**

* India Singapore Comprehensive Economic Cooperation Agreement (CECA) 2.5%

For details please refers to Preferential Tariff Table for Tyres/ Raw-Materials of Tyre Industry (Ref. Section on RTAs)Excise Duty: Tyres

All categories of Tyres14%

*When import from Bangladesh, Bhutain, Maldivies and Nepal.** When import from Pakistan and Sri Lanka.

8. Regional Trade AgreementsREGIONAL TRADE AGREEMENTS (RTAs) AN OUTLINE WITH REFERENCE TO TYRE INDUSTRY

Trade Agreements are broadly on the following lines: RTAs (Regional Trade Agreements, can be bi-lateral or plurilateral)

RTAs aim to establish a Preferential Trade Area (PTA) and/or a Free Trade Area (FTA)

Framework Agreement (setting the ground for establishing a Free Trade Area) generally precedescomplete FTA.

In case of simultaneous applicability of more than one RTA, trade can take benefit only under one Agreement

RTAs are WTO compatible.

The following are the important and integral components of any RTA:

Rules of Origin : prescribing minimum value addition in exporting country; Preferential/Concessional Rate of Import Tariff: specified as extent/percentage of concession on the MFN rate (i.e. applied/basic rate of normal customs duty);

RTAs have assumed added significance due to slowdown of trade talks at multilateral platforms (WTO), each industry/sector trying to source/sell globally, intense competition,progressive reduction in import tariffs etc.

Tyre Industry Related (key features and practical dimension) The following RTAs concern tyres and raw materials of tyre industry:

a) Asia Pacific Trade Agreement (Bangkok Agreement) Tyres and inner tubes can be imported from signatories to the Bangkok Agreement (please see list attached) at concessional rate of customs duty for signatories tothe Agreement and specific details, please refer to the statement given below).

b) Indo-Sri Lanka Free Trade Agreement Tyres can be imported at nil customs duty.Natural Rubber is in the Negative List of India. Several other raw-materials of tyre industry are eligible for duty concessions of varying magnitude.

c) SAPTA (SAARC Preferential Trading Agreement) Truck & Bus, LCV and Jeep tyres and select raw-materials of tyre industry can be imported into India at concessional/Nil rate of duty from signatory countries, (viz. Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka) Reference statement given below.

d) India-Singapore Comprehensive Economic Co-operation Agreement: Truck and bus, passenger car (bias) and other tyres can be imported into India at concessional custom duty rate of 5%. e) India-Nepal Trade Treaty Select raw-materials of tyre industry eligible for concession in customs duty when imported from Nepal under the Treaty. For details please statement of customs duty concessions, given below:

9 . MarketingCategorization

Segmentwise Tyre Supplies (2007 - 08) Tyre supplies are broadly to the following segments:

Replacement Market (aftermarket)

Original Equipment Manufacturers (OEMs), i.e. vehicle manufacturers

Export

State Transport Undertakings (STUs) (primarily for Bus tyres)

Government PurchasesEstimated supplies of key tyre categories to various segments are given in the following table:

Category Production(Nos.)2007-08 Segmentwise Percentage supply(as % of Total Production)

ReplacementMarket OEMs Export

Truck/Bus 13136592 61* 20 19

Passenger Car / Jeep 1790481245* 49 6

LCV 55319922 43 27 30

Tractor Front 1814391 61 38 1

Tractor Rear 1233611 39 56 5

Scooter / Moped11603930 48 48 4

Motor Cycle 27920746 52 47 1

* Includes supply of 1.37% of Truck /Bus Tyres and 0.09% Passenger Car tyres to Governments/STUs

Dealers

Dealers : Multi Brand (different companies); Single Brand; Company owned exclusive showrooms.

Dealers of commercial vehicle tyres and passenger segment tyres are different, though some overlap does exist.

Dealers of commercial vehicle tyres also financing purchase of tyres for commercial vehicles and agricultural tyres.

Dealers are also an important link between the tyre companies and the end consumers and replacement / warranty schemes are implemented by the companies through the dealers.

Distribution

The distribution system consists of distributors, followed by large dealers and also small/sub dealers. Some tyre companies also follow a system of appointing C&F agents, in place of distributors.

Replacement Market: Tyre companies sell tyres through widespread dealer distribution net-work ( over 5000 in the country ), either through exclusive dealer of the companies or through multi-company dealers.

OEM: Direct supply by tyre companies through negotiations.

STU: Direct supply by tyre companies through tender system.

Government: Direct supply by tyre companies through tender system.

Export: Through dealers in the exporting countries.

Import: Some tyre companies also import tyres for the domestic market. Such imports are generally from the principal company overseas or from technical collaborator or from tyre companies with which it has an alliance for a particular line of tyres, for example, passenger car tubeless tyres;

With tyre import freely allowed (except Truck / Bus (Radial Tyres)) import of various categories of tyres is also taking place.

Tyres are imported by importing agents and then marketed through the dealers who are marketing Indian tyres also.

10. Tyre Technology

1.Tyre with Cotton (reinforcement) Carcass :

In the starting phase of proper Bias or Cross ply tyre, cotton plies were used as main reinforcing material (end of 19th and early 20th Century). Cotton reinforcing material had inherent problems of low strength and high moisture regainer. Leading to large number of plies to get the requisite casing strength for the tyre weight of the tyre and poor heat dissipation. This, in turn, gave an adverse impact on Tyre weight and buck rendering poor performance.

2.Tyre with Rayon (reinforcement) Carcass :

With the development of viscose and rayon the strength of reinforcing material went up and found application in tyres in early 20th Century. Due to higher strength of rayon it was possible to reduce number of plies and weight of the tyre. Since less number of plies were needed to match cotton strength, concept of ply rating developed. It was also possible to have higher ply ratings now.

3.Tyre with Nylon (reinforcement) Carcass :

Persuent to development and introduction of Polymide (Nylon) the strength and flexing behavior of reinforcing materials improved substantially resulting in further reduction of number of plies, consequently the weight of the tyres. This development substantially improved the heat and impact resistance of the carcass leading to better tyre performance and higher durability. Nylon casing gave a boost to retreadability. Thus effective cost of the tyre in operation became much more economical.

