JK Tyre

Raw Material Costs Continue To Be On Upward Curve, May Squeeze Margin

 

HIGHER revenue on the back of increased volume and lower base helped the country's thirdlargest tyre producer, JK Tyre, more than double its net profits to Rs 26 crore for the quarter ended March 2010 with a 22% increase in revenue. The company's numbers are more or less similar to those two years ago when the tyre sector was in fine shape.

   The share price of JK Tyre touched Rs 235 in March, the highest level in a year, before shrinking by a third as investors have turned cautious due to the impact of relentless increase in rubber prices, which make up half of the cost for tyre producers. The change in operations has come from better volume growth that was up 11% to 56,700 metric tonne for the three months ended in March as compared to 51,000 metric tonne in the year-ago period. But operating margins have been impacted by increase in raw material costs.

   Input costs as a percentage of revenues rose to 69% from about 57% in the year-ago period and the company recorded a 90 basis points (bps) decline in operating margin last quarter. To meet the rising costs, the firm has raised tyre prices by an average 5% across the segments over the past two quarters.

   Price of rubber has more than doubled in the past one year and traded at Rs 169/kg as of June 1. This is expected to result in further pressure on product prices in the current quarter (April-June). But given that the increase in rubber prices and other raw materials is estimated at 30-40% and the tyre price increase is projected to be relatively modest, the company will continue to face margin pressure in coming months. The net profit, however, was partly boosted by moderation in interest and depreciation cost.

   For the full year ended March 2010, the company had consolidated net profit of Rs 224 crore with topline of Rs 4,571 crore. The numbers are not comparable to the past year as the previous financial year stretched to 18 months. Mexican firm Tornel that JK Tyre acquired two years ago has increased net sales 10% for FY10.

   The company is operating at full capacity in its Indian operations and expects the demand from the passenger tyre segment to grow 18% annually. The company plans to invest a total Rs 750 crore to raise capacities and has already invested Rs 315 crore last year.

   Given this background, the outlook for the coming quarters looks bright as far as revenues are concerned. However, if rubber price continues to rise, margins would be under pressure in the forthcoming quarters.

NOT EXACTLY A SMOOTH RIDE

The change in operations has come from better volume growth, up 11% to 56,700 metric tonne for the three months ended in March

The company is operating at full capacity in its Indian operations and expects the demand from the passenger tyre segment to grow 18% annually.