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Tyre makers profitability unlikely to grow: Crisil

Our Bureau

MUMBAI, Jan. 22

PROFITABILITY of tyre manufacturers is unlikely to

improve in the next couple of years due to firm raw material prices and increasing competition in the car tyre category, according to the credit rating agency Crisil.

Prices of natural rubber are expected to increase significantly in the period due to an expected decline in surplus rubber stocks. Increasing competition in the car tyre category, due to new car radial tyre capacities, would also results in a pressure on average price realisation, Crisil said in a study on tyre industry.

The report is based on forecast of demand for tyres till 2004-05 and compares companies in terms of cost structure, operational efficiency and market position.

Between 2000-01 and 2004-05, the industry is expected grow at 6-7 per cent. Demand for truck tyres is projected to grow at 5.7 per cent due to an expected increase in replacement demand. Demand for car tyres is projected to grow 12.7 per cent based on th e expected increase in car production. By 2003, the total industry capacity is expected to increase to approximately 60 million tyres.

Due to high capital cost and low expected radial penetration in truck tyres (about 5 per cent by 2005), not more than 2-3 producers are expected to set up truck radial tyres capacity. However, in car radials, large capacity additions are expected by tyre producers during next 3-5 years due to high demand growth. Car radials are projected to grow at 24 per cent to 10 million tyres in 2004-05.

The Cris-Infac report also studied the likelihood of disinvestment or acquisition for each producer, by analysing the state of competition and past trends in acquisition activity in the tyre industry, and company-specific factors including financial capa bility, cost structure operational efficiency and investment strategy.

No major M&As likely: According to the study, mergers and acquisitions activity in the industry during the 2000-01 to 2004-05 period is not expected to be significant. Except for car tyre category, the intensity of competition is not expected to be high enough to result in divestment by the existing producers.

The importance of cash flows from tyre business to the group companies is expected to be an exit barrier. Further, new multinational entrants are uncertain about investing in the Indian tyre industry, given the high level of planned capacity additions by existing companies in car radial tyres and low radial penetration in the truck tyre category.