Development of Tyre Technology due to change in Reinforcing material is basically in the case of Cross Ply or Bias Tyres. Bias tyre has cotton, Rayon or Nylon Cords, bound as plies and each ply (i.e. Cords) cross each other at a definite angle anchoring at the bead.

4.Radial (Construction) Tyre - Textile/Textile belt (Rayon/Nylon/Polyester) :

Inspite of continuos development in Bias Tyre Technology, inherent problem of high heat development and poor life remains a continuos challenge.

In early 1950s new concept of Tyre design was developed namely "RADIAL" wherein plies were made highly flexible by keeping the cords at 90 and in order to improve tyre life, inextensible (stiff) belts were placed on the top of the Carcass under the tread. This led to stiffer tread portion, leading to higher Tread life (Mileage) and much more comfortable ride due to flexible carcass. This was the beginning of 'Revolution' in tyre technology.

Initially Radial tyres were introduced with Casing Plies as well as belt material of textiles. Continuous development in Radial Concept led to further improvements as explained below.

5.Radial (Construction) Tyre - Textile/Steel belts :

Once Steel Tyre cord got developed it found its immediate application in Belt material, keeping casing plies of Textile, to further improve durability.

6.Radial (Construction) Tyre - Textile/Glass Fibre Belt :

Similarly, development of glass fibre which is practically inextensible, led to application in passenger and Light Commercial Vehicle tyres with Textile Casing, providing corrosion free radial Tyre belt material.

7.Low Aspect Ratio (Cross Ply or Bias) Tyre :

A new concept of low aspect ratio (ratio between section height and section width) of the tyre in cross ply construction was introduced for higher speed and better performance.

8.Tubeless Tyre (Cross Ply) :

Concept of tubeless tyre in cross ply construction wherein an inner liner compound based on chlorobutyl or Halo Butyl which is impermeable to gases, was introduced eliminating the usage of tubes. This concept could not find sustained application in India due to bad roads and poor handling/maintenance of Rims other than in OTR range. However, Tubeless tyres are produced for Export Market.

Gradually this concept will become fully acceptable with the advent of new generation vehicles and improved service facilities.

9.Radial (Construction) Tyre - Textile/Aramid Belt :

Due to poor roads and inadequate vehicle maintenance, Steel belts had corrosion problem due to cuts and chips in the tread. This led to trials with Aramid belt (Textile material with very high strength and Low extensibility).

However, this could not find any sustained use.

10.Radial (Construction) Tyre - All Steel :

In developed countries, Radial Truck/Bus tyres use steel wires in casing as well as in Belts to achieve the optimum advantage of radial construction. In India also this construction was tried since late 1970s by Indian Companies using tyres of collaborators. This could not succeed.

Indian companies started experimentally since late 1980s (themselves or with collaborators) which continues and the product has found gradual entry into low load application.

11.Tubeless Tyre - Radial Construction :

As in the case of Bias Tyres, the concept of tubless tyre was extended to radial construction and introduced in later half of the century in Developed countries. A tubless tyre not only has tube eliminated but provides for smoother ride and vehicle handling. This is slowly entering into the Indian market with the advent of new generation vehicles.

12.Low Aspect Ratio - Radial (Construction) Tyres :

The concept of low aspect ratio tyre, after gaining the experience from cross ply construction, was introduced in Radial construction also. The present trend of tyre development for high speed tyre is being pursued in this direction. Tyres with aspect ratio upto 0.65 are being manufactured today enabling Indian Industry to adopt high speed rating e.g. 190 kmph, 210 kmph etc.

13.High Performance Passenger Car Radial Tyre :

High Performance Passenger Car radial tyres not only have very low aspect ratio (0.65 - 0.35) but also have substantial changes in construction. Very low aspect ratio enables use of large diameter wheels which, in turn, allows better stability at high speeds. The tyre contour is based on the cross section of a fully loaded tyre and this reduces the energy losses within the tyre and reduced dynamic fatigue. High performance Passenger tyres are made with speed rating upto ZR indicating speed capability in excess of 240 kmph. In India, this concept has not yet been found popular though customers are demanding tyres upto 220 kmph (V Rating).

14.Run Flat (Puncture Proof) Tyre - New Concept :

A new concept of run flat tyre (puncture proof) was introduced by Continental in early 1980s wherein the basic construction of the rim and bead was changed by which on loosing air the tyre tread sits on the rim thus enabling one to drive at a reasonable speed for a long distance till the flat tyre could be attended to.

This revolutionises the OE need for a new vehicle as the Stepney tyre can also be dispensed off. However, there is very slow progress of this concept. This has not been tried in India so far.

15.Fuel economy/low rolling resistance tyre - special compound :

Tremendous work is being carried out towards the development of tyres with modified special compounds, besides tyre construction aspect, to reduce rolling resistance thus gaining in fuel consumption. However, the ultimate advantage is obtained by Radial Construction which is gradually findig its well deserved place in Indian Industry.

16.Green Tyre (Environment Friendly) :

This is the latest development in Passenger Radial tyres. These tyres have a rolling resistance appreciably lower than normal tyres. These tyres have high proportion of non petroleum based material used in their construction and are called environment friendly or 'green tyres'.

This concept is well perceived and will gradually find its application world over, including India.

11. Factors to be considered in selecting tyre for vehicle

1. Vehicle Type and Use

When specifying a tyre, analyze the size and type of the vehicle to determine whether it is better to use standard original equipment (OE) tyre or whether optional tyre should be selected. Options in tyre sizes are limited by vehicle clearances and rim widths. Also one has to consider the proposed type of operation to determine tyre service conditions. For instance a dump truck tyre may be used to haul gravel over highway from pit to the job or to haul gravel exclusively in the pit for construction. Since the operating conditions vary widely, tyres should be selected carefully to assure maximum tyre life and safety of operation.

2. Load

From the safety point of view, the overloading of tyres should be carefully avoided, otherwise dangerous conditions exists. Misapplication of tyre from the load capacity is prevented for original equipment on new vehicles, which require manufacture of motor vehicles and trailers to affix a label that include the gross Axle Weight Rating on the front and all other axles. The total load per tyre must not exceed the manufacturers specified tyre load-carrying capacities at corresponding inflation pressures for both the tyre and the rim.

