Rising crude oil prices to hit tyre manufacturing firms' profit margins

After a marginal recovery in the December quarter, profit margins of tyre manufacturing companies are likely to remain under pressure for the next six months due to rising prices of rubber and crude oil derivatives used for synthetic rubber and other raw materials. 

Tyre companies led by Apollo Tyres reported a 17 per cent year-on-year (y-o-y) jump in consolidated revenue to Rs 40.50 billion, supported largely by a nearly 50 per cent yoy growth in the tree-born rubber (TBR) volume due to increasing radicalisation and imposition of anti-dumping duty on Chinese tyres. 

Consolidated EBIDTA (earnings before interest, debt, tax and amortization) margins of Apollo Tyres jumped by 180 bps (basis points) on a quarterly basis to 12.3 per cent on lower commodity prices and better scale.

Profit margins of tyre manufacturers improved during the December quarter when compared to the September quarter, despite rising prices of crude oil and its derivatives. Tyre manufacturers were able to pass on the rising input cost to consumers, who were helped by the government’s decision to impose anti-dumping duty on Chinese tyres to curb cheap imports.

“Consolidated margins of Apollo Tyres improved q-o-q (quarter-on-quarter) due to a benign trend in commodity prices. In comparison, margins compressed y-o-y due to higher commodity prices. The increase in prices of crude oil derivatives, however, is likely to affect costs in Q4FY18 and Q1FY19,” said Raghunandhan N L, an analyst with Emkay Global Ltd.

The impact of crude oil price is reflected on its derivatives and later on user industries with a lag of four-six weeks. Since, prices of brent crude oil and its derivative carbon black hit their highest in recent times in January 2018, the impact will be seen in user industries in the forthcoming March and June quarters.

According to industry sources, Brent crude oil price jumped by 18.2 per cent to $66.8 a barrel in the December quarter. The price of carbon black too jumped by a staggering 35.9 per cent to $1,475 a tonne between October and December 2017. 

Similarly, prices of synthetic rubber and nylon thread used in tyre making also jumped significantly after December. Despite lower availability, the price of natural rubber moved in a narrow range to end the December quarter at Rs 13,100 a tonne.

“Crude derivatives are likely to remain costlier in the coming months due to rising prices of Brent crude oil. Rising crude derivatives prices will dent tyre makers’ margins in the near future,” said Rajiv Budhraja, Secretary General, Automotive Tyre Manufacturers’ Association (ATMA).

Meanwhile, robust automobile demand drove tyre consumption in India during the December quarter. Experts anticipate growth in the auto segment and thereby in the tyre industry to continue in the near future on the back of a growing economy.