Industry Comment

Tyres

ICRA Management Consulting Services Limited

IMaCS Research & Analytics

THE INDIAN TYRES INDUSTRY

June 2009

Industry Comment

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Industry Comment

Tyres

Contacts: Vineet Nigam +91 120 4515831

Programme Leader (Research & Analytics)

Disclaimer All information contained in this document has been obtained by IMaCS from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided as is without any warranty of any kind, and IMaCS in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. All information contained herein must be construed solely as statements of opinion, and IMaCS shall not be liable for any losses incurred by users from any use of this document or its contents in any manner. Opinions expressed in this document are not the opinions of our holding company, ICRA Limited (ICRA), and should not be construed as any indication of credit rating or grading of ICRA for any instruments that have been issued or are to be issued by any entity.

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TABLE OF CONTENTS
ENVIRONMENT ANALYSIS PORTERS MODEL .............................................................................. 4 MARKET SIZE AND SEGMENTATION .............................................................................................. 5 INDUSTRY STRUCTURE ................................................................................................................. 6 MARKET CHARACTERISTICS .......................................................................................................... 7 OVERVIEW ............................................................................................................................................. 7 PRODUCTION TRENDS............................................................................................................................... 8 PRODUCT CATEGORIES ........................................................................................................................... 10 PRODUCT-WISE DEMAND AND SUPPLY ...................................................................................................... 11 TRADE ....................................................................................................................................... 17 IMPORTS .............................................................................................................................................. 17 EXPORTS .............................................................................................................................................. 19 SUPPLY CHARACTERISTICS.......................................................................................................... 21 KEY ISSUES ................................................................................................................................ 23 HIGH BUT STAGNANT DEMAND FOR RETREADED TYRES ................................................................................ 23 NON-TARIFF MEASURES ON IMPORTS OF TYRES AND RAW MATERIALS ........................................................... 24 HIGH INCIDENCE OF TAXES ...................................................................................................................... 25 FINANCIAL PERFORMANCE......................................................................................................... 25 RAW MATERIAL COSTS ........................................................................................................................... 25 MARGINS ............................................................................................................................................. 33 RETURNS .............................................................................................................................................. 35 FINANCIAL PERFORMANCE DURING FY2009 .............................................................................................. 36 CONCLUSION ............................................................................................................................. 37

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ENVIRONMENT ANALYSIS PORTERS MODEL

Entry BarriersHigh The entry barriers are high for the tyre industry. It is a highly capital intensive industry. A plant with an annual capacity of 1 million cross-ply truck and bus tyres costs around Rs. 6 billion. A similar plant producing radial tyres costs Rs. 14 billion. For passenger cars, a plant with an annual capacity of 10 million radial tyres costs around Rs. 12 billion. Bargaining Power of BuyersHigh The OEMs have high control over prices. In fact, the OEMs faced with declining profitability have also reduced the number of component suppliers to make the supply chain more efficient.

Inter Firm RivalryModerate The tyre industry in India is fairly concentrated, with the top nine companies accounting for more than 90% of the total domestic tyre production.

Bargaining Power of the SuppliersHigh The tyre industry consumes nearly 58% of the natural rubber (NR) produced in the country. The price of NR is controlled by Rubber Board and the domestic prices of NR have registered a significant increase in recent times.

Threat of ImportsModerate During FY2008, around 3.3 million tyres were imported, representing 4% of domestic tyre production. Since imports are primarily of passenger car and commercial vehicle tyres, the percentage in value terms is higher.

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MARKET SIZE AND SEGM ENTATION

With an estimated production of 82 million tyres during FY2009, the size of the Indian tyre industry is estimated at Rs. 210 billion. The industry consists of around 43 companies, spread throughout the country, with many being rather small. There are around 58 tyre factories across India (of which 9 factories are presently closed). The total contribution of excise and customs duty is estimated at around 0.1% of Indias gross domestic product (GDP). Tyre companies directly employ over 0.13 million persons of varying skill levels. Tyre industry consumes around 58% of the total Natural Rubber (NR) produced in the country. Since production of NR involves over 1 million growers (farmers), tyre industry provides gainful employment to nearly 0.5 million growers of NR, a majority of them in the small grower category. In addition, if related services like tyre retreading, repairing, air filling etc. are taken into account, employment potential increases manifold. The pattern of growth in the tyre industry is cyclical as it is a derived demand, based on demand from automotive sector. Indias tyre production and consumption is dependent on demand from automotive manufacturers or original equipment manufacturers (OEMs), replacement market, and exports. Till the late-1990s, demand from OEMs contributed the dominant share. However, with the sharp increase in vehicle stock over the last five years, replacement demand now accounts for nearly 52% of tyre demand. Growth in Tyre Production and Automotive Production
FY 20% Tyres Automotive

15%

10%

5%

0% 1999 -5% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Three segmentscommercial vehicles or CVs (trucks and bus), four wheelers (4Ws), and two wheelers (2Ws)account for around 94% of Indias total tyre production. Original equipment manufacturers (OEMs) or automotive manufactures account for around 41% of total demand for domestic tyre industry. Thus, automotive production growth has a direct impact on growth of tyre production. In addition, demand in the replacement market has a significant impact on tyre production. The replacement market accounts for around 52% of Indias tyre production, and demand in this segment is dependent on the stock of vehicles, and tyre wear/tear. Over the last few years, while OEMs have accounted for lesser share of demand, the replacement and export markets have shown a higher growth. This accounts for the fact that while automotive production declined 2.3% in FY2008, domestic tyre production increased 10.3%. However, replacement demand growth

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has slowed down in FY2009 largely because of sharply lower growth in demand from passenger car segment. Growth in Tyre Supply to Various Segments
FY 30% 25% 20% 15% 10% 5% 0% -5% -10% 2003 2004 2005 2006 2007 2008 2009

Replacement

OEM

Exports

INDUSTRY STRUCTURE
The Indian tyre industry meets the requirements of various automotive segments such as truck and bus, passenger car, jeep, light truck, tractor (front, rear and trailer), animal-drawn vehicle, scooter, motorcycle, special defence vehicles and aeroplanes. In India, Dunlop Rubber limited set up the first tyre company in the country at Sahaganj, West Bengal in 1926. Madras Rubber Factory (MRF) followed suit in 1946. Since then, the Indian tyre industry has grown rapidly and is currently a Rs. 210 billion industry. With an estimated 105 million registered vehicles in the country, and annual new automotive sales of around 11.5 million during FY2009, there exists a vast potential of tyre industry in India. Tyre industrys growth is contingent upon agricultural and industrial performance of the economy, road transportation needs and production of vehicles. Tyres can be broadly classified into two types: Cross-Ply Tyres are made of superimposed layers of textile cord running at alternate angles from bead to bead. With this design, the sidewalls and tread are not differentiated, giving the tyre structure great rigidity. With a cross-ply tyre, the maximum width and the height of the tyre above the rim are approximately equal. This relationship is known as the aspect ratio, and is 100% for cross-ply tyres. Cross-ply are the most widely used tyres in India as it is more suitable for the poor road conditions prevalent in India and can also withstand the overloading of commercial vehicles (CVs), a common feature on the Indian roads. Cross-ply tyres are also used in two- and three-wheelers. During FY2009, nearly 97% of Indias new truck and bus production was fitted with cross-ply tyres, as compared with 100% for 2Ws, 89% for light commercial vehicles (LCVs), and 4% for passenger cars. Radial Tyres separate the functions of the sidewall and crown of the tyre, allowing greater vertical flexibility whilst ensuring that there is still as much surface in contact with the road as possible. In radial tyres, the sidewall has one or two layers of textile cord giving good flexibility, www.IMaCS.in 6

Industry Comment

Tyres

and the tread is made rigid by combining the casing layer with two (or more) layers of steel-cord bracing plies. Both these factors give radial tyres good road holding capabilities and a longer life span when compared with cross-ply tyres. Other advantages of radial tyres as compared with conventional cross-ply tyres include shorter braking distance, greater resistance to wear, better control, and fewer punctures. In India, radial tyres are primarily used in the passenger car segment. Over 96% of Indias new passenger car production in FY2009 was fitted with radial tyres, as compared with 11% for LCVs and 3% for truck and bus. The main prerequisites for success in this industry include a well-established distribution network, and good brand recall. With the entry of overseas players in the automotive market in India there is greater demand on radial tyres of late and hence a greater stress on technology. Indian tyre exports have also increased at a moderate rate in recent years. Indias exports of tyres have increased at a 3-year compound average growth rate (CAGR) of 1.2% to around 5.59 million tyres in FY2009. Exports account for around 7.5% of Indias tyre production. Currently, Indian tyres are exported to more than 50 countries, primarily in Asia, Africa, and the Middle-East. Passenger car tyres are primarily exported to UAE, Nigeria, Iran, and US. CV tyres are primarily exported to Bangladesh, Iran, Nigeria, Pakistan, Philippines, UAE, and the US. Two-wheeler (2W) tyres are primarily exported to Bangladesh, Sri Lanka, UAE, Peru, and Paraguay. Transportation industry and the tyre industry are interdependent on each other. Although road and rail are the key service providers, road accounts for over 85% of all freight movement. With almost 3.3 million kilometres of roads, India has one of the most extensive road networks in the world. The road network comprises of national highway, state highways, district roads, rural roads, and special purpose roads (for military, port etc). The Indian road network of 3.34 million kms, comprises of 65,569 kms of National Highways (NHs); 130,000 kms of State Highways; 470,000 kms of Major District Roads; and about 2.67 million kms of other District and Rural Roads. NHs are the prime arterial routes span about 65,569 kms (2% of the total road length) throughout the country but cater to about 40% of the total road transport demand. Rural roads link rural communities with the highway network, providing access to higher agricultural incomes, employment opportunities, and social services. They represent about 80% of the network and carry about 20% of the traffic.

MARKET CHARAC TERISTICS

Ov er vi ew
The Indian tyre industry is mainly dominated by the organised sector, with the exception of bicycle tyres, where unorganised sector dominates production. Some of the salient features of this industry are as follows: Tyre manufacturing is a highly capital intensive industry. A plant with an annual capacity of 1 million cross-ply truck and bus tyres costs around Rs. 6 billion. A similar plant producing radial tyres costs Rs. 14 billion. For passenger cars, a plant with an annual capacity of 10 million radial tyres costs around Rs. 12 billion. Since considerable economies of scale exist in tyre production, large markets are essential. Major players in the industry compete on the basis of price differentiation. Truck and bus tyre sectors are the major revenue earners for the industry Replacement market contributes to 51% of the tyre sales in India.

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The industry is cyclical and seasonal in nature. Nearly 42% of demand is dependent on automotive production, which is both cyclical and seasonal. Further, prices of petrochemical-based raw material and NR also tend to be cyclical.

