Indian Tyre Industry

p date Sector\ue000U

The Indian Tyre Industry Rolling on the Drive

20th\ue000September\ue0002006\ue000

Although\ue000the\ue000tyre\ue000industry\ue000faces\ue000huge\ue000competition,\ue000price\ue000&\ue dynamics,\ue000with\ue000the\ue000growing\ue000economy\ue000and\ue000the\ue000escalating\ue000auto\u zooming\ue000auto\ue000industry,\ue000with\ue000sales\ue000growing\ue000at\ue000a\ue000CAGR\ue000of in\ue000the\ue000tyre\ue000industry,\ue000keeping\ue000both\ue000the\ue000OEM\ue000and\ue000replace industry\ue000depends\ue000on\ue000primary\ue000factors\ue000like\ue000overall\ue000GDP\ue000growth, vehicle-demand\ue000and\ue000on\ue000secondary\ue000factors\ue000like\ue000infrastructure\ue000develop number\ue000of\ue000vehicles\ue000on\ue000the\ue000road\ue000is\ue000constantly\ue000swelling,\ue000o would\ue000gain\ue000more\ue000momentum\ue000once\ue000projects\ue000like\ue000the\ue000Golden\ue0 implemented.\ue000\ue000 \ue000 The\ue000Indian\ue000tyre\ue000industry\ue000has\ue000witnessed\ue000a\ue000CAGR\ue000of\ue0007.7% has\ue000driven\ue000the\ue000industry\ue000growth\ue000for\ue000a\ue000long\ue000time,\ue000the\ue00 years.\ue000The\ue000truck\ue000and\ue000bus\ue000market\ue000is\ue000the\ue000largest\ue000segment industry\ue000turnover,\ue000in\ue000terms\ue000of\ue000value.\ue000Tyre\ue000production,\ue000in\ue00 against\ue000that\ue000of\ue0002004-05.\ue000The\ue000medium\ue000and\ue000heavy\ue000commercial\u 7.7%\ue000while\ue000the\ue000light\ue000commercial\ue000vehicle\ue000(LCV)\ue000and\ue000passenger\ growth\ue000of\ue00014.8%\ue000and\ue00014.7%,\ue000respectively.\ue000Exports,\ue000on\ue000 Tyregrown\ue000 Production Truck & due\ue000to\ue000 Passengerthe\ue000 the\ue000other\ue000hand,\ue000have\ue000not\ue000 much,\ue000 ( ' 000) Bus LCV Cars slowdown\ue000in\ue000MHCV\ue000tyre\ue000exports\ue000and\ue000have\ue000recorded\ue000a\ue000 2005-2006 11,940 4,528 13,605 0.3%\ue000growth,\ue000in\ue000tonnage\ue000terms.\ue000 \ue000 2004-2005 11,090 3,944 11,865 A\ue000 few\ue000 years\ue000 back\ue000 the\ue000 auto\ue000 industry\ue0007.7 was\ue000 and Change (%) 14.8 sluggish\ue000 14.7 so\ue000also\ue000was\ue000the\ue000tyre\ue000industry,\ue000 there\ue000has\ue000been\ue000a Tyre Exports in but\ue000 '000 dramatic\ue000 shift\ue000 since\ue000 the\ue000 last\ue000 2-3\ue000 years,\ue000 as\ue000 the\ue000 vehicle 2005-2006 2,408 1,392 1,054 production\ue000has\ue000considerably\ue000gone\ue000up.\ue000\ue000Economic\ue000 2004-2005 2,505 1,130 1,026 expansion,\ue000investments\ue000and\ue000road\ue000development\ue000have\ue000all\ue000 Change (%) -3.9 vehicles.\ue000 23.2 2.7 contributed\ue000to\ue000this\ue000increase\ue000in\ue000 demand\ue000for\ue000 Source: ATMA This,\ue000in\ue000turn,\ue000has\ue000helped\ue000the\ue000growth\ue000in\ue000the\ue000tyre\ue000in In\ue000this\ue000article,\ue000we\ue000have\ue000put\ue000forward\ue000the\ue000present\ue000tyre\ue0 and\ue000its\ue000way\ue000ahead.\ue000\ue000 \ue000 However,\ue000although\ue000the\ue000tyre\ue000industry\ue000grew\ue000in\ue000terms\ue000of\u to\ue000a\ue000substantial\ue000increase\ue000in\ue000raw\ue000materials\ue000costs,\ue000which\ue000a soared\ue000to\ue000over\ue00070%\ue000in\ue0002005-2006.\ue000Hence,\ue000the\ue000growth\ue000in \ue000 Market Share (%) The\ue000Indian\ue000tyre\ue000industry\ue000is\ue000two\ue000tiered;\ue000Tier-I\ue000players\ue 17%80%\ue000of\ue000industry\ue000 5\ue000tyre\ue000companies),\ue000account\ue000for\ue000over\ue000 24% turnover\ue000and\ue000have\ue000a\ue000well\ue000diversified\ue000product-mix\ue000and\ue000 6% presence\ue000in\ue000all\ue000three\ue000major\ue000segments,\ue000i.e.,\ue000replacement\ue000 market,\ue000original\ue000equipment\ue000manufacturers\ue000(OEM's)\ue000and\ue000 exports.\ue000Tier-II\ue000companies\ue000are\ue000small\ue000in\ue000size,\ue000mainly\ue000 14% concentrating\ue000on\ue000production\ue000of\ue000small\ue000 tyres\ue000(for\ue000two/\ue000 22% three-wheelers,\ue000etc.),\ue000tubes\ue000&\ue000flaps\ue000and\ue000the\ue000replacement\ue000 17% market. MRF CEAT

