In the wake of surging input prices, the tyre industry is facing an uphill task of not hurting its margins too much while maintaining a healthy demand. The price of natural rubber, a key ingredient, has more than doubled in less than one year. Satish Sharma, chief of India operations, Apollo Tyres, explains to Swaraj Baggonkar about the challenging times. Edited excerpts:
What is the kind of pressure you are facing with regard to input prices?
We are facing immense pressure. There is a ‘real’ chance of going into to the red. Operating profit margin (OPM) has eroded to a large extent. During the last two years, it stood at 16.5 per cent, which came down to 10.5 per cent last quarter. We are not looking at a double-digit growth moving forward. We need a structural change, where we would be able to push it to the customer.
What is the impact on margins?
The rise is humongous and cannot be done in one go. If prices were raised by 20 per cent, only then we would be able to touch an OPM of 10 per cent. Future does not seem rosy, demand is not strong, especially in the commercial vehicle segment.
Are tyre inflows from China and other low-cost countries hurting business even more?
This is a mixed bag. We have seen companies like Tata Motors and Ashok Leyland actually bring down their imported content. This is solely because our products outscore the products from China. They are of no match in quality. Further, they don’t offer after-sales service. Indian vehicle makers are reducing their dependence on imports. We are witnessing a positive momentum.
Is the recent hike in prices of your tyres enough to offset the rise in input prices?
Either the rubber (price) crashes, which looks highly unlikely, or there is some natural calamity, wiping off demand. The tsunami in Japan had made the rubber crash, which lasted for only three days. The other basket in raw material is crude oil, which is not relenting because of the Middle East crisis. There is no legroom for taking further impact on margins. But we are exploring all possibilities.
What would be your turnover in 2011-12?
We are looking at a green field project, coming up in Chennai. The investment was made during the downturn of 2008. So, we had an advantage. We are looking at a top-line growth of at least 30-40 per cent this year, compared to last year.
What is the reason behind surging rubber price?
I don't think any logic can explain this. During the first quarter, it was at 100/kg and now, it’s more than 232/kg. There are multiple reasons behind the rise – landlocked production pattern, flooding in some areas, demand-supply mismatch, with demand being much more than supply. Nowadays, rubber growers are asking us to forget price, as availability is a much bigger issue. Typically, a rubber plant takes seven years to mature for tapping.
By when do you see prices cooling off?
From what we have gathered speaking to our suppliers, there is no silver lining in sight at least for some months. We may see some gradual softening in prices, but only by a few rupees. But the worst part is that the yearly price takes shape based on the trend in the first quarter and it stabilises thereafter. We expect crude price to go even higher.
Are more price hikes in the offing?
Most definitely. At the slightest opportunity, we will do it. I would be happy, if we could pass on the hike every month, but that's not practical. If you look at the past trends, we have taken price increase at regular intervals, but a situation such as this was never there. So, all I can say is that difficult situations call for difficult measures.