P roduct i o n Tr en ds
The Indian tyre industry produces the complete range of tyres required by the Indian automotive industry, except for aero tyres and some specialised tyres. Domestic manufacturers produce tyres for trucks and buses, passenger cars, jeeps, light trucks, tractors (front, rear and trailer), animaldrawn vehicles, scooters, motorcycles, mopeds, bicycles and off-the-road vehicles and special defence vehicles. Category-wise Tyre Production in India
Units (thousands) 2006 2007 2008 13,137 16,437 1,467 5,320 39,525 11,604 27,921 3,934 409 733 141 81,103 Growth 2009 12,839 16,570 1,469 5,298 41,031 10,883 30,148 3,915 281 568 136 82,107 2008 6.2% 15.2% 7.2% 10.4% 10.6% 20.3% 7.1% 1.6% 7.3% 15.4% 22.6% 10.3% 2009 -2.3% 0.8% 0.1% -0.4% 3.8% -6.2% 8.0% -0.5% -31.3% -22.5% -3.5% 1.2% 200709 2.4% 6.8% 4.9% 5.4% 10.2% 4.6% 12.7% 7.9% -4.6% 3.3% 8.7% 7.5%

FY Truck & Bus Passenger Car Jeep/MUV LCV Two-wheelers

2005

11,091 11,941 12,367 11,862 13,605 14,263 1,463 1,272 1,368 3,945 4,529 4,820 28,243 30,627 35,722 Scooter 9,992 9,519 9,643 Motorcycle 18,127 21,053 26,079 Mopeds 124 55 Tractors 2,815 3,113 3,873 Animal Driven Vehicles 197 324 381 Industrial 377 515 635 Off-The-Road 89 106 115 Total 60,082 66,032 73,544 Source: Automotive Tyre Manufacturers Association (ATMA)

The demand growth for the key segments of the automotive industry was robust during FY2003-07, driven by a 15.7% annual average growth in domestic automotive production, and a 13% annual average growth in exports. However, replacement market increased at a slow annual average rate of 5% during FY2003-07. However, after five years of impressive growth, the domestic auto industry faced worsening demand situation in FY2008-09. Domestic automotive production declined 2.1% in FY2008 to 11.18 million, primarily because of lower sales of 2W, and slow growth in the CV segment, caused by an economic slowdown, hardening of interest rates, and tighter credit conditions. Nevertheless, domestic tyre production increased 10.3% in FY2008, mainly because of a sharp increase in sales in the replacement tyre market. However, Indias tyre production growth slowed down sharply to 1.2% during FY2009. Although Indias tyre production continued to increase at a healthy rate during H1FY2009, production thereafter declined yoy primarily because of a significant decline in Indias automotive production, and stagnation/decline in replacement and export markets. While OEM demand growth slowed down from 1% in FY2008 to 0.5% in FY2009, replacement market demand growth declined sharply from 19% in FY2008 to 4% in FY2009. Exports, which had increased 11% in FY2008, declined 8.3% in FY2009.

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Industry Comment Indias Automotive Production

Units (thousandth) FY 2005 2006 2007 2008 2009 2008 4Ws 1,210 1,309 1,545 1,778 1,839 15.0% PVs 960 1,046 1,238 1,426 1,517 15.2% UVs 182 197 222 246 218 10.6% MPVs 67 67 85 105 104 24.3% CVs 354 391 520 549 417 5.6% MHCVs 215 219 294 295 193 0.2% LCVs 139 172 226 254 225 12.5% 2Ws 6,530 7,609 8,467 8,027 8,419 -5.2% Motorcycles 5,194 6,208 7,112 6,504 6,802 -8.6% Scooters 987 1,021 944 1,075 1,157 13.9% Mopeds 348 380 380 431 436 13.4% Electric 0 0 30 17 24 -42.9% 3Ws 374 434 556 501 501 -10.0% Passenger Carriers 237 287 386 371 418 -3.8% Goods Carriers 137 147 171 130 83 -24.0% Tractors 249 297 353 345 366 -2.2% Total 8,717 10,040 11,471 11,216 11,565 -2.2% 4Ws: four-wheelers; PV: passenger vehicles; UV: utility vehicles; MPV: multipurpose vehicles: heavy commercial vehicles; LCV: light commercial vehicles; 3W: three wheelers Growth

Tyres

2009 2007-09 3.4% 12.0% 6.4% 13.2% -11.3% 3.6% -1.6% 15.9% -24.0% 2.2% -34.7% -4.2% -11.6% 9.3% 4.9% 3.4% 4.6% 3.1% 7.7% 4.3% 1.1% 4.7% 36.4% #DIV/0! 0.1% 4.9% 12.6% 13.3% -35.7% -17.3% 6.0% 7.2% 3.1% 4.8% MHCV: medium and

During FY2009, production increased 9.3% (yoy) in Q1FY2009, and 6.2% (yoy) in because of recovery in 2W sales driven primarily by a decline in product priced caused by excise duty reductions (from 16% to 12%) in the Union Budget for 2008-09. However, during the second half of FY2009, tyre production declined 2.4% (yoy) in Q3FY2009, and 7.2% (yoy) in Q4FY2009 primarily because of a sharp decline in automotive production, especially of CVs. Trends in Tyre Production and Indias Automotive Production
Yoy growth in percent FY Q1FY06 Q2FY06 Q3FY06 Q4FY06 Q1FY07 Q2FY07 Q3FY07 Q4FY07 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 CVs 10.6 9.4 10.4 7.8 4.2 6.5 2.2 4.5 6.2 6.7 7.2 9.0 9.2 2.1 -4.2 -12.8 4Ws 6.7 8.8 11.9 19.1 9.0 7.3 1.4 3.2 12.9 15.8 15.5 14.3 10.2 8.8 -3.7 -11.6 Tyres Scooter Motor /3Ws cycles -11.4 -3.4 -3.6 -8.6 -2.5 -8.6 -4.4 1.9 17.1 23.9 22.7 21.8 13.7 -4.5 -12.1 -21.1 6.3 12.6 16.7 15.9 19.0 36.4 31.1 17.2 13.2 2.8 -0.2 13.4 12.7 15.2 13.7 1.9 Total 7.9 9.1 9.3 13.2 14.1 14.5 7.9 9.3 8.8 7.6 12.8 11.9 9.3 6.2 -2.4 -7.2 CVs 5.7 20.7 3.5 12.8 36.2 31.2 35.2 30.3 6.8 0.1 9.4 5.8 9.3 0.0 -50.5 -43.5 Automotive 4Ws 2W/3W 16.7 -0.6 4.2 13.5 16.9 20.2 14.0 19.1 13.4 12.5 22.0 13.4 14.9 10.3 -8.7 -2.0 18.8 16.5 12.8 18.5 20.4 14.8 11.1 3.8 -7.3 -5.9 -4.5 -4.4 8.9 17.5 -11.7 3.4 Total 17.9 14.0 11.3 17.5 20.5 16.2 12.4 7.2 -3.9 -3.1 -0.6 -1.0 9.8 15.5 -13.2 -0.3

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Tyres

P roduct C at e gori es
Tyres can be broadly classified as Cross-ply and Radial. Cross-ply tyres account for account for nearly 80% of Indias tyre production, with 2W/3Wtyres accounting for nearly 65% of Indias cross ply tyres production. The body of the tyre is called the carcass and is made up of layers of rubber coated nylon or rayon fabric called piles. The main difference between these two tyres is the direction in which ply cords are arranged and the type of reinforcement medium used. In a cross-ply tyre, the fabric cords of the tyre criss cross each other and the major reinforcing materials used are rayon and nylon tyre cords. Radial tyres have more flexible sidewalls and the reinforcing medium include polyester, nylon, fibreglass and steel. As such, there is a substantial price difference between crossply and radial tyres. Radial tyres are 20-40% costlier compared to the cross-ply ones due to costlier inputs and manufacturing technology. Radial tyres can be differentiated on the type of belt usedfibreglass, steel and nylon. World wide, steel belted radials are most popular owing to their superior performance. Radial tyres provide certain advantages like better vehicle control, longer life, cooler running, better road holding and lower fuel consumption. They even reduce the occurrence of flats in Indian road conditions. However, radials' longer life also has the potential to decrease unit demand in the more profitable replacement market. Further, as against radials, the cross-ply tyres can be retreaded twice during the lifetime of the tyre and given the cost of a new tyre it comes out much cheaper. Apart from the high cost of radial tyres, automobiles running on them have to be equipped with special type of suspension systems, which would require automobile manufacturers to invest in capital expenditure. Moreover, the overloading in trucks and CVs are also a factor responsible for non-popularity of radials in this segment. At present, radial tyres are fitted overwhelmingly in passenger cars and CVs. Over the last decade, growth in radial tyre production for these segments has far exceeded the growth in cross ply tyres. As a result, the share of radials in these 2 segments has increased from 13% in FY1998 to 50% in FY2008. Trends in Type-wise Tyre Production for Passenger Cars and CVs
thousands FY Cross Ply MHCVs LCVs Cars Radials MHCVs LCVs Cars 1998 2004 2005 2006 2007 2008 5-year CAGR 9.6% 22.3% -28.8% 26.0% 31.0% 28.9%

7,899 1,808 2,686 159 95 1,577

10,605 2,910 1,710 216 361 9,689

10,869 3,511 1,999 222 434 9,863

11,702 4,031 1,488 239 498 13,389

11,996 4,242 782 371 578 14,849

12,743 4,682 895 394 638 17,009

While radialisation has sharply increased in the passenger car segment, acceptance in the bus and truck tyre segment is still limited. Crossply tyres dominate in the 2W segment because of their lower cost. Bus and truck radialisation could increase in the country in the long term as the quality of roads improves and the restrictions on overloading are better enforced. Compared with cross-ply tyres, radial tyres have a longer life span since they can withstand greater pressure. Thus, an increase in radialisation can lead to a decrease in replacement demand.

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Industry Comment Level of Radialisation

FY 120% 100% 80% 60% 40% 20% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 MHCVs LCVs Cars

Tyres

2009

P roduct -wi se De man d a nd Sup pl y

Ov e r v iew Indias tyre production and consumption is dependent on demand from OEMs, replacement market, and exports. The replacement market accounted for around 52% of total supply of tyres by domestic producers during FY2009, followed by OEMs (41%), and exports (7%). Domestic IndustrySupply of Tyres to Various Segments
Volume (thousand units) 2006 2007 2008 65,240 71,757 79,202 31,760 33,662 40,158 27,945 32,518 32,838 195 195 195 5,340 5,382 6,012 100% 100% 100% 48.7% 46.9% 50.7% 42.8% 45.3% 41.5% 0.3% 0.3% 0.2% 8.2% 7.5% 7.6% Growth 2009 80,515 41,788 33,017 195 5,515 100% 51.9% 41.0% 0.2% 6.8% 2008 10.4% 19.3% 1.0% 0.0% 11.7% 2009 1.7% 4.1% 0.5% 0.0% -8.3% 2007-09 7.3% 9.6% 5.7% 0.0% 1.1%

FY Volume Replacement OEM Government Export Share Replacement OEM Government Export

2005 60,150 30,056 24,871 195 5,028 100% 50.0% 41.3% 0.3% 8.4%

The OEM segment accounted for 41% of the total domestic tyre industry supply in FY2009. The demand from the OEM segment is a derived one and directly correlated to the level of automotive production. The share of tyre demand originating from OEMs varies significantly across categories from 14% for truck and bus; 23% for LCVs; 46% for passenger cars; 45% for tractors, and 45-50% for motorcycles and scooters. The OEM market has shown signs of a slowdown during FY2007 and FY2008 primarily because of a slowdown in production.

