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Project Report On

“Sector analysis – Tyre Industry”

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF


DEGREE OF MASTERS OF MANAGEMENT STUDIES MMS FROM THE UNIVERSITY OF
MUMBAI

SUBMITTED BY
Mukesh R. Gehani
MMS FINANCE
BATCH: 2007-09

Under the guidance of

PROF. P L ARYA

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES & RESEARCH

SHRISHTI, SECTOR 1, MIRA ROAD (E), MUMBAI 401104


Analysis of the Tyre Industry

CERTIFICATE
This is to certify that Mr. Mukesh R. Gehani, student of N.L. Dalmia
Institute of Management Studies and Research, has successfully carried
out the project titled “SECTOR ANALYSIS – TYRE INDUSTRY”, under my
supervision and guidance as partial fulfilment of the requirements of MMS
course, Mumbai University Batch 2007-2009

Prof. P.L. Arya Prof. P.L. Arya


Project Guide Director

Date:
Place: MUMBAI

ACKNOWLEDGEMENT

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Analysis of the Tyre Industry

THE SUCCESS OF ANY PROJECT IS THE RESULT OF HARD WORK &


ENDEAVOR OF NOT ONE BUT MANY PEOPLE AND THIS PROJECT IS
NO DIFFERENT.

I TAKE THIS AS A PROSPECT TO AVOW THAT IT WAS AN


ACHIEVEMENT TO HAVE SUCCEEDED IN MY FINAL PROJECT,
WHICH WOULD NOT HAVE BEEN POSSIBLE WITHOUT THE
GUIDANCE OF PROF. P. L. ARYA (DIRECTOR – N. L. DALMIA
INSTITUTE OF MANAGEMENT STUDIES & RESEARCH) MY PROJECT
GUIDE AT NLDIMSR.

I ALSO EXPRESS MY APPRECIATION AND GRATITUDE TOWARDS


ALL THE FACULTY MEMBERS AT N.L. DALMIA INSTITUTE OF
MANAGEMENT STUDIES AND RESEARCH FOR MAKING THE M.M.S.
DEGREE AND THIS PROJECT A MEMORABLE LEARNING
EXPERIENCE.

FINALLY I AM THANKFUL TO ALL MY FRIENDS, FACULTY MEMBERS


AND STAFF WHO HAVE GIVEN THEIR FULL SUPPORT IN
COLLECTING THE REQUIRED INFORMATION AND CONTINUOUS
HELP DURING THE PREPARATION OF THE PROJECT.

MUKESH R. GEHANI
MMS FINANCE

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Table of Contents

Sr. No. Topics Page nos.

91 Executive Summary
Marketing 27

10 Tyre Technology
1.1 Introduction 30
7

11 Factors to be considered in selecting tyre for vehicle 36


1.2 Evolution of the Tyre Industry 8
12 Peculiar Features of the Tyre Industry 37
2 Overview of the Indian Tyre Industry 11
13 Michael Porter’s five forces model 38
3 Radialisation 12
14 SWOT Analysis 41
4 Tyre Retreading 13
15 Key Players
5 Statistics

15.1 JK Tyres & Industries Ltd. 43


5.1 Total Tyre Production in India 16

15.2 MRF Tyres Ltd. 47


5.2 Categorywise Tyre Production in India 18

15.3 Apollo Tyres Ltd. 48


5.3 Categorywise Exports of Tyres 19

6 15.4 Ceat Tyres Ltd.


Raw material 50

16 Sector Specifics 52
6.1 Overview 22
17 Sector Trends 53
6.2 Raw material availability 23
18 Outlook 53
7 Government Policy 24

8 Regional Trade agreement 25

Table of Contents

Table of Contents
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Sr. No. Topics Page nos.

19 Valuation

19.1 Relative Valuation 55

19.2 FCFF 56

19.3 FCFE 62

20 Results 68

21 Conclusion 69

22 Bibliography 70

1. Executive Summary

1.1 Introduction

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The Indian Tyre Industry produced 736 lakh units of tyres (11 lakh tonnes) garnering Rs. 19000
crores in FY07. MRF Ltd. was the market leader (22% market share) followed closely by Apollo
Tyres Ltd. (21%). The other major players were JK Tyre & Industries (18%) and Ceat Ltd.
(13%).

The Indian tyre industry is characterized by its raw material intensity (raw material costs account
for approximately 70% of operating income), capital intensity, cyclicality, fierce competition
among the top players, low bargaining power and resulting low margins. The top players are now
focusing on branding their products and strengthening their distribution network so as to increase
their market share.

The industry derives its demand from the automobile Industry. While OEM market offtake is
dependent on the new vehicle sales, replacement market demand depends on the total population
of vehicles on road, road conditions, vehicle scrapping rules, overloading norms for trucks,
average life of tyres and prevalence of tyre retreading.

The main category of tyres produced in the country is that of Truck & Bus tyres. These tyres
accounted for 57% of the total tyre tonnage production in FY07 followed by LCV tyres which
accounted for 9% of the total tyre tonnage production. Approximately 53% of the total tyre
tonnage offtake was by the replacement market, 31% by OEM and 15% by the export market in
FY07.

The industry tonnage production registered a 5 year CAGR of 9.69% between FY 02-07. The
largest category of Truck & Bus tyres recorded a 5 year CAGR of 7.85% (slower than the
industry) while Light Commercial Vehicle (LCV), motorcycle and car tyre categories grew at
15%, 16% and 14% respectively (faster than the industry). Off the road (OTR) tyre category
(customized tyres) which fetch a higher margin compared to other tyre categories, is the fastest
growing category. The OTR tyre category has registered a 5 year CAGR of over 20% in the last
five years. Most of the top players are increasing their capacity for the production of OTR tyres
so as to improve their product mix, this being a high margin product.