Apollo Tyres Goodyear

J K Inds Others

Source: Cris INFAC

The zooming auto industry, with sales growing at a CAGR of 15.8% during 2002-06, has driven the growth in the tyre industry, keeping both the OEM and replacement demand buoyant. Tyre production, in tonnage terms, grew at a healthy rate of 8.7% in 2005-06

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002, Raheja Paramount, 138, Residency Road, Bangalore \u2013 560 025. Ph: (080) Research Desk - Mumbai contact no.:022-22671924 / 25 email:[email protected] website:www.way2wealth.com

\ue000Sector\ue000 \ue000 \ue000 \ue000 \ue000 \ue000 \ue000 \ue000 \ue000 \\ue000 ue000 \ue000 Tyres The\ue000Demand\ue000Cycle\ue000 Growing Economy

Increase in income level, higher disposable income

Increase in demand of freight movement

Increase in wear & tear of tyres

Increase in demand for Passenger cars

Increase in Commercial Vehicles demand

Creates Replacement demand for Tyres

Increase in demand for Passenger car tyres

Increase in Tyres Demand from OEMs

Creates Replacement demand after about 24-48 months

Creates Replacement demand after about 12-18 months

Increase in Tyre Sales

Major\ue000Sales\ue000Segments\ue000 Sales Segments (Volume)

Category-wise Tyre sales FY06 (Volume) 18%

0.3%

8.2%

48.7%

47%

21% 1% 2% 2% Truck/Bus LCV Tractor-trailer

Passenger Car Tractor-front Others

7%

42.8%

2%

Jeep Tractor-rear

\ue000

Replacement

OEMs

Govt.

Exports

Source: ATMA

Demand\ue000for\ue000tyres\ue000can\ue000be\ue000categorised\ue000under\ue000four\ue000segments\ue Manufacturers\ue000(OEMs),\ue000Exports,\ue000and\ue000the\ue000Government.\ue000In\ue000FY05-06,\u tyre\ue000sales\ue000(by\ue000volume),\ue000followed\ue000by\ue000OEMs\ue000at\ue00042.8%.\ue000Exp 0.3%.\ue000According\ue000to\ue000the\ue000products,\ue000the\ue000maximum\ue000tyre\ue000sales\ue0 Passenger\ue000cars\ue000and\ue000Tractor\ue000-\ue000trailers.\ue000 Since the last thee years, the Growing Economy has led to an overall increase in freight movement and consumption of automobiles, both commercial and passenger, leading to an increase in tyre sales. Currently, the tyre industry is in the growth phase. Page 2 of 11

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\ue000Sector\ue000 \ue000 \ue000 \ue000 \ue000 \ue000 \ue000 \ue000 \ue000 \\ue000 ue000 \ue000 Tyres