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Industry Comment OEM Market Trends for TyresSupply by Domestic Producers

Volume (thousand units) 2006 2007 2008 1,974 2,648 2,620 5,229 6,190 7,082 1,315 1,534 1,728 945 1,242 1,397 5,122 5,284 5,622 12,402 14,224 13,007 478 698 690 478 698 690 27,945 32,518 32,838 Growth 2009 1,733 7,584 1,610 1,235 5,894 13,604 679 679 33,017 2008 -1.1% 14.4% 12.7% 12.5% 6.4% -8.6% -1.0% -1.0% 1.0% 2009 -33.9% 7.1% -6.9% -11.6% 4.8% 4.6% -1.6% -1.6% 0.5%

Tyres

FY Truck & Bus Passenger Car Jeep/MUV LCV Scooter & Mopeds Motorcycle Tractor Front Tractor Rear Total

2005 3,909 4,803 1,246 764 4,775 10,388 498 498 26,879

2007-09 -4.2% 13.2% 7.0% 9.3% 4.8% 3.1% 12.4% 12.4% 5.7%

The replacement demand accounts for around 52% of total domestic industry tyre supply. After a period of stagnation, the replacement market has shown high growth since FY2007, mainly because of higher demand in the cars and motorcycle segment. The replacement market is a price-sensitive segment, and less dependent on vibrant economic activity than the OEM market, primarily because drivers still need functional parts to run their vehicles. However, demand growth may be lower because of longer replacement intervals and lower business mileage if the economic activity slows down. A growing vehicle population, lower vehicle scrappage rates, and poor road conditions in India have lent a positive impetus to replacement demand. Replacement Market Trends for Tyres
Volume (thousand units) 2006 2007 2008 7,379 7,262 7,905 7,308 7,092 8,248 0 0 0 2,193 1,979 2,301 4,866 4,038 5,529 8,566 11,703 14,591 892 1,045 1,107 557 542 477 31,760 33,662 40,158 Growth 2009 8,992 7,980 0 2,433 4,553 16,091 1,149 590 41,788 2008 8.9% 16.3% 16.2% 36.9% 24.7% 5.9% -12.1% 19.3% 2009 13.7% -3.3% 5.7% -17.6% 10.3% 3.8% 23.8% 4.1% 2007-09 6.8% 3.0% 3.5% -2.2% 23.4% 8.8% 1.9% 9.6%

FY Truck & Bus Passenger Car Jeep/MUV LCV Scooter & Mopeds Motorcycle Tractor Front Tractor Rear Total

2005 5,443 6,020 216 2,050 6,277 7,677 795 513 28,992

The demand in the replacement market depends on the vehicle population, the level of economic activity, life of the products transported, vehicle kilometres travelled, the price of the tyres, and the quality of the existing road infrastructure. Additionally, the replacement market, which offers better margins, is extremely competitive. Although motorcycles tyres dominate in volume terms, the 4W and CV segment dominate in value terms. The large size of the replacement market in turn is determined by the interplay of various factors that are discussed as follows: The replacement demand may be lower because of longer replacement intervals and lower business mileage if the economic activity slows down. Poor road conditions in India, by lowering the life of tyres, have a positive impact on replacement demand. Stricter enforcement of the Motor Vehicles Act, which seeks to prevent overloading of vehicles, is expected to result in an increase in the life of tyres and thus impact replacement demand negatively. In tyre manufacturing, an estimated 75-80% of the manufacturing cost is incurred in making the tyre body. The remaining 20-25% is incurred on the treadthat portion of the tyre that meets www.IMaCS.in 12

Industry Comment

Tyres

the road surface. By applying a new tread or `re-treading, the life of the tyre can be extended at a significantly lower cost, thereby lowering replacement demand. In India, re-treading finds greater acceptance in the commercial segment. Increased penetration of radial tyres is likely to result in longer replacement intervals. However in India, while car radialisation has reached a level of 97%, truck and bus radialisation is a low 23%. Poor road and support infrastructure as well as traditional vehicle designs (some old models of commercial vehicles cannot be fitted with radial tyres) act as a barrier to radialisation in the commercial vehicle segment. Radial technology for trucks and buses would help increase operating efficiencies by delivering better mileage. For example, according to calculations by Automotive Tyre Manufacturers Association (ATMA), even if only 15% of the existing truck, bus and LCV vehicle population are fitted with radial tyres, the savings in fuel costs would be around Rs. 18 billion. Introduction of tubeless tyres in the passenger car segment is also likely to affect replacement demand adversely. Introduction of eco-friendly radial tyres in the passenger car segment may affect replacement demand adversely. The 1990s saw the introduction and use of silica (rubber with the addition of silicate) tyres. It is claimed that using silica in treads to replace Carbon Black enables rolling resistance to be reduced1 without a corresponding reduction in wet grip or other tyre performance measures. The use of silica in tread compounds is now standard in Europe, but does not appear to have achieved the same level of market penetration in India. Mo to rc y c le T y re s Motorcycle tyres accounted for 37% of all tyres produced in FY2009. The motorcycle segment is the largest segment in the 2W industry and accounted for 81% of Indias 2W production, and 59% of Indias automotive production in FY2009. After a healthy growth till 2006, motorcycle tyre production had slowed down in 2007-08, before showing a modest recovery during 2008-09. In terms of markets, the replacement market accounted for around 53% of the total motorcycle tyres sold by the domestic industry during FY2009, while OEM demand accounted for around 45%, with the balance being exported. In fact, as OEM demand declined in FY2008 caused by an 8.6% decline in domestic motorcycle production, replacement market supply increased at a high rate in FY2007 and FY2008. During FY2009, while the replacement market continued to grow at a high (albeit lower) rate, the OEM market has also shown modest growth because of a 4.6% growth in motorcycle production.

For passenger cars, a 5-7% reduction in rolling resistance produces a 1% increase in fuel economy. Further, a 10% tyre weight reduction results in approximately 0.1% combined fuel economy gain.

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Industry Comment Motorcycle Tyre Supply Trends

Volume (thousand units) 2006 2007 Growth 2008 2009 2008 2009

Tyres

FY

2004

2005

200709 12.7% 23.4% 3.1% 74.8%

Volume Replacement OEM Export Share Replacement OEM Export

16,688 18,127 21,053 26,079 27,921 30,148 7,931 7,677 8,566 11,703 14,591 16,091 8,710 10,388 12,402 14,224 13,007 13,604 47 63 85 152 323 453 100% 100% 100% 100% 100% 100% 47.5% 42.4% 40.7% 44.9% 52.3% 53.4% 52.2% 57.3% 58.9% 54.5% 46.6% 45.1% 0.3% 0.3% 0.4% 0.6% 1.2% 1.5%

7.1% 24.7% -8.6% 112.7%

8.0% 10.3% 4.6% 40.5%

Growth in Domestic Motorcycle and Motorcycle Tyres Production

yoy 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Motorcycle Production Motorcycle Tyre Production

S co o t e r a nd M o ped s Ty re s Scooters were the dominant segment in the Indian 2W industry till 1997-98, accounting for around 42% of domestic 2W sales that year. However, the demand shift in favour of motorcycles and the introduction of new motorcycle models has seen demand in the 2W segment tilt in favour of motorcycles. The OEM segment accounted for around 54% of the total sales in the scooter tyre segment in FY2009, with the rest being accounted for by the replacement (42%), and exports (4%). Over the last few years, the replacement market has declined significantly primarily because of higher scrappage of scooters, and increased shift towards purchase of motorcycles. However, the replacement market increased in FY2008 because of lower scrappage of old 2Ws. Replacement market declined 18% in FY2009 primarily because of continued high growth in scooter/moped sales.

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Industry Comment Scooters/Mopeds Tyre Supply Trends

Volume (thousand units) 2006 2007 Growth 2008 2009 2008 2009

Tyres

FY

2004

2005

200709 1.9% -2.2% 4.8% 14.5%

Volume Replacement OEM Export Share Replacement OEM Export

10,444 11,255 10,278 5,826 6,277 4,866 4,497 4,775 5,122 121 203 290 100% 100% 100% 55.8% 55.8% 47.3% 43.1% 42.4% 49.8% 1.2% 1.8% 2.8%

9,643 4,038 5,284 321 100% 41.9% 54.8% 3.3%

11,604 10,883 5,529 4,553 5,622 5,894 453 436 100% 100% 47.6% 41.8% 48.4% 54.2% 3.9% 4.0%

20.3% 36.9% 6.4% 41.4%

-6.2% -17.6% 4.8% -3.9%

Growth in Domestic Scooter, Mopeds, 3Ws Automotive and Tyres Production

yoy 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Automotive Production Tyres Production

CV T y r e s The CV tyre segment accounted for 22% of all tyres produced in India in FY2009. The high share of CV tyres is primarily because of Indias heavy reliance on roadways for transport services and the continual increase in the cumulative number of CVs on road which need periodic tyre replacements. Further, every truck/bus manufactured generates a demand for seven tyres (six regular and one spare) as against three in the case of 2Ws, and five for passenger cars. In addition, the price of a truck tyre is significantly higher than that of a passenger car tyre (roughly 10 times) or a motorcycle tyre. Thus the demand multiple emanating from the CV segment is the highest in value terms, with the CV tyre segment accounting for around 60% of industrys turnover. The demand for truck tyres essentially emanates from the replacement market. Given the regular use and heavy wear and tear of truck and bus tyres, tyre replacement is very frequent in this segment. The demand from the replacement market was estimated at around 63% of the total domestic industry supply of truck and bus tyres in FY2009; the OEM demand accounted for around 16%. With the Indian manufacturers of cross-ply tyres focusing on the export market, exports accounted for around 22% of the demand for truck and bus tyres. The share of replacement market has increased from 54% in FY2007 primarily because of lower growth in OEM demand, and lower scrappage rates of old CVs.