3. Speed and Continuity of Operation

The right tyres used on the vehicle ensure various speeds at which the vehicle runs without discontinuance of the vehicle run.

4. Tyre/ Rim Combination

It is of utmost importance that appropriate Tyre/Rim combinations are met. These combinations are specified by the tyre manufacturer in their selection manuals and should be complied to.12. Peculiar Features of the Tyre Industry

High Capital Cost

This sector is capital intensive. A 1.5 million tyre per annum radial tyre plant costs Rs8 billion, while 1.5 million crossply tyre plant would cost Rs 4-5 billion

Distribution Network-

With typically higher margins in the replacement market, companies need to invest in brand building and distribution network, which acts as an effective entry barrier. A nation wide distribution network and strong brand recalls are factors critical to tyre sales. Domestic companies enjoy the advantage of an existing distribution network and so will however spend higher on marketing, distribution and advertising to maintain brand visibility among foreign majors.

Cyclical

Due to high minimum economic size, demand supply mismatches constantly exist. Tyre industry has a derived demand due to dependence on a cyclical auto industry. Prices of petro-based raw material and natural rubber also tend to be cyclical.

Technology Incentive

Tyre manufacturing involves sophisticated technology and now with the advent of radial tyres, technology has assumed importance in tyre manufacturing. Global spending on R & D is growing (more than Rs. 10 billion per annum by each major producer). All foreign cars introduced in India are launched on redial tyres.

Retreading

As only the outer surface of the tyre wears out, tyres are usually retreated and used again. Truck tyres are usually retreated twice, while other tyres are retreated around 4 times.

13. Michael Porters five forces model

1) Bargaining power of supplier

Bargaining power of suppliers can be segregated in two parts according to the demand of industry.

Rubber

There are two reasons behind this being low first one is most of the tyre firms get150 days credit for buying the rubber from international market which is not the case if they buy it from domestic rubber growers. And the second reason is, this credit is being offered at LIBOR, which is the London Inter-bank Offered Rate. It is the rate of interest at which banks borrow funds from other banks.

Other Petro chemical based material (Carbon black, Nylon tyre cord etc.)

The power of suppliers is high in this category as India is limping back in case of Petro based raw materials like carbon black and chemicals which account low in quantity terms but are high cost generators. Also the price of NTC fluctuates in line with the prices of Caprolactam (a petroleum derivative)-its main raw material. The prices of these materials are beyond control of tyre industry.

2) Bargaining power of buyers

This can be seggeregated into two parts as follows.

OEM's

The OEMs are always in strong position when the bargaining power of buyers is concerned. The reason behind this is most of them are having contract with their relative tyre manufacturer under which the prices of tyre remains stable for this OEM irrespective of market price. The benefits are given to them as they are buying in bulk and the relation gives the tyre firms some thing called brand association.

Replacement

The scene in replacement segment is quite reverse as the bargaining power for the replacement segment is moderate due to the fact that the buyers are not that strong as compared to OEMs. The demand in buses and truck segment is always high because of Indian poor road conditions apart from this the purchase is made in small units.

3) Threat of substitute

It is moderate or as the industry is facing opposition from retreading sector all over the globe. This cheaper option, around 20-25% of the original tyre cost, is present in developed countries since some decade back. And this is heading to wards strong position here in India too.

4) Threat of new entrants

The threat of new entrant is moderate or can be described as low because the industry is highly capital intensive and the level of technological expertise required is also highly specific.

But if we see from domestic (Indian) industry's point of view, this better can be defined as high. The reason being, global tyre industry is already seeing mergers and acquisitions in order to restructure. And as of now India and China going to be the hub of activities as far as tyre industry is concerned due to low production cost as well as other relevant benefits. So for any of the global big shot Indian company will be a good option to go for.

5) Industry rivalry

High, because gradually the overseas players are expanding their wings over Indian tyre industry and also a limited and every player is moving towards automated technology, like ERP and SCM.

Apart from the aforementioned reason, the industry is seeing high competitive scenario at present because of various reasons like rising input costs, low realizations from growing OEM segment where the vehicle manufacturers are not ready to share the burden of tyre firms, the portion of replacement pie continuously taken away by the retreading sector which is slowly but firmly rising its head and that to in high realization segment of Bus-Truck tyres and last but not the least the unorganized sector is always there to give head ache to these established players like CEAT, JK, Apollo and MRF etc.

14. SWOT AnalysisStrengths

Established brand names (key in the replacement market)

Extensive distribution networks - For example Apollo Tyres has 118 distinct offices, 12 distribution centres and 4250 dealers.

Good R&D initiatives by top players

Weakness

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 - 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 Growing Automobile Industry Increasing OEM demand Subsequent rise in replacement accounts for 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

15. Key PlayersWhile the tyre industry is mainly dominated by the organised sector, the unorganised sector holds sway in bicycle tyres. The major players in the organised tyre segment consist of MRF, Apollo Tyres, Ceat and JK Industries, which account for 63 per cent of the organised tyre market. The other key players include Modi Rubber, Kesoram Industries and Goodyear India, with 11 per cent, 7 per cent and 6 per sent share respectively. Dunlop, Falcon, Tyre Corporation of India Limited (TCIL), TVS-Srichakra, Metro Tyres and Balkrishna Tyres are some of the other players in the industry. MRF, the largest tyre manufacturer in the country, has strong brand equity. While it rules supreme in the industry, other players have created niche markets of their own15.1 JK Tyres

"Excellence comes not from mere words or procedures. It comes from an urge to strive and deliver the best. A mindset that says, when it is good enough, improve it. It is a way of thinking that comes only from a power within." - H.S.Singhania

JK tyre, a Division of JK Industries is the flagship company under the umbrella of JK Organization. The advent of JK Organization on the industrial landscape of India almost synchronizes with the beginning of an era of industrial awareness - an endeavor for self reliance and the setting up of a dynamic Indian industry. This was way back in the middle of the 19th century. And the rest that followed is history.