Analysis: SWOT\ue000 Strengths

Weaknesses

* Established brand names (key in the replacement

* Cost Pressures - The profitability of the industry has high correlation with the prices of key raw materials such as market) rubber and crude oil, as they account for more than 70% of * Extensive distribution networks - For example, the total costs Apollo Tyres has 118 district offices, 12 distribution* Pricing Pressures \u2013 The huge raw material costs have resulted in pressure on the realisations and hence, the centres and 4,250 dealers players have been vouching to increase the prices, although, due to competitive pressures, they have not been able to * Good R&D initiatives by top players pass on the entire increase to the customer * Highly capital intensive - It requires about Rs 4 billion to set up a radial tyre plant with a capacity of 1.5 million tyres and around Rs 1.5-2 billion, for a cross-ply tyre plant of a 1.5 million tyre-manufacturing capacity

Opportunities

Threats

* Continuous increase in prices of natural rubber, which * Growing Economy \ue000 Growing Automobile Industry \ue000 accounts for nearly one third of total raw material costs Increasing OEM demand \ue000 Subsequent rise in replacement * Cheaper imports of Tyres, especially from China, selling at demand * With continued emphasis being placed by the Central very low prices, have been posing a challenge. The landed price is approximately 25% lower than that of the Government on development of infrastructure, particularly corresponding Indian Truck/ LCV tyres. Imports from roads, agricultural and manufacturing sectors, the Indian economy and the automobile sector/ tyre industry are China now constitute around 5% of market share poised for an impressive growth. Creation of road * With crude prices scaling upwards, added pressure on raw infrastructure has given, and would increasingly give, a material prices is expected tremendous fillip to road transportation, in the coming * Ban on Overloading, leading to lesser wear and tear of years. The Tyre industry would play an important role intyres and subsequent slowdown in demand. However, this would only be a short-term negative this changing road transportation dynamics * Access to global sources for raw materials at competitive* Cyclical nature of automobile industry prices, due to economies of scale * Steady increase in radial Tyres for MHCV, LCV

Analysis:\ue000Five\ue000Forces\ue000 Supplier Power - High

The demand for most raw materials, especially rubber, has been high, while supply is restricted, resulting in rise in prices

* * * *

Barriers to Entry - High

Capital-intensive Distribution Network Low operating margins Branding

Competitive Pressures - High Threat of Substitutes - Low Top six players enjoy over 80% ofImports, especially from China the total market share

Buyer Power - High

High competitive pressure due to high bargaining power of OEMs and the wide brand choice in the replacement market

\ue000

Page 3 of 11

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Sector Update

Tyres GrowingOEMdemand

Traditionally,thereplacementmarkethasbeenthemaingrowthdriverforthetyreindustry,asalsothemajor segment that consumes tyres; however, with the recent escalation in auto sales, OEM demand too, has a substantial increase, thus enlarging its share in the sales pie. Auto sales have been growing at a C 15.8% during 2002-06, which has driven the growth in the tyre industry, keeping the OEM deman Going forward, the automobile industry is estimated to grow at double digits. This, in turn, is expecte demand, for tyres from OEMs, buoyant.

Looking at the global rail-to-road cargo scenario, in Europe, roadways have an 84% share, while in India, currently, the ratio is 35:65, which was 62:38, two decades ago. Also, with growth in roadways and w like Golden Quadrilateral and NSEW getting implemented, there would be a further shift in freight mo from railroad to roadways. This would lead to an increase in demand for automobiles and hence, the demand for tyres. Sales Segments in Truck & Bus

Sales Segments in Passenger Cars

Sales Segments in LCV

8%

20%

48%

31%

2%

17%

Replacement

61%

OEMs

Govt.

Exports

38% 54% Replacement

OEMs

Exports

21% Replacement

OEMs

Exports

Source: ATMA

Replacementmarkettoseesustainablegrowth The Replacement Market is one of the more sought-after markets by Tyre players, since the margins compared to those of OEMs (who are relatively few in number and have a huge bargaining power). R demand, which comes from existing automobiles, has been increasing for sometime now and is expecte the same, going forward. Replacement of tyres varies across categories, due to different life-spans of tyr which depends on reasons like i. Road conditions ii. Load carried iii. Distance travelled iv. Re-treading The typical life of truck tyres is 40,000-45,000 kms or, on a general basis, around 12 to 18 months. The replacement cycle is relatively longer for two-wheelers and cars, ranging anywhere between 24 to However, the demand for radial tyres in cars has further augmented the replacement cycle.