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Industry Comment CVs Tyre Supply Trends

Incl. trucks, bus, LCVs Volume (thousand units) 2006 2007 Growth 2008 2009 2008 2009

Tyres

FY

2004

2005

200709 3.3% 6.1% 0.6% 0.0% -2.1%

Volume Replacement OEM Government Export Share Replacement OEM Government Export

14,092 13,904 16,470 17,187 18,457 18,137 8,622 7,494 9,572 9,242 10,206 11,424 2,095 4,673 2,918 3,890 4,017 2,968 180 15 180 180 180 180 3,195 1,722 3,800 3,875 4,053 3,564 100% 100% 100% 100% 100% 100% 61.2% 53.9% 58.1% 53.8% 55.3% 63.0% 14.9% 33.6% 17.7% 22.6% 21.8% 16.4% 1.3% 0.1% 1.1% 1.0% 1.0% 1.0% 22.7% 12.4% 23.1% 22.5% 22.0% 19.7%

7.4% 10.4% 3.3% 0.0% 4.6%

-1.7% 11.9% -26.1% 0.0% -12.1%

As can be seen from the table above, although growth in the replacement market has been high during FY2008-09 (compared with a decline in FY2007), the sharp decline in domestic CV production has resulted in Indias CV tyre production declining from around late-2008. However, the magnitude of decline in CV tyre production has been much lower than the decline in domestic CV production primarily because of the >60% share of replacement demand. Growth in Domestic CV Automotive and Tyres Production
yoy 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Automotive Production Tyres Production

F o u r -Wh ee le r s Tyr e s The 4W tyre segment accounted for 22% of all tyres produced in India in FY2009. Although, 4W production growth moderated from 18% in FY2007 to 15% in FY2008, total domestic industry supply increased 15% in FY2008, compared with 5.9% in FY2007, primarily because of higher demand growth in the replacement market. However, domestic supply increased only 0.1% in FY2009 because of a sharp slowdown in domestic 4W production growth to 3.4% in FY2009. OEM demand accounted for 50% of domestic supply in FY2009, and OEM demand growth moderated from 14% in FY2008 to only 4% in FY2009. On the other hand, the replacement market accounted for around 44% of the total domestic industry sales of 4W tyres in FY2008. Replacement demand declined 3.3% in www.IMaCS.in 16

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FY2009 primarily because of sharp increase in tyre prices and longer replacement intervals. With the stock of cars in the Indian market increasing, replacement demand is likely to continue being an important component for car tyres. 4Ws Tyre Supply Trends
Volume (thousand units) 2006 2007 Growth 2008 2009 2008 15.0% 16.3% 14.1% 0.0% 13.6% 2009 0.1% -3.3% 4.3% 0.0% -8.9% 200709 6.8% 3.0% 12.0% 0.0% -1.7%

FY Volume Replacement OEM Government Export Share Replacement OEM Government Export

2004

2005

11,399 13,324 14,921 15,799 18,173 18,190 5,850 6,236 7,308 7,092 8,248 7,980 4,943 6,048 6,545 7,724 8,811 9,193 15 15 15 15 15 15 592 1,025 1,054 967 1,099 1,002 100% 100% 100% 100% 100% 100% 51.3% 46.8% 49.0% 44.9% 45.4% 43.9% 43.4% 45.4% 43.9% 48.9% 48.5% 50.5% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 5.2% 7.7% 7.1% 6.1% 6.0% 5.5%

Growth in Domestic 4W Automotive and Tyres Production

yoy 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Automotive Production Tyres Production

TRADE
I mport s
During 8MFY2009 (April-November 2008), around 3.42 million tyres were imported into India including 2.41 million radial tyres. Although this constitutes only 6% of total tyre production, the share of imports has been increasing, driven by increased imports of tyres for passenger cars and CVs. While Indias tyre imports have increased from 0.35 million in FY2002 to an estimated 3.3 million in FY2008, imports as a percentage of domestic production has increased from 0.8% in FY2002 to 6-7% at present. As noted, tyre imports are primarily of higher value tyres for passenger cars and CVs. Thus, the share in value terms is likely to be much higher.

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Industry Comment

Tyres

Category-wise Tyre Imports

thousands FY Total Passenger Cars/Jeeps Bus/Lorries 2Ws Retreads Others Of which Radials Passenger Cars/Jeeps Bus/Lorries 2004 854 446 88 107 128 85 176 61 2005 1,255 781 212 98 52 113 588 49 2006 1,469 695 506 115 14 139 610 50 2007 2,909 1,502 873 104 91 339 1,280 248 2008 3,642 1,627 1,328 173 114 400 1,188 598 2009 (8M) 3,417 2,008 1,006 26 31 346 1,751 663

A large percentage of imports in the past have been from South Korea, China, and Thailand at the concessional rate of customs duty. With the basic import duty reduced to 10% (in addition to a 4% additional duty of customs), the import of tyres is likely to increase and this poses a threat to the domestic industry. Further, customs duty on passenger cars is 8.5% (under the Asia Pacific Trade Agreement) and nil (under the Indo-Sri Lanka Free Trade Agreement). Although tyres imported from China are price-competitive, a critical factor that can influence volumes of imports is the after sales service offered on imported tyres, particularly in the CV segment. Country-wise Imports of Major Items of Tyres
thousands FY Radial Motor Car Tyres Of which Korea China Thailand Sri Lanka Turkey Non-Radial Motor Car Tyres Of which Korea China Thailand Czech Republic Japan Sri Lanka Radial Bus/Lorries Of which China Thailand Non-Radial Bus/Lorries China Sri Lanka Motorcycles Of which Korea China Thailand 2004 176 30 11 22 0 29 270 172 19 1 0 15 35 61 52 4 27 15 5 106 22 27 31 2005 588 321 57 52 27 39 193 18 63 10 0 22 62 50 44 2 171 148 6 93 0 17 30 2006 610 213 222 42 1 38 85 10 17 3 0 16 0 50 45 1 456 300 42 115 4 53 26 2007 1,280 224 564 84 0 40 222 9 87 61 3 11 0 248 221 2 625 529 51 35 0 7 15 2008 (9M) 1,188 327 502 79 53 35 439 0 162 106 45 36 0 598 564 14 730 627 81 28 2 1 4 Growth (2006-08) 26.4% 0.6% 106.6% 15.4% 24.9% -2.9% 31.5% -85.9% 37.2% 119.9% 1546.9% 17.9% -100.0% 129.1% 134.3% 88.9% 62.2% 61.8% 138.4% -33.1% -57.3% -49.3% 2009 (9M) 1,985 706 827 218 15 281 0 74 13 37 60 0 695 633 45 350 251 89 17 10 1

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In December 2005, the ATMA had filed an application with the Ministry of Commerce & Industry (MoC), GoI alleging dumping of bias tyres for bus and lorries including trucks, originating in or exported from the China and Thailand, and had requested for initiation of antidumping (AD) investigations for levy of anti dumping duties on the subject goods. In July 2006, based on its preliminary findings, the MoC had recommended imposition of AD duty concerning imports of subject goods originating in or exported from China and Thailand. Subsequent to the provisional findings, the GoI had imposed provisional AD with effect from October 9, 2006. In June 2007, based on its final findings, the MoC has recommended a definitive AD on these imports. Accordingly, definitive AD has been recommended from the date of imposition of provisional duty, on all imports of subject goods falling under chapter 40 of Custom Tariff Classification Act 1975, originating in or exported from China and Thailand. As a result, the GoI imposed AD duty on such imports with effect from July 24, 2007. However, inspite of such tariff measures, tyre imports, especially from China and Thailand, have continued to increase at a high rate. The replacement market is especially price sensitive and Chinese tyres are usually priced around 20-30% cheaper than domestically produced tyres.

E xpo rt s
Indias tyre exports have increased at a 3-year CAGR of 1.2% to around 5.59 million units in FY2009. In value terms, tyre exports increased at a 3-year CAGR of 11% to around Rs. 31 billion in FY2008. Following high growth in FY2008, exports declined 8.3% in FY2009 primarily because of a sharp decline in exports of CV. However, growth in value terms was 10% during FY2009 mainly because of higher prices and rupee depreciation. Indias Tyre Exports
FY 6,500 5,500 4,500 3,500 2,500 1,500 500 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2,322 1,863 2,209 2,445 3,444 2,911 4,102 Thousand units Rs. million 5,067 5,388 5,450 6,094 5,589 25,000 20,000 15,000 10,000 5,000 0 30,000

Indian companies have currently entered into sourcing agreements (for tyres) with neighbouring countries. For instance, Ceat and J K Tyres have sourcing agreements with tyre producers in Sri Lanka and China.

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Industry Comment Growth Trends in Indias Tyre Exports

Volume (thousand units) 2007 2008 2,276 966 1 1,599 31 152 289 76 12 43 4 5,450 2,432 1,092 7 1,622 12 323 441 101 13 46 6 6,094 Growth 2009 1,934 992 10 1,630 11 453 425 79 8 37 10 5,589 3-year CAGR -7.1% -2.0% 126.3% 5.4% -33.7% 74.8% 18.9% -11.9% 1.4% 3.1% 59.7% 1.2%

Tyres

Percent of Production 2005 22.6% 8.6% 0.0% 28.7% 0.9% 0.1% 0.3% 3.8% 2.6% 26.3% 8.4% 2007 18.4% 6.8% 0.1% 33.2% 1.3% 0.3% 0.6% 3.7% 1.8% 37.5% 7.4% 2008 18.5% 6.6% 0.5% 30.5% 2.0% 0.1% 1.2% 2.0% 1.7% 32.6% 7.5% 2009 15.1% 6.0% 0.7% 30.8% 2.2% 0.1% 1.5% 2.6% 1.3% 27.0% 6.8%

FY Truck & Bus Passenger Car Jeep/MUV LCV Scooter Motorcycle Three wheelers Tractor Tyre Industrial OTR Others Total

2005 2,504 1,025 0 1,131 9 63 194 107 10 23 2 5,067

In value terms, non-radial CV and 4W tyres dominate. By comparison, exports of radial tyres have declined in recent years. Although aircraft tyre exports have increased at a high rate over the last few years, primarily to Belgium, Netherlands, and Thailand; they represent a small proportion of total exports. Category-wise Exports of Major Items of Tyres
Rs. Million FY Radial Motor Car Tyres Non-Radial Motor Car Tyres Radial Bus/Lorries Non-Radial Bus/Lorries Aircraft Motorcycles Motor Scooters MCP Tubes Tyres for Bicycles Other Bicycle Tyres Agricultural or Forestry Machine Tyres Industrial/Construction Machinery Tyres Retreaded Tyres 2004 744 470 6,761 3,987 51 61 20 1,246 541 49 146 126 2005 941 522 7,492 4,650 25 38 39 1,106 254 152 111 42 2006 1,091 773 9,067 5,835 97 79 18 1,269 342 746 18 72 2007 1,062 1,080 7,385 9,138 348 201 43 1,171 592 1,799 9 188 2008 (9M) 1,152 2,409 5,300 9,604 194 136 16 375 740 2,528 42 85 Growth (2006-08) 7.0% 66.5% -10.9% 27.4% 99.2% 52.7% -25.1% -30.3% 42.9% 155.1% -27.8% 26.3% 2009 (9M) 1,109 2,432 3,768 8,442 288 184 21 818 893 1,965 72 109

As can be seen from the table above, CV tyres dominate Indias tyre exports. Exports of CV tyres accounted for around 64% of Indias tyre exports in FY2009. These tyres are primarily exported to countries in Latin America, UAE, Bangladesh, Iran, Philippines, and Vietnam. Passenger car tyre exports have also increased significantly in recent years, primarily because of increased exports of non-radial tyres to UAE and Nigeria. 4W tyres accounted for around 18% of Indias tyre exports in FY2009, and have declined during FY2007-09. Indian companies primarily export non-radial tyres. However, exports of higher-value radial tyres have declined in recent years primarily because of increased competition from China and South-East Asian countries.