JK Organization has been a forerunner in the economic and social advancement of India. It always aimed at creating job opportunities for a multitude of countrymen and to provide high quality products. It has striven to make India self reliant by pioneering the production of a number of industrial and consumer products, by adopting the latest technology as well as developing its own know-how. It has also undertaken industrial ventures in several other countries.

J.K. Tyre has been at the forefront of the radial revolution in India. Since inception, we have been regularly releasing high quality, high technology products, which have withstood the test of time and are forerunners in the industry today. Our leadership position in the industry can be attributed to the mantra of offering high technology products and services to the customer. In J.K. Tyre, it is our philosophy to continuously anticipate and understand the customer requirements, convert them into performance standards for our products and services, and meet these standards every time.

This has resulted in development of many innovative products from the most modern, technologically advanced production facilities, some of which are listed below:

First manufacturer to launch "T" rated tyres in 1994-Ultima.

First manufacturer to launch "H" rated tyres in 1996-97-Ultima 210 H.

First manufacturer to launch Dual Contact High Traction Steel radials- Aqua sonic

First manufacturer to introduce India's first range of eco-friendly coloured tyres.

J K Industries Ltd. (JKI), the leader in the Indian Tyre Industry and manufacturers of well-known J K TYRE. J K Tyre along with its subsidiary Vikrant currently holds the No.1 position in the 4 Wheeler tyre segment with a market share of 20.8 %. J K Tyre and Vikrant continue to be the leaders in the commercial tyre segment which constitute 70% of the Tyre Market with the highest market share in the Indian Tyre Industry. J K Tyre maintains its dominant position in the Passenger Car Radials. J K Tyre is a preferred supplier with most of the OEMs. J K Tyre has launched several new products including recently launched Tractor Radial Tyre. J K Tyre is in the process of further expanding its Passenger Radial capacity to strengthen its position further.

A greater thrust on exports is yielding good results. J K Tyre along with Vikrant holds its No.1 position being the highest exporter of Tyres in the country with exports to over 60 countries across 6 continents. J K Tyre has tied up with a leading tyre manufacturer in China & is outsourcing tyres for its international markets. These initiatives shall be further intensified in the coming months. J K Sugar achieved growth of 31 % in the cane crushed for the season. J K Sugar is also implementing expansion. The 1st phase of capacity expansion up to 4300 TCD is already complete. J K Agri Genetics, the makers of "J K SEEDS" has continued to perform well and maintain its leadership in the Hybrid Seed Industry. The expected revival in the Indian economy, particularly the transport and automobile sector should lead to further strengthening the company's operations in the coming months. Today, JK Tyre's products compete with the best international players in the premium international bias market in more than 55 countries in 6 continents. JK Tyre had obtained international accreditation for its products in the US, Europe, South America and the Middle East.

JK Tyre, a division of the Hari Shankar Singhania group's flagship JK Industries, has increased its share in the commercial tyre market to 24.5 per cent from April to September 2001. The company's market share was 22.4 per cent during 2000-01, as per the data available with the Automotive Tyre Manufacturers Association (Atma). JK Tyre is the largest player in the commercial segment of the domestic tyre market. The commercial vehicles segment accounts for almost 70 per cent of the Rs 10,000 crores tyre market in India.

JK Tyres Plants, Head offices and regional Offices

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INCLUDEPICTURE "http://www.jktyre.com/gifs/india-map3-network.gif" \* MERGEFORMATINET 15.2 MRF TYRES

MRF TYRES, India's No. 1 tyre manufacturing company manufactures an extensive range of superior quality tyres in six production facilities in India. MRF exports its products to over 75 countries worldwide - a standing testimony to MRF's outstanding leadership JK Tyre is a leading exporter of tyres from India and roughly accounts for about 26% of the total tyre exports from India (along with its associate Vikrant Tyres Limited). The company caters to a host of impressive clients. It has signed on to be the sole supplier for auto giants like General Motors, Fiat and Ford in India.HISTORY

In 1946, a young entrepreneur, K. M. Mammen Mappillai, opened a small toy balloon manufacturing unit in a shed at Tiruvottiyur, Madras (now Chennai).In 1952, MRF ventured into the manufacture of tread rubber. And with that, the first machine, a rubber mill, was installed at the factory. This step into tread-rubber manufacture was later to catapult MRF into a league that few had imagined possible. With the success achieved in tread rubber, MRF entered into the manufacture of tyres. MRF established a technical collaboration with the Mansfield Tire & Rubber Company of USA. In 1967, MRF became the first Indian company to export tyres to USA - the very birthplace of tyre technology. In 1973, MRF scored a major breakthrough by being among the very first in India to manufacture and market Nylon tyres. Then MRF entered into a technical collaboration with the B.F. Goodrich Tyre Company of USA.MRF tyres were the first tyres selected for fitment onto the Maruti Suzuki 800 - India's first small, modern car. MRF was the clear market leader in every tyre segment.

In addition, by readers of the A & M magazine, MRF was considered as one of India's most admired Marketing Companies. Then MRF was chosen for fitment on the Daewoo Cielo, Ford Escort, Opel Astra and Fiat Uno, showing its world-class quality and appeal. A special factory dedicated entirely to the manufacture of radials was started at Pondicherry. Brands

Steel Belted Radial

MRF Radial ZVTS

MRF Radial GP

MRF Radial GT

MRF Radial VT

MRF Radial CC

Bias Ply

Legend

Estate

SW99 (ULT)

Twin Tread

15.3 Apollo Tyres Ltd

Apollo Tyres Ltd (ATL) is one of the leading tyre manufacturing companies in India. ATL manufactures automobile tyres, tubes & flaps and is well entrenched in the T&B (truck and bus) tyre replacement segment, which comprises the bulk of the market. However, its presence in the fast growing passenger car and two-wheeler segments are low. One other point of concern is the less than cordial state of industrial relations in the company. After coming out of a prolonged agitation in FY99, the companys workers in Baroda went on a strike recently. In FY2000, thanks to the upturn in the automotive segment, ATL has posted a sales growth of 17%yoy in the first nine months of the year. However, rising cost of material inputs and increased competition has put pressure on operating margins. The company has, however, succeeded in holding on to its market share by affecting a change in product mix with production of more car radials.