Here,itbecomesimportanttotalkaboutRe-treading,whichisaphenomenonofrepairingtheoutersurfaceof the tyre in order to increase its life. The cost of re-treading a tyre is around 20-25% of the cost of a re-treaded tyre lasts for around 60% of the life of a new tyre. Though the quality of tyre deteriorates o treading, since it is highly economical, it is highly resorted to, especially in the passenger car segmen LCV/ HCV (truck) segment, re-treading depends on the type of operator. For instance, for a single tru that operates over shorter distances, mainly on inter-city and intra-state routes, re-treading is high. Ho organised or large-fleet operators prefer to replace the tyres after an average usage of 40,000-45,000 km These operators do not risk using old or re-treaded tyres on long-distance trips because breakdowns c immense.

Thesubstantialgrowththattheautoandtyreindustrieshaveseeninthelastfewyearsisboundtokeepthe replacement demand high, in the years to come. Similarly, the current growth in the auto industry a OEM demand would keep replacement demand further buoyant, going ahead. Though the replacement market has driven the industry growth for a long time, the OEM market has seen robust escalation over the last three years. Going ahead, OEM demand is expected to be buoyant while replacement demand would also see sustainable growth. Page 4 of 11

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Sector Update

Tyres

Exportslikelytogrow Tyre exports are increasing consistently, with tyres being 2500 exported to over 65 countries worldwide. Tyre exports grew at a CAGR of 11%, over FY1994 to FY2006. With the 2000 government providing various export incentives and withs good demand overseas, we expect exports to add to theero 1500 r c growth of the tyre companies. s R

Exports 50% 40% 30%

th

20% w o r

10% G

1000

In2004-05,exportswitnessedagrowthof26%;however, 500 the estimate for 2005-06 is a growth of 9%, which is a little 0 slowdown from the last 3 years’ growth rates. 4 9 9 1

0% -10% 5 9 9 1

CostStructures,MarginScenario Source: ATMA Raw material costs account for almost 70% of the tyre

6 9 9 1

7 9 9 1

8 9 9 1

9 9 9 1

0 0 0 2

1 0 0 2

2 0 0 2

3 0 0 2

4 0 0 2

5 0 0 2

E 6 0 0 2

-20%

industry’s incomes. Labour cost is another significant overhead. The Tyre industry has a narrow product range, Raw Material Costs huge operating overheads and high break-even levels. Raw material costs for the last three years have been rising 20% 35% constantly, especially those of rubber and crude oil-linked raw materials. The steep rise in raw material prices has5% impacted profit margins of all players. Consistent rise in major raw materials costs (those of natural rubber, 5% nylon tyre cord, carbon black, synthetic rubber), with limited pricing flexibility, has resulted in pressure on margins of tyre companies, despite a good topline growth. 13% 22% Consequently, while the revenues showed a healthy growth, profitability remained depressed. In fact, some of Rubber NTC Fabric Carbon Black the major tyre companies are operating at break-even SBR PBR Others situations. Source: ATMA

RubberPrices Rubber Prices (Rs/Quintal) In 2005-06, production and consumption of rubber grew by 5.5% and 6.2%, respectively, while exports increased by 51.2% (for the same period), on account of the imbalance 10000 in the global demand-supply position. The average domestic price of rubber increased by 20.3%, while the international prices soared by 31.5% in the same period. In April-June 2006, Domestic-Rubber prices increased 59% y-o-y, while the international prices increased 76.6%. 5000 5 6 6 5 6 6 5 Natural-Rubber prices have been continuously on the rise 50' 0' 0' 0' 0' 0' 0' 0' r y y y v n p l ly a a a e o in the international markets, with weather conditions Ja u u S J J M N M M playing a major role in disrupting supplies. During FY06, Domestic International China lost rubber plantations in the Hainan provinceSource: due toBoard Rubber a typhoon in September 2005, followed by floods in Thailand and Malaysia in December, the same year. Production suffered in most rubber-producing regi India, due to bad monsoons, which in turn led to the soaring of rubber prices. With international natu prices ruling high, and India being a part of the global market, exports of rubber from the country a demand and supply positioning in its domestic market. The growth in exports is driving-up average prices of rubber. With rising demand from the Tyre sector, the supply situation is expected to remain in the medium term. Currently, rubber prices have depleted to around Rs 80-levels, but there is volatility and hence, their behaviour is difficult to predict. If current levels persist, it would result in b profitability for tyre companies. Raw material costs account for almost 70% of tyre industry’s incomes. In 2005-06, the average domestic price of rubber increased by 20.3% and in April-June 2006, Domestic-Rubber prices have increased 59% y-o-y. Page 5 of 11