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Industry Comment Country-wise Exports of Major Items of Tyres

thousands FY Radial Motor Car Tyres Iran Kenya Nigeria Pakistan Peru Philippines UAE Non-Radial Motor Car Tyres Egypt Kenya Nigeria Pakistan Philippines UAE US Radial Bus/Lorries Djibouti Ecuador Egypt Iran Nigeria Pakistan Peru Philippines UAE US Non-Radial Bus/Lorries Egypt Iran Nigeria Pakistan Peru Philippines UAE Viet Nam Motorcycles Bangladesh Colombia Sri Lanka 2004 537 18 35 10 24 7 21 27 342 12 22 6 10 9 20 31 1,951 4 20 40 89 53 103 43 99 137 252 1,439 34 45 39 74 14 60 79 18 111 9 0 16 2005 865 23 57 41 41 18 28 74 458 19 14 3 33 22 50 44 1,971 19 23 48 110 43 164 59 177 180 209 1,359 70 27 47 105 21 128 166 54 80 15 0 12 2006 883 22 39 60 47 17 42 191 476 36 14 2 28 29 89 26 2,187 43 35 113 117 82 184 42 160 250 89 1,545 57 51 56 146 14 149 197 50 181 55 5 33 2007 601 13 52 66 39 14 25 71 617 18 35 8 32 88 72 16 1,569 59 34 79 130 92 56 50 69 166 82 2,121 83 129 79 208 50 222 318 72 375 77 27 69 2008 (9M) 841 31 40 65 44 35 48 91 1,003 53 47 59 66 74 87 30 1,178 73 50 62 94 98 27 46 52 85 38 2,229 68 212 51 213 49 257 266 72 352 101 26 32 Growth (2006-08) -0.9% 10.5% -11.3% 16.6% 2.5% 23.5% 20.3% 6.8% 29.8% 40.6% 49.6% 174.7% 25.8% 50.7% 20.1% -11.4% -15.8% 57.4% 29.5% 8.9% -4.9% 31.4% -44.9% -8.0% -33.7% -22.1% -43.4% 17.9% -1.0% 99.6% 3.2% 26.7% 32.0% 26.1% 17.0% 10.0% 63.7% 88.7% 38.8%

Tyres

2009 (9M) 715 41 50 32 37 25 33 130 908 52 48 71 41 42 88 52 657 27 22 14 68 47 10 53 28 43 31 1,502 35 97 97 145 23 162 137 55 381 94 42 45

SUPPLY CHARACTERISTI CS
The Indian tyre industry has around 43 companies, out of which the top 10 companies account for around 90-92% of total production. The major players have a well diversified product mix with a presence in all major segments. Other players are smaller in size, with a focus only on one or two www.IMaCS.in 21

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categories of tyres, plus tubes and flaps primarily for the replacement market. As per industry estimates, the annual installed capacity has increased from around 54 million in FY2002 to 86 million in FY2007. Most of the additional installed capacity has been for the production of passenger car tyres, truck and bus tyres, and motorcycle tyres. Some of the major players in the Indian tyre industry are MRF Limited, Ceat Limited, JK Industries Limited, Apollo Tyres Limited, and Modi Rubber Limited. The following table provides details of installed capacity and production trends of some major players. Trends in Capacity and Production
thousands FY Capacity Apollo Balkrishna MRF Ceat Falcon Goodyear J K Tyre TVS Srichakra Production Apollo Balkrishna MRF Ceat Falcon Goodyear J K Tyre TVS Srichakra 2004 2005 2006 2007 2008 Growth (2006-08) 11.9% 13.5% 8.6% 1.8% 11.6% 0.0% 14.4% 14.1% 21.4% 12.6% 2.7% 10.8% -1.8% 21.5%

5,422 2,017 17,372 4,311 5,200 1,264 6,055 7,362 4,889 930 17,097 6,360 4,309 1,182 5,562 5,705

6,889 2,288 19,772 4,311 5,400 1,264 6,296 7,362 5,971 1,024 17,597 7,278 5,112 1,207 5,774 5,456

7,934 2,320 21,572 4,311 5,700 1,264 7,598 9,300 7,030 1,348 20,349 7,640 5,421 1,095 6,785 7,206

8,823 2,585 24,850 4,311 6,480 1,264 8,700 10,725 7,841 1,443 22,714 7,510 6,249 1,188 7,217 9,674

9,659 3,341 25,350 4,542 7,500 1,264 11,029 8,867 1,831 25,092 7,895 6,963 1,143 9,774

In recent years, mergers and acquisitions are taking place in the tyre industry. In December 2005, the tyre business of Jumbo Group (Dunlop, Falcon Tyres and India Tyre Co, a trading company) was sold to Pawan Ruia in an offshore deal. The exit from the tyre business was in line with Jumbo Groups policy to concentrate on its core business electronics. The trend of consolidation is expected to gather momentum, because of the need to achieve economies of scale. The likely entry of international players into the Indian market will increase the role of technology in the tyre market in future. Further, these multinational tyre manufacturers are likely to leverage their association with the OEM manufacturers in the international markets, to capture domestic demand, from the OEMs, at least in the passenger car segment. This could also offer significant spillover benefits in the replacement market. The entry barriers for the tyre industry are high and hence this is unlikely to be a risk factor for the industry. The industry is a highly capital intensive industry. A plant with an annual capacity of 1 million cross-ply truck and bus tyres costs around Rs. 6 billion. A similar plant producing radial tyres costs Rs. 14 billion. For passenger cars, a plant with an annual capacity of 10 million radial tyres costs around Rs. 12 billion. The capital costs for setting up a 2W tyre plant is lower with an estimated cost of Rs. 3 billion for a plant with an annual installed capacity of 1 million tyres.

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KEY ISSUES
Hi gh but St agn a nt De man d for Ret r e ad ed Tyr es
Retreaded (reconditioned) tyres constitute an important substitute for new tyres. Although driving behaviour, road conditions, and tyre maintenance determine the life of a tyre; improvements in tyre manufacturing over the past 40 years have more than doubled the mileage of tyres. Presently, steelbelted radial passenger tyres can last about 65,000 kilometres. If these tyres are properly inflated, rotated, and otherwise cared for, a lifetime of around 100,000 kilometres may also be achieved. The increased number of vehicles has led to a tremendous growth in the volume of used tyres. Worldwide, over 1 billion tyres reach their end of life annually. The options available to increase the economic life of tyres and the raw materials use include reuse; retreading and regrooving; recycling through material recycling; and recovery through incineration with energy recovery. In Europe, these options concerned on average nearly 40% of total discarded tyres. Retreading alone accounts for around 9% of annual usage of discarded tyres in the US, and 13% in the European Union (EU). A tyre normally consists of a casing or carcass that forms the skeleton of the tyre and the tread that is mainly made of rubber and therefore in most cases can be renewed. Retreading consists of stripping the old tread from a worn tyre and reclothing the old casing with a tread made from new materials. Although the price of retreaded tyres is between 30-80% lower than the price of a new tyre, they deliver the same mileage as new tyres. The potential market for retreading is quite important since 40-50% of discarded car tyres and 60-80% of truck tyres are suitable for reuse and retreading. Partly worn tyres may also be regrooved: a new pattern is grooved into the tread base that remains after the pattern has been worn away by use. This technique is carried out primarily on truck tyres because they are designed with significant tread thickness. If the process is carried out correctly, about 30% extra mileage will be obtained for only around 5% of the cost of a new tyre. The annual retreading market in India is estimated at around 14-15 million. The truck and bus segment accounts for around 58% of the retreading market, followed by LCVs (13%), and passenger cars (17%). With greater acceptance of retreading in the CV segment, retreading is competing with the replacement market demand for tyres. Retreading of tyres has emerged as an attractive alternative to the purchase of new expensive tyres and improvements in retreading technology should see retreading maintain pressure on replacement tyre demand. Retreading in the CV segment is poised for growth, driven by increased level of radialisation in the CV 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 CVs); and increased investments in road projects (coupled with reduction in overloading and improved condition of road network which could result in retreading offering added financial benefits). However, inspite of advancement in retreading technology, retreading rates are much lower and stagnant in the passenger car tyre market. Till the last decade, retreaded tyres were used in passenger cars because of their significantly lower price as compared with `new replacement tyres. However, till recently, the stagnation in tyre prices and lower prices of new tyres has adversely affected the retreaded passenger car tyre market. Safety perceptions about retreaded tyres (which are often retreaded in the unorganised sector) is also an important factor. Consumers are often

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reluctant to substitute a retread for a new replacement tyre because of perceived uncertainty concerning quality.