ATL has grown rapidly in the last decade, and from being a marginal player, it has raced ahead to become the third largest player in the tyre industry. ATL management has been quick to spot opportunities and has displayed remarkable market savvy. In FY2000, ATL has tied up with Castrol Ltd and Kotak Mahindra Finance Ltd to provide multiple product opportunities to its exclusive dealers. The management has not been found wanting when it comes to introducing new products to tap growing segments in the auto industry.

Amazing performance

A marginal player in the tyre industry a decade ago, Apollo Tyres leads the replacement market in the heavy vehicle and car radials segments. "The focus is to increase our market share to 25 per cent from 15-18 per cent in all the market segments."

Bus and truck tyres account for a lions share of the industry's revenues. Since the OE market is margin-sensitive, all the action is focused on the lucrative replacement market, especially in the heavy vehicles segment. According to Satish Sharma, product manager at Apollo Tyres, "The size of the truck tyre replacement market is 4 lakh tyres per month, and our share in that is 25per cent." Though the volume will be small, talks have been initiated with Volvo India.

Apollo Tyres is also giving MRF Ltd, the leader in the car tyres market, a run for its money. Its Apollo Excel tyres, rolled out from its Baroda plant, have received an excellent response in the marketplace, according to the company. In the OE segment MRF has been losing its hold to Bridgestone. And in the replacement market, Apollo Tyres has become a major threat. Apollo Tyres is now negotiating with Hyundai Motors and Hindustan Motors for OE sales. In the two wheeler market, Apollo is focusing on the motorcycle tyres market.

To boost sales, Apollo Tyres has tied up with Castrol India and Kotak Mahindra Finance. Apollo Tyres dealers will stock Castrol lubes and improve their earnings. The tie-up with Kotak Mahindra will facilitate sales by providing finance for tyre purchases, for the first time in India. Apollo Tyres has increased its ad budget to Rs 35 crores from Rs 25 crores earlier, in order to push sales. According to the Apollo management, the company sells 1.1 lakh of the 5 lakh car radials sold per month in India today.

At present, the company's tyres are fitted as OE in Hindustan Motors Ambassador and Contessa models, in tractors from Tafe, Punjab Tractors and Mahindra & Mahindra, and trucks made by Ashok Leyland and Telco.15.4 CEAT TYRES LTD.

Ceat Ltd, a part of the RPG Goenka group, is the second largest tyre manufacturer in the country after MRF. Ceat manufactures truck & bus, passenger car, scooter and LCV tyres. The company is a dominant player in the truck & bus and passenger car tyre segments with a market share of 14% and 17% respectively. In FY2000, Ceat did well to posting a 21%yoy sales growth in the replacement market for truck & bus tyres. It is presently focusing on catering to the fast growing passenger car and two-wheeler industry. Towards this, it is commissioning a new radial tyre factory in June 2000.

Being the second largest selling brand in India with a market share of 14.6 per cent, Ceat caters primarily to the replacement market. Due to the strong growth in the OEM sector, the share of the replacement market in the total revenue of the company has fallen. Ceat is part of the RPG group, which is diversified, with presence in major sectors like power, fertilizers, pharmaceuticals, tyres, computer, telecom, financial services etc. The group stumbled trying to grow via diverse platforms and has many companies that have turned sick. But lately the strategy seems to be one of restructuring and consolidation. The group is divided into 4 broad areas - rubber & allied products, power, electronics & telecom and chemicals. Ceats investments in its subsidiaries have also come down this fiscal which is a sign of prudence on the management.

Since inception in 1958, CEAT has been at the forefront of Indian Tyre industry. It has established itself as one of the Top Manufacturers of Superior quality tyres. Their endeavor to continually improve business processes & ensure conformance to the established quality standards has earned a high reputation with their esteemed customers. CEAT is committed to the Customers by delivery of outstanding products & services at the most affordable prices.

Amidst the rapidly changing business scenario, they have now established an additional communication platform to interact with each other. In this seamless world, they recognize the importance of linking themselves with the cyber age.

Ceat, a part of the RPG Enterprise, is planning to set up a production facility to manufacture truck radial tyres at an investment of around Rs 200-250 crore. The tyre manufacturing company is also investing around Rs 75-80 crore to expand its capacity for passenger car radial tyres. Though the life (number of months in use) of radial tyres for trucks is expected to last 35-40% longer, company officials said the tyres would cost 15-20% more. Development in the road infrastructure is cited as a major reason for possible shift to truck radial tyres. Almost the entire truck demand is now cross ply or bias ply tyres. On the passenger car radial tyres, Mr. Paul said, We plan to invest Rs 75-80 crore to ramp up the passenger car radial capacity to one lakh units. At present, the company enjoys only 6% market share in the passenger car radial market. In the two and three wheeler market, Ceat had increased its capacity to five lakh units per month during the last year (from 60,000 units) by roping in three dedicated third party manufacturers who now contribute 80% of this capacity. He said the company had drawn up plans to increase its market share in the motorcycle segment by 9% to 20% in 03-04 and consolidate its presence in the scooters segment (25% market share). We have achieved a major breakthrough by signing an OE contract with a major south-based two wheeler manufacturer. Such contracts will give boost to the two and three wheeler market.

However, the production growth in the automobile sector over the past few years should provide a boost to the replacement market in the coming years and Ceat could be a major beneficiary thereof. With the advent of multinationals like Goodyear, Michelin, Bridgestone and Continental, a major shakeout in the industry is imminent and the same could result in Ceat, which is already operating on thin margins, being hived off as a joint venture with Goodyear, 16. Sector specifics

The tyre industry is a major consumer of the domestic rubber production. Natural rubber constitutes 80 per cent of the material content in Indian tyres. Synthetic rubber constitutes only 20 per cent of the rubber content of a tyre in India. World wide, the ratio of natural rubber to synthetic rubber is 30:70. Apart from natural and synthetic rubber, rubber chemicals are also widely used in tyres.

Most of the RSS-4 grade natural rubber required by the Indian tyre industry is domestically sourced, with only a marginal amount being imported. This is an advantage for the industry, since natural rubber constitutes 25 per cent of the total raw material cost of the tyres.