Sector Update

Tyres

Nylon Tyre Cord (NTC) Fabric Nylon tyre cord accounts for around 22% of the total raw material costs. During 2005-06, the produc fabric declined by 12.2%, while its consumption grew by 9%. This imbalance in the production-consumpt pattern has led to a 7.5% increase in domestic NTC prices in 2005-06. The international prices are m than e domestic rates and have shown a 15.2% increase in 2005-06; the price of caprolactam, the main feedstock for NTC fabric, increased by 6.2% in the same period. However, the average international and domestic prices during April-June 2006 were lower by 22% and 18%, respectively, due to carpolactam which declined by 10.8 %.

OtherRawMaterials The prices of other raw materials like carbon black, styrene butadiene rubber (SBR) and poly butadien (PBR) are closely linked to global crude oil prices. The average domestic price of carbon black increa % in 2005-06 and the average international prices of both SBR and PBR increased by 16.9% and 13.4% respectively, during 2005-06. During April-June06, the average domestic price of carbon black increased % and this momentum is expected to continue. The average international prices of both SBR and PBR 10% and 1.4%, respectively, during April-June06. The prices are expected to be in line with global oil

HikeinTyrePrices The rising raw material prices have been the key concern for the tyre industry, especially due pricing flexibility. Since the tyre industry is highly competitive and price sensitive, players have been ve conservative about increasing the prices. However, after the constant rise in raw material costs, almos player has, in different tranches, stepped up their product prices. In 2005-06, the average tyre prices hiked thrice and the cumulative increase in truck & bus tyres is 4.6%, in car nylon is 1.2% and in c is 5.1%, over the same period last year. The price hikes in 2006-07 have resulted in a cumulative pri 20% across all categories, by almost all players, with MRF an exception, which did not increased prices July06. Combined with the price hikes, if the current price-levels of raw materials persist, it would re profitability for tyre companies. There also exists a possibility of tyre companies rolling back the since the prices of rubber and oil-related raw materials have come down. However, it is very difficult rubber and other raw material prices. Level Of Radialisation (%)

90%

85% 80% Radialisation 90% 75% 70% 80% 65% Radial Tyres are better, as they offer better fuel efficiency, longer life 70% 51% 60% 49% and smooth movement on roads, together with working out to be 50% cheaper in the long run. The level of radialisation in passenger 40% cars is 30% 2% 11% 11% 11% 10 % 10 % 20% as high as 90%, but for commercial vehicles it is very low; in T&B, it 1% is7% 2%8% 2% 2% 2% 2% 2% 10 % 1% only 2% (globally 65%). This trend has not really picked-up pace, 0% mainly because of poor road infrastructure, overloading, poor vehicle 9 0 1 2 3 4 5 6 -9 -0 -0 -0 -0 -0 -0 -0 8 9 0 1 2 3 4 5 maintenance, high costs involved and the requirement of radial tyres for 9 9 0 0 0 0 0 0 9 9 0 0 0 0 0 0 1 2 2 2 2 2 2 regular maintenance, in terms of checking air pressure, balancing and1 realignment of wheels. Additionally, the industry believes that vehicles Truck & Bus LCV Passenger Car with radial tyres cannot be overloaded to the same extent, as can vehicles with cross-ply tyres. Radial tyres cost close to 20% more than cross-ply tyres (Rs 2,000 more in t MHCV tyres, and Rs 1,500 more in the case of LCV tyres). Hence, the OEM segment has not pushed radi radial tyres mean an elevated cost of around Rs 10,000 for LCVs (5 tyres), Rs 14,000 for single-axle MHC Rs 22,000 for double-axle MHCVs (11 tyres) and Rs 30,000 for triple-axle MHCVs. However, going forward, improvement in the quality of highways, we expect radialisation to gather some momentum; levels of radial MHCV is predicted to be 10% in five years time, while in LCV, around 20%.