Non -Ta ri ff Me asur es o n I mport s o f Ty re s a nd Raw M at e ri al s

Although import of NR and other raw materials is under open general licence (OGL), except carbon black, which is in the restricted list from November 24 onwards, the domestic prices of NR, the primary raw material for the tyre industry is fixed by the Government through the mechanism of Minimum Statutory Price (MSP). The domestic NR price may be higher than comparable prices in the international markets. However, this does not entail the tyre industry players to import as the Government through its import policies has also put restrictions on the import of NR. For instance, NR currently may be imported only through two ports in the countryKolkata & Vishakapatnam. Additionally, the customs duty on import of NR is currently at 20%. The tyre industry is also a signatory to several trade agreements that allows for import of tyres at a concessional rate: for example, under the Asia Pacific Trade Agreement (APTA) or formerly the Bangkok Agreement, all categories of tyres can be imported from Bangladesh, China, Korea, and Sri Lanka, at a generally lower preferential rate of 8.6%. Under SAARC Preferential Trade Agreement (SAPTA), truck/bus tyres can be imported at 5% customs duty from Pakistan and Sri Lanka; and at nil duty from Bangladesh, Bhutan, Maldives, and Nepal. Under India Singapore Comprehensive Economic Cooperation Agreement (CECA), customs duty on tyres is 2.5%. Under Indo-Sri Lanka Free Trade Agreement (ISL), new tyres can be imported at nil customs duty. Under APTA, NR can be imported at 16% customs duty as compared with basic customs duty of 20% on NR. However, NR is not cultivated in Korea and Bangladesh. Though NR can thus be imported from China and Sri Lanka, such rubber is of poor quality, and thus there is only a negligible amount of imports of NR by the tyre industry from these countries. Hence, the options of rubber import are restricted and the tyre industry players have to rely on the domestic market for procuring rubber. Customs Duties on Tyres and Raw Materials
Basic Tyres New Tyres (All) Aero Tyres Used Rubber Tyres Raw Materials NR NR Latex Nylon Tyre Yarn NTC Fabric Carbon Black Steel Tyre Cord Rubber Chemicals Polyester Tyre Cord Zinc Oxide Resorcinol Bead Wire Caprolactum Carbon Black Feedstock 10% 3% 10% 20% 70% 10% 10% 5% 10% 7.5% 5% 7.5% 7.5% 0% 10% 5% APTA 8.6% 2.58% Not Covered 16% 39.9% Not Covered Not Covered 4.3% Not Covered 6.97% Not Covered Not Covered Not Covered Not Covered Not Covered 4.3% ISL 0% 0% Negative List Negative List Negative List Negative List 7.5% 0% 0% 0% 3.75% 0% 0% 0% 0% 0% SAPTA 0-5% 1.5% Not Covered Negative List Negative List 0% Not Covered 0-5% 0-5% Not Covered Not Covered Negative List 0-7.5% Not Covered 0-5% 0-5% CECA 2.5% 105% 5% Negative List Not Covered Not Covered Not Covered Not Covered Not Covered 3.75% (Antioxidant) Not Covered Not Covered 4.87% Not Covered Not Covered Not Covered

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Hi gh In ci d enc e of Ta x es
The tyre industry is subject to an excise duty of 14%. However, the total tax incidence including excise duties, octroi, etc is considerably higher. For example, the percentage of total tax to the tax excluded price for various categories of tyres is 33% for passenger car radials, 33% for truck tyres; 35% for tractor tyres (rear), and 40% for truck tyre tube.

FINANCIAL PERFORMANC E
Raw Mat e ri a l Cost s
The basic raw materials used for tyre production are rubber, textiles (primarily nylon tyre cord or NTC), steel, and chemical additives (primarily zinc oxide and carbon black). The proportions in which these components are used depend heavily on the specific characteristics of the tyregenerally passenger car tyres have lower NR content that truck tyres. The consumption pattern of total raw material consumption during FY2007-08 is as follows: Consumption Pattern of Major Raw Materials
Thousand tonnes Item FY2007 NR 459 SBR 48 PBR 55 Carbon Black 247 NTC Fabric 98 Rubber Chemicals 21 Steel Tyre Cord 6 Butyl Rubber 34 SBR: synthetic butadiene rubber; PBR: polybutadiene rubber FY2008 496 69 73 273 104 22 7 36

Approximately 70% of total weight of car tyres and 65% of truck tyres is rubber compound that is a combination of NR and synthetic rubber (SR) hydrocarbons. The tyre weight is around 2 kg for a scooter tyre, 5-5.5 kg for a motorcycle tyre, 5-18 kg for a passenger car tyre, 11-23 kg for a LCV tyre, and 30-80 kg for a truck/bus tyre. NR is obtained from the sap collected from Hevea brasiliansis (rubber tree) plantations. SR is obtained from petroleum and coal requiring several stages to produce2. Steel, textile and carbon black are the main reinforcement materials of tyres. The amount of steel wire used in tyres is larger for truck tyres compared to passenger car tyres. The most important chemical additive is zinc oxide, which is used as an activator. Carbon black is derived from the incomplete combustion of petroleum feedstocks, mainly decant oil obtained from fluid catalytic cracking of gasoils to produce gasoline; ethylene tar or ethylene cracker residue from the steam cracking of naphtha/gasoil; and raw coal tar oil, creosote and anthracene oil from coal coking. Carbon black is added to further improve the rubber properties, prevent oxidation and provide greater abrasion resistance. All the input materials
2

SR has its origin in two gases: butadiene, a by-product of petroleum refining, and styrene, captured either in the coking process or as a petroleum refining by-product. The two are mixed in the presence of soapsuds in a reactor to produce liquid latex.

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Industry Comment

Tyres

are finally mixed and vulcanised using sulphur. Vulcanisation is a thermochemical process that gives the tyres their performance characteristics in the consumption phase of the product lifecycle. NR accounts for around 41% of raw material cost, followed by NTC fabric (18%), synthetic rubber (16%), carbon black (10%), and rubber chemicals (5%). Share of Raw Material Costs
Item FY2005 NR 40% SBR 3% PBR 5% Carbon Black 12% NTC Fabric 26% Rubber Chemicals 5% Steel Tyre Cord 2% Butyl Rubber 5% Others 2% SBR: styrene butadiene rubber; PBR: poly butadiene rubber FY2007 42% 5% 6% 12% 22% 5% 2% 5% 1% FY2008 41% 5% 6% 10% 18% 5% 2% 5% 8%

The Indian tyre industry consumed around 722 kilotonnes (kt) or 0.72 million tonnes (mt) of rubber during FY2009comprising 508 kt of natural rubber (NR), 185 kt of synthetic rubber (SR), and 29 kt of reclaimed rubber. NR accounts for around 70% of rubber consumption by the Indian tyre industry, followed by SR (26%), and reclaimed rubber or RR (4%). The tyre industrys consumption of rubber has increased in recent years, and the industry accounted for around 58% of Indias rubber consumption in FY2009, compared with 47% in FY2002. Indias Rubber Consumption
tonnes Total FY 2002 2003 2004 2005 2006 2007 2008 2009 Growth 2008 2009 2006-08 NR 638,210 695,425 719,600 755,405 801,110 820,305 861,455 871,720 5.0% 1.2% 2.9% SR 174,530 194,850 210,190 224,650 237,495 270,830 297,155 292,950 9.7% -1.4% 7.2% Reclaimed 63,875 67,320 70,460 72,905 76,535 78,435 83,165 86,030 6.0% 3.4% 4.0% Total 876,615 957,595 1,000,250 1,052,960 1,115,140 1,169,570 1,241,775 1,250,700 6.2% 0.7% 3.9% NR 304,425 353,032 378,185 406,226 442,921 462,081 495,577 508,121 7.2% 2.5% 4.7% SR Tyre Industry Rec. Total 12,925 16,138 18,244 19,908 21,978 23,814 27,589 29,191 15.9% 5.8% 9.9% 412,627 476,653 515,796 557,401 606,479 656,704 714,673 722,406 8.8% 1.1% 6.0% Share 47.1% 49.8% 51.6% 52.9% 54.4% 56.1% 57.6% 57.8%

95,277 107,483 119,367 131,267 141,580 170,809 191,507 185,094 12.1% -3.3% 9.3%

The tyre industrys consumption of NR has increased in recent years, and the industry accounted for around 58% of Indias NR consumption in FY2009.

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Industry Comment Indias NR Production, Trade and Consumption

Total (tonnes) Import Export 49,552 26,229 44,199 68,718 45,285 89,699 86,394 81,545 -3.7% -5.6% 21.7% 6,995 55,311 75,905 46,169 73,830 56,545 60,353 46,926 6.7% -22.2% -14.0% Tyre Industry

Tyres

FY 2002 2003 2004 2005 2006 2007 2008 2009 Growth 2008 2009 2007-09

Production 631,400 649,435 711,650 749,665 802,625 852,895 825,345 864,500 -3.2% 4.7% 2.5%

Consumption Consumption Share of Total Consumption 638,210 304,425 47.7% 695,425 353,032 50.8% 719,600 378,185 52.6% 755,405 406,226 53.8% 801,110 442,921 55.3% 820,305 462,081 56.3% 861,455 495,577 57.5% 871,720 508,121 58.3% 5.0% 1.2% 2.9% 7.2% 2.5% 4.7%

Consumption of SR by the Indian tyre industry aggregated around 185 kt during FY2009, as compared with 192 mt during FY2008. SR consumption has declined in FY2009 primarily because of higher domestic production of NR, and sharp increases in SR prices driven by high crude oil prices. Styrene-Butadiene Rubber (SBR) is the largest tonnage SR being produced over the world. It accounts for about 60% of the SR production and more than 30% of all rubber consumed. SBR possesses the greatest balance of functional qualities in the widest range of applications. Polybutadiene Rubber (PBR) is another type of SR, and about 90% of PBR is used in tyres, blended in various proportions with SBR, NR etc. Indias SR Production, Trade and Consumption
Total (tonnes) Import Export 111,323 124,475 173,784 113,095 132,118 171,998 195,705 196,030 13.8% 0.2% 14.1% 0 0 0 0 0 0 0 0 Tyre Industry Consumption Consumption Share of Total Consumption 174,530 95,277 54.6% 194,850 107,483 55.2% 210,190 119,367 56.8% 224,650 131,267 58.4% 237,495 141,580 59.6% 270,830 170,809 63.1% 297,155 191,507 64.4% 292,950 185,094 63.2% 9.7% -1.4% 7.2% 12.1% -3.3% 9.3%

FY 2002 2003 2004 2005 2006 2007 2008 2009 Growth 2008 2009 2007-09

Production 69,653 80,401 88,366 94,209 97,638 99,513 106,286 96,739 6.8% -9.0% -0.3%

As compared with the world NR:SR consumption ratio of 44:56, Indias NR:SR consumption ratio is around 70:30, mainly because of the higher proportion of 2W tyres produced. Over the medium term, usage of SR and the partial replacement of NR by synthetic polyisoprenc is expected to increase. SR is preferred for radial truck tyre manufacturers because of its excellent physical and mechanical properties, and better adhesion to steel cord.

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Industry Comment NR and SR Consumption

Thousand tonnes NR 2001 2002 2003 2004 2005 2006 2007 2007 2008 2009E Growth 2007 2008 2006-08 2009E 7,320 7,190 7,550 7,967 8,581 9,082 9,329 9,884 9,726 9,175 5.9% -1.6% 4.3% -5.7% SR World Total 18,150 17,443 18,242 19,348 20,475 20,977 21,810 23,045 22,299 20,742 5.7% -3.2% 2.9% -7.0% Share of NR 40% 41% 41% 41% 42% 43% 43% 43% 44% 44% NR 306 304 353 378 406 443 462 496 525 SR 171 175 195 210 225 237 271 297 317 India Total 539 543 615 659 704 757 811 876 927

Tyres

10,830 10,253 10,692 11,381 11,894 11,895 12,481 13,161 12,573 11,567 5.4% -4.5% 1.9% -8.0%

Share of NR 57% 56% 57% 57% 58% 59% 57% 57% 57%

7.2% 5.9% 5.8%

9.7% 6.8% 10.2%

8.0% 5.8% 7.0%

-0.7% 0.0% -1.1%

As compared with a 3% decline in 2008, world rubber consumption is expected to decline 7% in 2009 to 20.74 mt. Rubber consumption could increase 6-7% in 2010 to 22 mt. The automotive sector accounts for nearly 70% of world rubber demand, the outlook for automotive production is bleak for 2009, with almost all world regions forecast to see a substantial reduction in output levels in 2009. In North America and Europe, overall rubber consumption is expected to decline 15% and 14%, respectively. The fundamental factors influencing NR prices are demand and supply, while all other factors have indirect effects through changes in the fundamentals of demand and supply. For example, an improvement in the world economy and an increase in automotive production leads to an increase in rubber demand; a decline in the price of NR relative to SR influences a falling share of SR in total rubber consumption; and weak currencies of Thailand and Indonesia (cumulatively accounting for 58-60% of world NR production) relative to currencies in other producing countries encourages an increase in exports and output from these countries and hence a rise in world NR supply. In recent years, rubber prices have increasingly moved relative to crude oil prices. Higher crude oil prices can push up prices of SR, and increase demand and prices for NR. Changes to the stock situation provide an indication of the relative tightness of the rubber market. Tightness in the rubber market provides upward pressure on prices and vice versa. Important factors in the long term include technological innovation, economic development, etc.