The two types of synthetic rubber used in tyres are Poly Butadiene Rubber (PBR) and Styrene Butadiene Rubber (SBR). The former is used in most of the tyres, while the latter is mainly used in the radials for passenger cars. Synthetic rubber accounts for 14 per cent of the raw material cost. Unlike in the case of natural rubber, India imports 60 per cent of its synthetic rubber requirements.

Apart from rubber, major raw materials are nylon tyre cord and carbon black. The former is used to make the tyres strong and impart tenacity to it. The latter is responsible for the colour of the tyre and also enhances the life span of the tyre. Nylon tyre cord comprises 34 per cent, while carbon black accounts for another 13 per cent of the raw material cost. In India, the carbon black used is of the N660, N220 and N330 variety.

To sum up, the tyre industry is highly raw-material intensive, with raw material costs accounting for 70 per cent of the cost of production. Fortunately for the industry, the rubber and carbon black prices have taken a beating recently, which means lower costs for the tyre industry. The export-import policy allows free import of all types of new tyres and tubes. However, import of retreaded tyres, either for use or for reclamation of rubber is restricted. This has led to used tyres being smuggled into the country under the label of new tyres. Though tyre import and all raw materials for tyres except natural rubber are under open general license (OGL), only import of natural rubber from Sri Lanka is eligible under OGL.

17. Sector trends

Crossply tyres have been used in India for several decades. In these tyres, the ply cords run across each other or diagonally to the outer surface of the tyre. Rayon and nylon tyre cords are used as the reinforcing medium. These tyres can be retreaded twice during their lifetime and are hence preferred by Indian transport operators who normally overload their trucks. A vehicle with the normal carrying capacity of around 12 tonnes is usually loaded with double the capacity. Moreover, one also has to contend with the bad suspensions and bad road conditions. No wonder, 95 per cent of the tyres used in India are crossplies.

Radial tyres have their cords running radially from bead at 90 degrees angle to the rim or along the outer surface of the tyre. The reinforcing mediums used in these tyres are polyester, nylon, fibreglass and steel. Hence, these tyres are 20 per cent more expensive than the crossplies. But they have a longer life and provide lower fuel consumption. The unhealthy condition of the Indian roads has resulted in radial tyres accounting for only 5 per cent of the tyre industry as against a global trend of 60 per cent. With two-thirds of the capacity of all major tyre manufacturers being reserved for radials, this is a real cause for concern.

18. Outlook

Globally, the OEM segment constitutes only 30 per cent of the tyre market, exports 10 per cent and the balance from the replacement market. In India, the scenario is quite different. Nearly 85 per cent of the total tyre demand in the country is for replacement. This anomaly has placed the retreaders in a better position than the tyre manufacturers. Retreading is looming over the tyre industry as a colossal threat. The Coimbatore based Elgi Tyres and Tread Ltd., the largest retreader in India, is giving the tyre barons sleepless nights.

Simply put, rethreading is replacing the worn-out tread of the old tyre with a new one. The popularity of rethreading stems from the fact that it costs only 20 per cent of a new tyre but increases its life by 70 per cent to 80 per cent. Most of the transporters in India retread their tyres twice during its lifetime, while a few fleet owners even retread thrice. In their zealousness to economise costs, they overlook the reality that retreading reduces the quality of the tyre. It is highly popular in the South unlike in the North where the transporters overload their trucks and have to ply their vehicles in a rough terrain an environment in which buying a new tyre is the best option. Though retreading has penetrated 25 per cent of the tyre market, it has not made much of a dent in the rapidly growing two-wheeler and passenger car segments.19. Valuation

19.1 Relative ValuationCompanyApolloCEATFalcon(07-12)GoodYear(07-12)JK Tyre(07-09)MRF

Price (Rs)130.7158.60148.00114.8579.603106.50

Mkt cap (in crs)1879.92200.6581.21264.96326.841317.16

Book Value (Rs)25.09145.9753.1761.25119.512325.83

P/BV5.210.402.781.880.671.34

P/E29.711.3722.916.993.757.73

Growth in EPS-81.52%415.32%7.31%-12.24%308.67%116.39%

PEG-36.440.33313.45-57.151.226.64

EPS (Rs.)4.4042.726.4616.4221.21401.75

Enterprise Value (in crs)2207.01809.23220.44363.841274.612348.18

EV/EBIDTA4.582.7315.664.474.775.06

ROE17.85%28.95%3.32%27.77%12.50%17.42%

Debt460.65617.35145.780.00914.95848.09

Mcap + Debt2340.57818.00226.99264.961241.792165.25

EBIDTA (Rs. In Crores)481.50296.6414.0881.42267.29463.61

19.2 FCFFa. Apollo Tyres LtdMARKET PRICE(rs.)131.1104288

NO. OF SHARES(Cr)4.885

MV OF EQUITY640.4744449

DEBT460.65

EV1101.1244

WACC16.137%

Ke

RFR8.50%

RM21.90%

BETA0.961851

Ke21.39%

ASSUMPTION: GROWTH FOR THE NEXT 5YRS

Long term Growth Rate

AND THEREAFTER CONTINUES AT THIS GROWTH RATE

11.27%

4%dec/year1.45%

ROC equals wacc in long term16.137%

terminal roc16.137%

terminal rr24.788%

dec/year18.91%

20082009201020112012201320142015201620172018

GROWTH11.27%11.27%11.27%11.27%11.27%11.27%9.81%8.36%6.91%5.45%4.00%

RR*119.36%119.36%119.36%119.36%119.36%119.36%100.45%81.53%62.62%43.70%24.79%

NOPLAT275.11306.11340.60378.98421.69469.20515.25558.33596.90629.45654.63

RREINV328.37365.37406.54452.35503.32560.04517.55455.21373.76275.08162.27

FCFF-53.26-59.26-65.94-73.37-81.64-90.84-2.30103.12223.14354.37492.36

TV

WACC16.137%16.137%16.137%16.137%16.137%16.137%16.137%16.137%16.137%16.137%16.137%

DF0.8610520.741410.6383920.5496880.473310.4075440.3509170.3021570.2601730.224022

PV HG Period-39.7584

TV4056.657

DISC TV1055.433

TOTAL VALUE1015.675

EXCESS CASH191.8926

INV302.71

non core operating capital-411.09

TOTAL1099.187

DEBT460.65

NO. OF SHARES4.885

EV638.5372

Value per share130.71

b. CEAT Tyres Ltd.