BanonOverloading Industry estimates say that nearly 15% of Commercial Vehicles are overloaded to the extent of 100-15 results in a higher wear and tear of tyres. The recent Supreme Court order, to curb the overloading of truck expected to affect the demand for MHCV tyres, in both, the replacement and OEM markets. On account o overloading, the life of a tyre would increase and also, tyres that are not overloaded would further enable before being replaced. Hence, the replacement demand may come down. However, the curb on overloading expected to lead to additional truck sales, as also the demand for multi-axle vehicles would rise. This woul higher OEM demand. So, in the short term, ban on overloading could be a dampener, but in the long run a positive move. The ban would also provide a fillip to radialisation. The level of radialisation in commercial vehicles is very low and in T&B, it is only 2%. However, going ahead, this is likely to improve, with the ban on overloading also providing some fillip. The ban on overloading of trucks could be a dampener in the short term, but is definitely a positive in the long run.

Page 6 of 11


Sector Update

Tyres

Other Developments •

Tyreindustryseekingsuspensionofrubberexports The tyre industry has been suffering because of rubber exports that have resulted in vulcanisation o prices. Hence, the tyre industry, along with ATMA (Automotive Tyre Manufacturers Association), has the Commerce Ministry to put a temporary ban on the export of rubber. The Commerce Ministry, h rejected their proposal and therefore, the players now plan to appeal to the Finance Ministry.

•

ISImarkmadecompulsory In a move to bring about quality control in the tyre industry, the ISI mark has been made compuls This would effectively rule-out the sale of foreign tyres and thus result in reduced tyre-imports.

•

Importsoftyres Cheaper imports of tyres, especially from China, South Korea, Japan, Thailand and Indonesia, which very low prices, have been posing a challenge to the industry. India’s signing of the Bangkok agree ASEAN countries, in October 2003, intensified the import threat, as this agreement provided for pre customs duty of 15% for imports from China and South Korea, along with Sri Lanka and Bangladesh, against the standard rate of 20%. This led to a gush of imported tyres from these countries. The l is approximately 25% lower than that of the corresponding Indian Truck/LCV tyres. Imports from Ch constitute around 5% of the market share. However, Chinese tyres do not come with any warranty of these tyres is significantly lower than that of Indian tyres.

Excise and Customs Duty The union budget 2006-07 has reduced the peak customs duty on raw materials, like SBR, Polyb Rubber and NTC, from 15% to 12.5% and Butyl Rubber and Carbon Black, from 15% to 10%. customs duty on key petroleum-based raw materials is likely to moderate their rising prices, to som The customs duty on tyres has also been reduced, from 15% to 12.5%, and on Caprolactum, a key ra material for NTC, from 15% to 10%.

•

Risks and Concerns

Rising raw material prices - The consistently rising natural-rubber and crude oil prices increase in petroleum-based inputs has been posing a big challenge to tyre operators. In a move to their profitability, the players have increased tyre prices by 20%, across categories. However, it is a li difficult to predict the raw material prices and it, therefore, remains a key concern.

•

•

Import of tyres – The import of tyres has been posing some threat to the tyre industry in India. Free Trade Agreements with countries can lead to reduction and eventual elimination of import tariffs, for those countries. However, the recent move, to make the ISI mark compulsory, would help in this reg

Outlook

Onthepositiveside,itisestimatedthattherewouldbeavolumegrowthof12-14%in2006-07.Theperformance of the tyre industry is linked to the automobile and infrastructure sectors, the growth of which is dep performance of the economy. The current estimated economic growth is over 8%. The continuous thru placed by the Government on the development of infrastructure, particularly roads, agriculture and manufacturing sectors, would lead to an impressive acceleration in the automobile/ tyre sector, generat demand for tyres. However, tyre companies face immense competition together with price and cost pre Pricing pressures, from OEMs because of their high bargaining power and in the replacement mar huge competition, are existent dampeners. Companies are now giving emphasis to innovation in produ process technology and operational efficiencies. However, the continuously rising trend witnessed in the of raw materials remains an area of concern. Though rubber prices have come down from their peaks to Rs 82; currently, the trend is very volatile. Tyre companies would definitely show improvement in t sequentially, and if prices remain at these levels, profitability would improve. But then, it would be hig dependent on prices of major raw materials like Rubber, Carbon Black, NTC Fabric, SBR and PBR, wh highly volatile. Page 7 of 11


Sector Update

Tyres

Key players The Indian tyre industry, comprising of 40 companies (47 Market Share (%) factories) in the organised and unorganised sectors, can 17% be divided into two tiers; Tier-I players (top 5 tyre companies) account for over 80% of industry turnover 6% in containing a well diversified product-mix and presence all three major segments, i.e. replacement market, original equipment manufacturers (OEM's) and exports. Tier-II companies are small in size, concentrating chiefly on production of small tyres (for two/ three-wheelers,14% etc.), tubes and flaps and the replacement market. The industry has a negligible market share in the commercial 17% vehicles tyre category and is around 20% in the twoMRF Apollo Tyres wheeler tyre category. CEAT