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Industry Comment Relation Between Prices of Crude Oil and Rubber

140 120 100 80 60 40 20 0 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Oil (US$/bbl)-LS Rubber (US cents/pound)-RS

Tyres

160 140 120 100 80 60 40 20 0

NR is produced entirely in developing countries and Asia is the largest producing region accounting for 95% of world NR production. Asia (especially China, Korea, Japan, and India) is also the largest consumer of NR, accounting for 66% for world NR consumption in 2008. After a slow growth in production in 2007, world NR production increased 1.7% during 2008 to 9.88 mt because of a sharp increase in production in Indonesia, India, and Viet Nam accompanied by declines in Thailand and Malaysia. Indias NR production declined 3.2% in FY2008 because of unfavourable weather conditions and non availability of tappers due to disease conditions (caused by a viral disease called Chikungunya) prevailing in major rubber growing areas in Kerala (which accounts for nearly 90% of Indias NR output). However, production increased 20% in FY2009 primarily because of an 8% increase in yield to 1,901 kg/hectare (ha). Kerala realised more tapping days during June 2008 because of a weak monsoon, which usually disrupts harvest during June-August. By comparison, world NR consumption which had increased 5.9% in 2007, declined 1.6% in 2008, largely because of a sharp decline in consumption in the latter-half of 2008, caused by sharply lower demand from the automotive sector. Yoy consumption growth declined from 10.5% in 4Q2007 to 0.9% in 2Q2008. Consumption subsequently declined 0.2% (yoy) in 3Q2008, and by a sharp 10.2% (yoy) in 4Q2008. World NR Production and Consumption
2004 8,654 191 385 8,132 Thousand tonnes 2005 2006 2007 8,892 9,698 9,707 200 202 228 411 423 445 8,386 9,331 9,386 9,329 1,148 528 1,302 252 120 5,961 9,884 1,157 565 1,377 273 118 6,391 2008 9,876 241 443 9,406 9,726 1,179 562 1,189 255 112 6,453 Growth 2007 2008 0.1% 1.7% 12.9% 5.7% 5.2% -0.4% 0.6% 0.2% 5.9% 0.8% 7.0% 5.8% 8.3% -1.7% 7.2% -1.6% 1.9% -0.5% -13.7% -6.6% -5.1% 1.0%

Production Latin America Africa Asia

Consumption 8,581 9,082 North America 1,290 1,316 Latin America 523 538 European Union 1,292 1,318 Other Europe 198 227 Africa 122 120 Asia/Oceania 5,156 5,563 Source: International Rubber Study Group

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Industry Comment

Tyres

Compared with a 1.7% increase in production during 2008, world NR production is expected to decline 3-4% in 2009 to around 9.55 mt. Production in the Association of Natural Rubber Producing Countries (ANRPC) has declined sharply in the first four months of 2009. The present members of ANRPCChina, India, Indonesia, Malaysia, Papua New Guinea, Singapore, Sri Lanka, Thailand and Vietnamaccount for around 94% of world production. Overall production in the ANRPC countries is expected to decline 3.1% in 2009 to around 8.83 mt. Except for China, production is expected to decline in the remaining ANRPC countries. However, Chinas NR production is expected to increase 15% in 2009, reversing the 10% decline in 2008. In India, the fourth largest NR producing country, production declined 8% (yoy) during 4M2009 due to unusually severe drought in Kerala. Production is expected to decline 2.5% in 2009 to 0.86 mt. Although tapped area could marginally expand by 2,000 ha, average yield is anticipated to decline from 1,912 kg/ha in 2008 to 1,850 kg/ha in 2009. Over the next few years, there are some factors that could result in increased production. The large extent of area planted during 1996-97 (when NR prices were high) would have attained yielding age by 2003, and achieved increasing yield from 2007-08 onwards. However, there are many other factors that could constrain the supply of NR. The rubber trees attaining tapping age during 2008-10 are those planted during 2001-03. This was a period of low prices and lower acreage. Thus, addition to the tappable area could be only marginal during 2008-10. Although plantings had increased from 2004 onwards (because of rising rubber prices), they are not expected to attain the yielding girth until 2011. A total of 848,000 ha was additionally brought under cultivation or rubber by new planting undertaken from 2002 to 2008 in the six countriesIndia, Indonesia, Malaysia, Sri Lanka, Thailand and Vietnam. Out of this, 737,000 ha (or 87%) was cultivated from 2005 onwards. This implies that the large extent of new planting undertaken in response to the price boom after 2003 could impact on the supply only after 2011. In India, mature area in anticipated to expand only nominally by 4,000 ha until 2010. Finally, new rubber plantings boomed for a decade from the late1970s. The large extent of area planted during those years is now becoming aged, with expected decline in yields over the next few yields. When this large batch of trees is replanted, the yielding area would come down substantially. Already, rubber trees in 442,000 ha were discarded during 2000-07 (333,000 ha in Indonesia, 105,000 ha in Malaysia, 3,000 ha in Vietnam and 1,000 ha in Thailand). NR Production in Major ANRPC Countries
2004 Thailand 2,984 Indonesia 2,066 Malaysia 1,126 India 743 Vietnam 419 China 573 Sri Lanka 95 Source: ANRPC 2005 2,937 2,271 1,126 772 482 541 104 Thousand tonnes 2006 2007 3,137 2,637 1,284 853 555 538 109 3,056 2,755 1,200 811 602 588 118 2008 3,090 2,751 1,072 881 663 530 129 2009 3,075 2,586 1,023 859 650 610 126 2008 1.1% -0.1% -10.7% 8.6% 10.1% -9.9% 9.3% Growth 2009 -0.5% -6.0% -4.6% -2.5% -2.0% 15.1% -2.3% 200608 0.8% 10.1% 2.1% 3.0% 12.8% 0.9% 7.6%

Compared with a 1.6% decline in world NR consumption, consumption is expected to decline 4-5% (or by 0.5 mt) in 2009 primarily because of expected stagnation/decline in world automotive production.

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Industry Comment

Tyres

World and Indian NR prices have been on an upward trend since the first half of 2002. From a historical low of US$0.58/kg in 2001, average prices increased to US$2.29/kg in 2007. The price increase was driven by was contributed by various factors including buoyant growth in world output, increased demand from China, slow growth in production, high crude oil prices since 2003-04, and strengthening of local currencies of major exporting countries against the US dollar. Rubber prices had declined in early-FY2008 due to improved weather which brings in more crops and improves supply. However, prices firmed up subsequently because of an increase in crude oil prices. The sharp fall in crude oil prices has resulted in a sharp decline in rubber prices from September 2008-February 2009, followed by a sharp increase thereafter. Compared with their lows of US$1.1/kg on December 9, 2008, NR prices increased by 57% at the end of May 2009. Inspite of weak global demand conditions, prices have increased sharply because of lower production after wintering (mainly due to heavy rains in Thailand, Malaysia and Vietnam) as well as buying demand from China and India. Prices have also increased on account of improved market sentiment and increased oil prices. Indias NR prices have followed world price trends. Although NR prices declined during July 2004 to January 2005, they increased since the beginning of February 2005 as tight supply concerns that are usual to the onset of winter dominated market sentiments. NR prices continued to increase in 2005 because of an expected global deficit. Domestic NR prices increased 19.8% in FY2006 (for RSS-4 or ribbed smoked sheet-4 from Kottayam) to Rs. 66.8/kg, as compared with an increase of 10.6% in FY2005. During FY2007, prices had reached a peak in June 2006 and subsequently declined thereafter. Climatic disorders and piling up of stock by farmers restricted normal produce to the market thus creating supply scarcity. However, prices declined significantly from high levels in June 2006 because of significantly higher production during 2006 and lower growth in demand. However, the increase in crude oil prices since February 2007 resulted in a temporary increase in NR and SR prices, before a subsequent decline. Overall, while domestic NR prices increased 37.7% in FY2007 to Rs. 92/kg, international NR prices increased 31.9% during FY2007 to Rs. 97.7/kg. Prices of NR
Rs. per kg 160 140 120 100 80 60 40 20 0 RSS-4 India RSS-4 Thailand

Oct-05

Oct-03

Oct-04

Oct-06

Jul-07

Jul-03

Jul-04

Jul-05

Jul-06

Oct-07

Jul-08

Oct-08

During FY2008, rubber prices had declined in early-FY2008 due to improved weather which brings in more crops and improves supply. However, prices firmed up subsequently because of an increase in crude oil prices. Nevertheless, average domestic prices declined 1.3% in FY2008 to Rs. 90.85/kg. www.IMaCS.in 31

Apr-09

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Industry Comment

Tyres

During FY2009, prices continued to increase because of a continued increase in crude oil prices. In July 2008, while domestic prices of NR were around Rs. 133.4/kg, international prices were around Rs. 137.8/kg. With an increase in crude oil prices, the costs of producing SR rubber increased, and end-users found it profitable to continue switching to NR, thereby increasing demand and price of NR. With the decline in crude oil prices and sharp slowdown in domestic automotive production, domestic NR prices declined 45% during September 2008-March 2009. However, annual average domestic NR prices increased 11.3% in FY2009 to Rs. 101.12/kg, compared with a 7% increase in international prices. During 2009, NR prices reached their recent lows in February 2009, but subsequently increased 37% to average Rs. 94.9/kg in April 2009. Annual Average Domestic NR Prices
120 100 80 60 40 20 0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Rs./kg Growth 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40%

SR requires petrochemicals as a feedstock for its manufacture, using roughly 3.5 times more oil than required for a rubber tree plantation. SR prices have increased in recent years both because of higher crude oil prices, slow growth in SR production, and increase in NR prices. However, following their peak levels in mid-2008, prices declined sharply thereafter. With a sharp decline in crude oil prices, the costs of producing SR rubber have declined, resulting in a concurrent decline in SR (and NR) prices. Prices in the medium term are likely to be governed by crude oil prices. If oil prices continue their increasing trend of recent months, then the costs of production of SR will increase. In such a situation, inspite of weak demand prospects, prices of both NR and SR may increase. Recent forecast by the International Monetary Fund (IMF) indicate that average crude oil prices are expected to decline 46% in 2009 to average US$52/bbl, but increase 20% in 2010. By comparison, average crude oil prices increased 36% in 2008 to US$97/bbl. In the medium term, oil prices are likely to rebound further from their recent lows of December 2008. However, a rapid recovery to the record price levels seen in the first half of 2008 is unlikely, given prospects of more moderate growth in emerging and developing economies.