MARKET PRICE(rs.)226.9655309



DEBT477.6

EV1254.7300

WACC16.610%

WTS.COST

61.94%21.39%

38.06%8.83%

Ke

RFR8.50%

RM21.90%

BETA0.961851

Ke21.39%




8.55%

4%dec/year0.91%


terminal roc16.610%

terminal rr24.081%

dec/year10.16%

20082009201020112012201320142015201620172018

GROWTH8.55%8.55%8.55%8.55%8.55%8.55%7.64%6.73%5.82%4.91%4.00%

RR*74.86%74.86%74.86%74.86%74.86%74.86%64.70%54.55%44.39%34.24%24.08%

NOPLAT238.48258.88281.03305.07331.16359.49386.97413.02437.06458.53476.87

RREINV178.52193.79210.37228.36247.90269.10250.37225.29194.02156.98114.84

FCFF59.9665.0970.6676.7083.2790.39136.59187.73243.05301.54362.03

TV

WACC16.610%16.610%16.610%16.610%16.610%16.610%16.610%16.610%16.610%16.610%16.610%

DF0.8575560.7354020.6306480.5408160.463780.3977170.3410640.2924820.2508190.215092

PV HG Period508.1808

TV2870.886

DISC TV720.074

TOTAL VALUE1228.255

EXCESS CASH-4.9618

INV9.6

non core operating capital21.81

TOTAL1254.703

DEBT477.6

NO. OF SHARES3.424

EV777.1031

Val per share226.96

c. MRF Tyres Ltd.MARKET PRICE(rs.)3123.26


MV OF EQUITY699.6

DEBT1249.48

EV1949.0800

WACC13.341%

WTS.COST

35.89%21.39%

64.11%8.83%

Ke

RFR8.50%

RM21.90%

BETA0.961851

Ke21.39%

ASSUMPTION: GROWTH FOR THE NEXT 5YRS13.71%

Long term Growth Rate 4%dec/year1.94%



terminal roc13.341%

terminal rr29.984%

dec/year30.92%

20082009201020112012201320142015201620172018

GROWTH13.71%13.71%13.71%13.71%13.71%13.71%11.77%9.83%7.88%5.94%4.00%

RR*184.59%184.59%184.59%184.59%184.59%184.59%153.67%122.75%91.83%60.90%29.98%

NOPLAT210.71239.60272.45309.80352.27400.56447.69491.68530.44561.96584.44

RREINV388.95442.28502.91571.85650.24739.39687.96603.52487.08342.26175.23

FCFF-178.24-202.68-230.46-262.06-297.98-338.83-240.27-111.8443.36219.70409.20

TV

WACC13.341%13.341%13.341%13.341%13.341%13.341%13.341%13.341%13.341%13.341%13.341%

DF0.8822960.7784470.686820.6059790.5346530.4717220.4161990.367210.3239880.285854

PV HG Period-972.721

TV4380.868

DISC TV1419.35

TOTAL VALUE446.6293

EXCESS CASH1.456

INV68.56


TOTAL304.5353

DEBT1249.48

NO. OF SHARES0.424

EV-944.945

Val per share3123.26

19.3 FCFEa. Apollo Tyres Ltd.MARKET PRICE186.6480675Rs per share

NO. OF SHARES(Cr)4.885cr


KE21.390%

Ke

RFR8.50%

RP21.90%

BETA0.961851

Ke21.39%




10.87%

5%dec/year1.17%

ROC equals KE in long term21.390%

terminal roc21.390%

terminal rr23.376%

dec/year10.29%

20082009201020112012201320142015201620172018

GROWTH10.87%10.87%10.87%10.87%10.87%10.87%9.70%8.52%7.35%6.17%5.00%

RR126.31%116.02%105.72%95.43%85.14%74.84%64.55%54.26%43.96%33.67%23.38%

NOPLAT275.11305.02338.19374.96415.73460.94505.64548.74589.07625.44656.71

RREINV347.49353.87357.54357.82353.94344.98326.39297.72258.97210.58153.51

FCFE-72.38-48.85-19.3517.1461.80115.96179.25251.02330.10414.86503.20

TV

WACC21.390%21.390%21.390%21.390%21.390%21.390%21.390%21.390%21.390%21.390%21.390%

DF0.8237920.6786340.5590530.4605440.3793920.312540.2574680.21210.1747270.143938


TV3070.218

DISC TV536.4489

TOTAL VALUE828.2632

EXCESS CASH191.8926

INV302.71


TOTAL911.7758

NO. OF SHARES4.885

EV911.7758

Val per share186.65

b. CEAT TYRES LTD.MARKET PRICE314.0043878Rs per share



KE21.390%

Ke

RFR8.50%

RP21.90%

BETA0.961851

Ke21.39%

ASSUMPTION: GROWTH FOR THE NEXT 5YRS2.58%

Long term Growth Rate 5%dec/year-0.48%



terminal roc21.390%

terminal rr23.376%

dec/year0.05%

20082009201020112012201320142015201620172018

GROWTH2.58%2.58%2.58%2.58%2.58%2.58%3.07%3.55%4.03%4.52%5.00%

RR23.86%23.81%23.77%23.72%23.67%23.62%23.57%23.52%23.47%23.42%23.38%

NOPLAT238.48244.64250.96257.45264.10270.92279.23289.15300.81314.40330.12

RREINV56.9158.2659.6461.0662.5163.9965.8268.0170.6173.6577.17

FCFE181.57186.38191.32196.39201.59206.93213.41221.13230.20240.75252.95

TV

WACC21.390%21.390%21.390%21.390%21.390%21.390%21.390%21.390%21.390%21.390%21.390%

DF0.8237920.6786340.5590530.4605440.3793920.312540.2574680.21210.1747270.143938


TV1543.328

DISC TV269.6605

TOTAL VALUE1048.703

EXCESS CASH-4.9618

INV9.6

non core operating capital21.81

TOTAL1075.151

NO. OF SHARES3.424

EV1075.151

Val per share314.00

c. MRF Tyres Ltd.MARKET PRICE3415.55Rs per share



KE21.390%

Ke

RFR8.50%

RP21.90%

BETA0.961851

Ke21.39%

ASSUMPTION: GROWTH FOR THE NEXT 5YRS-41.92%

Long term Growth Rate 5%dec/year-9.38%



terminal roc21.390%

terminal rr23.376%

dec/year-33.44%

20082009201020112012201320142015201620172018

GROWTH-41.92%-41.92%-41.92%-41.92%-41.92%-41.92%-32.54%-23.15%-13.77%-4.38%5.00%

RR-311.07%-277.63%-244.18%-210.74%-177.29%-143.85%-110.40%-76.96%-43.51%-10.07%23.38%

NOPLAT210.71122.3871.0841.2823.9713.929.397.226.225.956.25

RREINV-655.47-339.76-173.55-86.99-42.50-20.03-10.37-5.56-2.71-0.601.46

FCFE866.18462.13244.63128.2766.4833.9519.7612.778.936.554.79

TV

WACC21.390%21.390%21.390%21.390%21.390%21.390%21.390%21.390%21.390%21.390%21.390%

DF0.8237920.6786340.5590530.4605440.3793920.312540.2574680.21210.1747270.143938


TV29.21628

DISC TV5.104863

TOTAL VALUE679.5342

EXCESS CASH1.456

INV68.56


TOTAL537.4402