Goodyear

24%

22%

J K Inds Others

Peer Comparison

Company Particulars Net Sales Total expenditure Operating Profit OPM (%) PBT before Extra-ordinary PBT (%) PBT Profit after Tax PAT (adj. for extraordinary) PAT (%) Equity Share capital EPS (Rs) CEPS (Rs) Adj. EPS ROCE (%) RONW (%) Market Price (Rs) P/E (x) P/E Adj. EPS (x) P/E Cash EPS (x) M cap (Rs crores) M cap/Sales (x) M cap/EBITDA (x) Debt (Rs crores) Cash and equivalent EV (Rs crores) EV / EBITDA (x)

MRF YE Sept FY05

Apollo Tyres YE March

J K Inds YE Sept

FY06

FY05

CEAT YE Mar

Goodyear YE Dec

FY06

CY05

Falcon Tyres YE Mar FY06

2,966.2 2,792.3 173.9 5.9 59.5 2.0 55.3 40.3 43.0 1.5 4.2 95.1 355.3 101.5 6.7 5.5

2,630.1 2,398.9 231.2 8.8 109.6 4.2 120.6 88.9 81.8 3.1 38.3 23.2 42.2 21.3 12.8 14.8

2,078.6 1,964.0 114.6 5.5 -4.8 -0.2 4.2 17.4 8.4 0.4 37.5 4.7 17.8 2.2 5.3 4.3

1,747.4 1,678.0 69.5 4.0 5.0 0.3 5.0 0.4 0.4 0.02 45.7 0.1 5.2 0.1 9.0 0.1

672.8 648.6 24.2 3.6 10.4 1.6 10.4 8.8 8.8 1.3 23.1 3.8 9.9 3.8 11.2 10.8

221.8 214.2 7.5 3.4 4.4 2.0 4.4 2.9 2.9 1.3 5.7 5.1 8.8 5.1 14.1 10.6

3,850.0 40.5 37.9 10.8 1,632.4 0.6 9.4 710.0 48.7 2,293.7 13.2

336 14.5 15.7 8.0 1,288.2 0.5 5.6 750.0 232.0 1,806.2 7.8

135 29.0 60.1 7.6 505.7 0.2 4.4 831.3 314.6 1,022.3 8.9

116 1,432.8 1,432.8 22.3 530.1 0.3 7.6 450.6 222.0 758.8 10.9

132 34.6 34.6 13.4 304.5 0.5 12.6 95.0 84.0 315.5 13.0

108 21.2 21.2 12.3 61.3 0.3 8.1 26.0 6.1 81.2 10.8

Note:Wehavenotconsidered Balkrishna Industries inourpeercomparison becauseitis a diversified pla with presence in tyres, textiles, paper and wind power.

Page 8 of 11


Sector Update

Tyres

Product Mix (In tonnage terms) MHCV

Apollo Tyres

MRF

JK Industries

CEAT

Goodyear

Falcon Tyres

Overall

54.4%

82.4%

78.6%

68.3%

44.9%

--

20.6%

Passenger Cars

6.2%

4.2%

7.2%

5.3%

15.4%

3.5%

18.0%

MUV

4.1%

0.8%

1.7%

2.4%

0.2%

0.7%

2.6%

LCV

7.2%

8.1%

7.1%

8.4%

3.8%

1.5%

5.9%

Tractor - front

2.0%

0.6%

1.0%

1.2%

5.5%

2.4%

2.1%

Tractor - rear

6.2%

3.1%

3.6%

4.6%

25.2%

0.8%

1.5%

Tractor - trailer

0.4%

0.6%

0.1%

1.0%

--

0.1%

0.8%

ADV

0.7%

0.2%

0.2%

0.2%

--

2.4%

0.5%

OTR

3.8%

0.1%

0.6%

2.9%

5.0%

Motorcycle

9.1%

--

--

2.6%

--

59.9%

30.2%

--

--

--

--

2.5%

0.3%

5.7%

--

--

3.1%

--

26.3%

16.8%

--

--

--

0.1%

--

Moped Scooter (2/3 wheeler) Industrial

0.1%

0.5%

MRF MRF is the market leader among tyre manufacturers in India, with a 24% share in terms of revenues. leadership position, coupled with its strong brand recall and high quality, MRF commands the price-ma MRF has a strong presence in the T&B segment, the largest segment of the tyre industry, and comman around 19% market share in the segment. It is the leader in the two/ three-wheeler segment (including motorcycles) and tractor front tyres, and holds second place in the passenger cars and tractor - rear ty Exports account for around 12% of the gross sales in MRF. The Company has a distribution network outlets within India and exports to over 65 countries worldwide.