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Industry Comment Trends in SR Prices

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 SICOM, RSS3, S$/t -LS New York, TSR20, US$/t-RS

Tyres

3,500 3,000 2,500 2,000 1,500 1,000 500 0

Prices of NTC fabric, constituting around 18% of raw material costs, had exhibited an upward trend in FY2006-07, because of increase in input costs and increased demand from the tyre industry. NTC fabric is produced using different deniers of yarn, and used for reinforcement of tyres. The product is sold as `Grey fabric and `Dipped fabric. The Indian tyre industry requires both Grey and dipped fabric. Prices of carbon black, accounting for 12% of raw material costs, have declined with the wholesale price index (WPI) for carbon black declined during FY2005, before increasing in FY2006-07 mainly because of an increase in crude oil prices. During FY2008-09, while NTC prices remained stable or declined, carbon black prices have increased at a high rate. During FY2009, prices of carbon black increased sharply reaching their peak levels of increase in November 2008. Since then, prices have moderated because of decline in input costs and slowdown in demand from the tyres segment. Annual Change in WPI for NTC Fabric and Carbon Black
FY 30% 24% 18% 12% 6% 0% -6% -12% -18% -24% -30% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 NTC Fabric Carbon Black

M argi ns
The tyre industry is generally a low-margin industry mainly because of high input costs and limited bargaining power with buyers, especially OEMs. In particular, the OEMs have total control over www.IMaCS.in 33

Industry Comment

Tyres

quality and prices. The OEMs faced with declining profitability have reduced the number of component and tyre suppliers to make the supply chain more efficient. With this strategy, the OEMs are focusing more on their core competencies of assembling vehicles and introducing new models at a faster pace. For analysing the financial performance of the Indian tyre industry, IMaCS has considered a sample of 8 major companies, which reported an operating income (OI) of Rs. 167 billion in FY2008. During FY2004-08, although there has been a significant increase in raw material costs, it has been accompanied by a higher increase in prices from FY2007. Although OI increased 14% in FY2008 and 20% in FY2007, raw material costs increased 14% in FY2008, and 16% in FY2007. However, lower increase in other costs resulted in a slight improvement in operating margins during FY2006, and a significant increase in FY2007. Operating margins remained stable in FY2008 primarily because of higher increases in selling and other costs. After a decline during FY2004, operating profits increased moderately in FY2005, followed by sharp increase of 55% in FY2006, and 69% in FY2007. During FY2008, operating profits increased 14% to Rs. 15.70 billion. Growth in OI, Operating Profits, and Net Profits
FY 200% 150% 100% 50% 0% 2001 -50% -100% 2002 2003 2004 2005 2006 2007 2008 OI Operating Profits Net Profits

Lower interest costs resulted in an improvement in net margins. Net profits increased 32% in FY2008 to Rs. 6.90 billion, compared with increases of 104% in FY2007, and 38% in FY2006.

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Industry Comment Financial Indicators of Indian Tyre Companies

Percent of OI FY Gross Sales Less Excise OI Raw Material Cost Power & Fuel Employee Costs Other Operating Costs Cost of Sales OPBDIT Interest Depreciation OPBT Other Income PBT Tax PAT Compiled by IMaCS 2003 120.8 20.8 100.00 64.38 5.85 7.27 14.55 92.06 7.94 3.92 3.07 0.95 4.69 5.63 1.81 3.83 2004 117.5 17.5 100.00 65.89 5.46 6.79 16.27 94.41 5.59 2.90 2.89 -0.20 2.85 2.66 0.86 1.79 2005 115.3 15.3 100.00 68.77 5.27 6.15 14.62 94.81 5.19 2.44 2.86 -0.11 2.44 2.34 0.49 1.84 2006 113.0 13.0 100.00 71.23 5.08 5.70 11.31 93.32 6.68 2.32 2.92 1.43 1.49 2.92 0.81 2.11 2007 113.2 13.2 100.00 68.93 4.54 5.52 11.60 90.60 9.40 2.16 2.63 4.61 0.86 5.47 1.88 3.59

Tyres

2008 112.4 12.4 100.00 68.72 4.56 5.45 11.84 90.57 9.43 2.01 2.55 4.86 1.33 6.19 2.05 4.14

Re t ur ns
The return on capital employed (ROCE) had declined in FY2005 mainly because of decline in operating profits, lower other income, decline in pre-tax profit, and significant capital expenditure. Capital expenditure was lower during FY2006-08. Furthermore, a healthy increase in operating profits during FY2006-08, and lower increase in interest costs resulted in an improvement in ROCE during FY2006-08. Higher net profits also resulted in a significant improvement in return on net worth (RONW). Return on Capital Employed (ROCE) and Return on Net Worth (RONW)
FY 30% 26% 22% 18.1% 18% 14% 10% 6% 2% -2% 2002 2003 4.1% 5.5% 2004 2005 2006 2007 2008 10.7% 15.1% 10.9% 11.2% 9.7% 9.1% 6.3% 8.9% 16.8% 20.0% 18.9% ROCE RONW

The tyre industry is capital-intensive reflecting in asset turnover ratio (OI as percentage of average assets) of 1.3 in FY2008. However, improvement in capacity utilisations has resulted in asset www.IMaCS.in 35

Industry Comment

Tyres

turnover ratio improving from 1.02 in FY2003. The improvement in profitability has resulted in a lower debt-equity ratio and higher interest coverage ratios during FY2006-08. Debt-Equity and Interest Coverage

7 6 5 4 3 2 1 0 2002

Debt Equity Interest Coverage

2003

2004

2005

2006

2007

2008

F i n a nci al P er for man ce du ri n g FY200 9

During 12MFY2009, operating income (OI) of listed tyre companies increased 13% (yoy) to Rs. 188.23 billion. OI (yoy) growth was healthy at 22% in Q2FY2009 but has declined sharply to 7% in Q3FY2009, and 5% (yoy) in Q4FY2009. Operating margins declined sharply in Q2FY009 and Q3FY2009 because of a higher increase in input and employee costs. However, margins improved in Q4FY2009 because of seasonal increase in sales and moderation in input costs. Although interest/depreciation costs remained stable, lower other income resulted in a sharp decline in net margins. Financial Performance
Rs. Million, except percentages Rs. Million 12MFY Net Sales/OI Raw Material Cost Employee Costs Power & Fuel Other Operating Costs Cost of Sales OPBDIT Interest Depreciation OPBT Other Income PBT Tax PAT 2009 188,230 133,339 10,322 536 32,838 177,034 11,196 4,083 4,894 2,219 1,631 3,850 1,311 2,539 2008 166,061 110,567 9,572 602 27,417 148,157 17,904 3,185 4,304 10,415 2,325 12,740 4,212 8,527 Change (%) 13.3 20.6 7.8 -11.0 19.8 19.5 -37.5 28.2 13.7 -78.7 -29.8 -69.8 -68.9 -70.2 % of OI 2009 100.0 70.8 5.5 0.3 17.4 94.1 5.9 2.2 2.6 1.2 0.9 2.0 0.7 1.3 2008 100.0 66.6 5.8 0.4 16.5 89.2 10.8 1.9 2.6 6.3 1.4 7.7 2.5 5.1

On a quarterly basis, operating margins declined from 7.6% during Q1FY2009 to 2.4% during Q2FY2009, but improved to 10.5% in Q4FY2009 because of a moderation in input costs. www.IMaCS.in 36

Industry Comment

Tyres

Trends in Operating Income and Operating Margins

55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 Q1FY05 Q3FY05 Q1FY06 Q3FY06 Q1FY07 Q3FY07 Q1FY08 Q3FY08 Q1FY09 Q3FY09 2% 0% 10% 8% 6% 4% OI (Rs. million) Operating Margin 14% 12%

CONCLUSION
Future growth in tyre production for OEMs would be critically dependent on growth in automotive production, which is expected to grow at a modest rate in FY2010. In particular, CV production has declined sharply since late-2008, with the trend expected to continue for most of FY2010. However, continued growth in CV replacement market demand is expected to result in CV tyre supplies by domestic players increasing 2-3% in FY2010, compared with a decline of 1.7% in FY2009. By comparison, given the low levels of penetration of two-wheelers and passenger cars in the country, and the recent excise duty cuts, domestic supply to these segments is likely to increase at modest rates of 7% and 5%, respectively in FY2010. With the OEM market accounting for around 41% of the overall tyre supply, the industry remains inherently vulnerable to economic cycles which affect automotive production. However, imports represent an increasing threat in the OEM and replacement market, especially for the passenger cars and CV markets. Domestic IndustryForecast Supply Growth of Tyres to Various Segments
FY Replacement OEM Government Export Volume 2008 19.3% 1.0% 0.0% 11.7% 10.4% 2009 4.1% 0.5% 0.0% -8.3% 1.7% 2010F 6-7% 5-6% 0% -5% 5%

While radialisation has become the norm in the passenger car segment, acceptance in the bus and truck tyre segment is still limited. Bus and truck radialisation could emerge in the country in the long term as the quality of roads improves and the restrictions on overloading are better enforced. However, the practice of re-treading is also gaining increasing acceptance and could pose a credible challenge to replacement demand in the medium term. The ability of the re-treading sector to capture potential replacement demand would depend on the awareness among customers (given the potential benefits of retreading) and also the quality of re-treading done.

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The prospects of tyre exports from India appear modest, following efforts by Indian companies to increasingly enter into outsourcing agreements with tyre producers in South-east Asia, Eastern Europe and Latin America. However, the increasing exports of bus and truck tyres (of the crossply variety) from India to developing countries is also because of the fact that the developing countries are unable to source them from developed countries as crossply tyres are currently not produced in the developed countries. Moderate increase in domestic demand is expected to result in a 5-6% growth in domestic tyre production and sales during FY2010. Although limited bargaining power with OEMs, higher levels of radialisation, and likely high growth in imports can affect revenues and margins of prominent players in the tyre industry, the expected high growth in the replacement market is expected to result in stable margins. While the outlook on the demand growth for tyres continues to be positive on account of healthy growth expectations in select segments of automotive industry and exports, volatility in prices of rubber and other derivatives of crude oil continues to be a concern for the players.

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