NO. OF SHARES0.424

EV537.4402

Val per share3415.55

20. Results

CompanyActual Share Price (as on 31/03/08)Valuation MethodComment

Apollo Tyres Ltd.Rs. 41.30FCFF 130.71Undervalued

FCFE 186.65Undervalued

Ceat Tyres Ltd.Rs. 109.25FCFF 226.96Undervalued

FCFE 314.00Undervalued

MRF Tyres Ltd.Rs. 3989.05FCFF 3123.26Overvalued

FCFE 3415.55Overvalued

21. Conclusion

The industry, already bogged by over capacity, is facing a severe threat of dumping of cheap tyres by South Korea. Under the Bangkok agreement, signed between India and South Korea in 1976, import of tyres from the latter into India would attract a concessional duty of 33 per cent as against the normal tariff of 40 per cent.

Two years ago, the industry estimated the growth in the passenger car radial demand at 20 per cent per annum. However, the auto recession has hit them badly. But South Korea made a killing by dumping cheap car radial tyres and walked away with 11 per cent of the tyre market.

Another threat to the industry is the price of its raw materials, most of which are petroleum by-products. Carbon, synthetic rubber and nylon tyre cord are offshoots of petrochemicals. Thus, the future of the industry will swing with the supply of crude oil.

The biggest threat, however, is yet to fully materialise. It will be from global majors like Bridgestone and Michelin, which control 36 per cent of the global tyre market. These players have set up their bases in Southeast Asia and the slump of the markets in this region, coupled with the vast growth potential of the Indian market, is beckoning them towards India. Bridgestone has tied up with ACC for a 100 per cent radial tyre unit and Michelin is also marketing its products through retail outlets. The industry is driven more by volumes than by margins and each of the big five in the global tyre industry Continental, Michelin, Goodyear, Pirelli and Bridgestone generate an annual tyre production equivalent to the total demand of the Indian market. These MNCs have deep pockets and can easily withstand losses for 2-3 years. Their financial muscles also permit them to invest in R&D, which is beyond the reach of the average Indian tyre manufacturer.Several different methods were used to determine the fair value of the Apollo tyres, MRF Ltd and the Ceat Tyre Stocks. Each method pointed to the same conclusion, the Apollo Tyre and the Ceat Tyre Ltd stock is undervalued whereas the MRF Ltd. Stock is a bit overvalued.

The aggregates of 11 tyre companies have reported depleted results for the quarter ended December 08. With the financial melt down and production cuts of many Auto companies, resulted in weaker demand and curtailment of capacities of tyre industry which together restricted the growth in top line of the industry to 8% at Rs 4282 crore. Coupled with the slowdown in demand and the use of high cost inventories built up in the previous quarters, piling up of inventory etc, the operating margins of the sector tumbled down by whooping 810 bps to 3.2% in the quarter ended December 2008 from robust 11.3% in the corresponding previous quarter. Thus operating profit margins have slipped down by 70% to Rs 136 crore. With the dip in other income by 22% to Rs 25 crore and increase in interest cost by 43% to Rs 113 crore and depreciation by 25% to Rs 125 crore turned PBT to a loss of Rs 77 crore. However, the tax income of Rs 10 crore as against out go of Rs 105 crore, left Bottom line of the company at a loss of Rs 67 crore as against profit of Rs 198 crore.

MRF the largest tyre producer in India with a wide product profile catering to almost all the segments of the automobile industry has reported Net loss of Rs 38.30 crore despite healthy growth in its top line by 17% to Rs 1351.97 crore. However, spike in the raw materials cost and other income has dipped PBIDT by 83% to 21.14 crore. Spike in interest and depreciation cost by 67% and 54% respectively has turned PBT to red at Rs 55.33 crore. The tax income of Rs 17.03 crore couldn't help the erosion of profit for the quarter ended December 08.

CEAT, the flagship company of RPG group and leading producer of tyre industry has also reported Net loss of Rs 21.64 crore, on the back of 4% rise in Net sales to Rs 584.15 crore for quarter ended December 08. With the spike in the raw material costs particularly natural rubber, synthetic rubber and carbon black; OPM crashed to a negative of 1.4% and led losses from the operating level. The dip in the other income and spike in the interest cost has made the losses further slippery.

Apollo Tyres has reported dip in the top line by 7% to Rs 903.26 crore for the quarter ended December 08.

22. Bibliography ATMA Tyre manual www.atmaindia.org www.way2wealth.com www.nseindia.com

www.indiainfoline.com www.timesofindia.com www.economictimes.com www.ceattyres.com www.mrftyres.com www.jktyre.com www.apollotyres.com

www.domain-b.com www.buzzle.com

N.L.Dalmia Institute of Management Studies and ResearchPage 2

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