ApolloTyres(ATL) Apollo Tyres is the second largest player in the Indian tyre industry, with a market share of 22%, in revenues, and the largest player in the T&B segment, with around 22% market share and 82% of its coming from this segment. It also enjoys a strong brand recall. ATL derives 80% of its revenues from t replacement market, where the EBITDA margins are higher; hence, at operating levels, Apollo Tyres h margins compared to those of its peers. ATL is a strong player in the domestic market, with just 2% coming from exports.

JKIndustries JK Industries has a 17% market share, in terms of revenue, making it the third largest player in the Company ranks first in the MHCV and Passenger Car tyre segments, with 79% and 7% of its product from these segments, respectively. Exports account for approximately 17% of its gross sales.

CEAT CEAT has a 14% market share, in terms of revenues, and is an average player across categories. 68% product mix comes from the MHCV segment. Its leading brands in the T&B segment are Lug XL, Mil XL, Secura in two-wheelers and Formula-1 in passenger radials. In terms of profitability, CEAT has low margins compared to its peers, in spite of deriving 60% of its revenues from the replacement market.

GoodyearIndia Goodyear India, with presence across the globe, has a market share of 6% in the Indian Tyre industr of revenues. It has a significant market share in the tractor tyres segment, with 22% share in tractor and a 30% share in tractor - rear tyres. It derives 45% of the product mix from the MHCV segment the tractor tyres segment.

FalconTyres Falcon Tyres has a 2% market share in the tyre industry, and is the third largest player in the two & t wheeler (including motorcycle) tyres segment. 86% of the Company’s product-mix accounts for motorcy the two/ three-wheeler segment. Page 9 of 11


Sector Update

Tyres

Conclusion and Investment Argument

The industry is definitely set to grow, with an estimated volume growth of 12-14% in 2006-07. Both, O Replacement demand would drive growth, with exports also adding-in. The growing economy and the infrastructure sectors provide the much-needed impetus. However, tyre companies face immense compe together with price and cost pressures. Pricing pressure, from OEMs because of their high bargaining in the replacement market due to huge competition, is a substantial dampener. Companies are now givi emphasis to innovation in product and process technology and to operational efficiencies. However, the continuously rising trend witnessed in the prices of raw materials remains an area of concern. Though prices have come down from their peaks of Rs 115, to Rs 82 currently, the trend is very volatile. Tyr would definitely show improvement in the margins, sequentially, and if prices remain at these levels, p would improve. But then, it is highly dependent on the prices of major raw materials like Rubber, Ca NTC Fabric, SBR and PBR, which are highly volatile. However, with surging automobile sales, if tyres increases without the supply catching up with it, then, prices of tyres are likely to increase. This provide some benefit to the tyre companies.

If we view the financial performance of various tyre-manufacturing companies, most of them are operating at wafer-thin margins and any substantial increase in costs would hurt the business adversely. Also, revie balance sheet, the ROCE and RONW are at very low levels. The industry leader, MRF, has an ROCE and an RONW of 5.5%. Apollo is a little better off, with ROCE and RONW at 12.8% and 14.8%, resp Hence, we do not find tyre stocks attractive, from an investment perspective.

Atcurrentlevels,alltyrestockslookfairlyvalued.Onecaninvestatlowerlevels,keepinginmindtheviewon rubber prices. When rubber prices fell from their highs, all tyre stocks performed well on the bourses returns; nevertheless, they should be looked-at only from a trading perspective. The industry is definitely set to grow, but the huge competition, huge buyer power, pricing inflexibility and cost pressures prove as detriments. Tyre companies are operating at very thin margins and their return ratios are also not attractive. One can look at tyre stocks but only from a trading perspective

Page 10 of 11


Sector Update

Tyres

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Page 11 of 11


Indian Tyre Industry

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