The exports from the country clocked a CAGR of 13% in unit terms and 18% in value terms in
the period FY 02-07. Most of these tyres that are exported are of cross ply design. With
radialisation catching up in some of these markets, the Indian manufacturers will need to
graduate to production and export of radial tyres so as to protect their share in the export market.

Radialisation of tyres is still minimal in India. Only the car tyre market has moved to radial tyres
(95%) but in all other categories, cross ply tyres are still preferred. Poor road conditions,
overloading in trucks, higher cost of radial tyres and poor awareness of the tyre users are the
main reasons for the non transition of the domestic market to radial tyres. However, going ahead
radialisation in truck & bus tyres may increase due to government’s focus on infrastructure
development.

1.2 Evolution of the Tyre Industry


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The achievements of the Indian tyre and rubber industry have been an unheralded success story.
It is perhaps the only industry in India to have achieved an average annual 6.5 percent growth
rate for almost 44 years, since 1960.aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa

The country's rubber industry got off to a very modest start in Calcutta in 1936 but India is today
the world's 4th largest rubber consuming country, with rubber consumption of over 1 million
tones (1,065,020 tonnes) including 50 percent of reclaim rubber as pure polymer. China is
currently the world's largest consumer followed by the US and Japan. Despite the high volume of
consumption, India's per capita rubber consumption is still under 1kg, compared to an average of
12 kilos in Europe and the US and nearly 3kg in China. This underscores the tremendous
potential of the rubber industry with the country's increasing prosperity and industrialization.

Another unique factor of the Indian rubber industry is that for the past few years it has been the
world's 4th largest producer of natural rubber after Thailand, Indonesia and Malaysia. However,
in terms of production efficiency, India is far ahead of the other three major rubber producing
countries in terms of yield per acre. This can be attributed to the country's highly skilled research
scientists and the outstanding work done by the Rubber Board of India, under the Ministry of
Commerce.

Till just three years ago, India was consuming all of the natural rubber it produced and in fact,
had to import a quantity of the commodity as well. With an eye on globalization, while expecting
increased output from the Indian rubber plantation industry, the Rubber Board decided to
establish India's position as a regular exporter of natural rubber. It has succeeded beyond
expectations, with the export of nearly 76,000 tonnes in the financial year ending March 2004.
Strong natural rubber exports have also helped to stabilize the domestic prices of natural rubber.

Similar to the case in all industrialized nations, India's automotive tyre sector is the major user, at
53 percent, of natural rubber. The country's automotive tyre sector has also been a remarkable
success. Practically every conceivable type of tyre is manufactured in India today, by almost 40
companies ranging from giants to small-scale enterprises. Today, seven Indian tyre companies

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feature in the list of the world's top 75 tyre manufacturers. According to the latest rankings based
on 2003 sales, MRF (with sales of US $537.3 million) is ranked at No. 15 followed by Apollo at
No. 17 (sales of $496 million), J. K at No. 18 ($455 million ), Ceat at No. 24 ($318 million ).
They are followed by Birla Tyres at No. 52, Metro Tyres at No. 68 and TVS Srichakra at No. 75.
In the fiscal year ending March 2004, the turnover of India's automotive tyre industry was Rs.
13,500 crore (almost $3 billion), with exports of Rs. 1400 crore ($318 million) to over 70
countries, including the US and Europe. The industry's total output of 54.27 million tyres
signifies capacity utilization of 85 percent of the installed capacity of 60 million.

Since the mid-1980s, Indian tyre companies have made major efforts to established a presence in
overseas markets through their exports. They have thus been able to import duty free raw
materials and remain competitive in the international market, while reducing their dependence on
the domestic local natural rubber market. While some Indian tyre majors export nearly 30
percent of their total tyre productions, about 20 percent of all locally manufactured tyres are
exported in total.

Dunlop Tyres of the UK, through its Indian subsidiary, was the country's first major tyre
manufacturer, with a plant in Calcutta. It led the way for Firestone of the US, which established
itself in Bombay and later for Goodyear and Ceat of Italy, which were also Bombay-based. It
was only in the early 1960's that Indian tyre companies (MRF, Incheck and Premier Tyres) broke
the monopoly of the foreign tyre makers. Modi Rubber followed in 1975, after which Apollo
Tyres became a serious player. Meanwhile, the Karnataka state government set up Vikrant Tyres
in Mysore in technical collaboration with the UK-based Avon Tyres. Since then, Premier Tyres
has been taken over by Apollo Tyres and Vikrant Tyres by J. K. Tyres.

With the liberalization of the early 1990's came a short-lived joint venture (South Asia Tyres)
between Ceat and Goodyear, after which the Japanese tyre giant Bridgestone Corporation made
its foray into the Indian market with the Tata Group. Within five years, Goodyear and
Bridgestone took over full control of their joint venture companies, by buying out their local
partners Ceat and the Tata Group respectively.

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With enormous strides being made internationally by global tyre majors due to their vast R&D
expenditure, it is naturally difficult for Indian tyre companies to manage without technology
input. While J. K. Tyres has a technical collaboration with Continental AG of Germany (the
world's number 4) and Birla Tyres with world No. 5 Pirelli, Apollo decided in November 2003 to
enter into an agreement with French tyre giant Groupe Michelin, the world's number 1, to set up
a joint venture project near Pune. Michelin has also invested in 26 percent equity in Apollo
Tyres. Other Indian tyre companies manage with in-house R & D and by using the expertise of
tyre experts from Europe and the US, who have taken early retirement from their earlier jobs.

With the Indian economy set for a growth rate of around 8 percent commencing 2005/2006, and
with the massive increase in infrastructure developments and the $18 billion boost for highway
and road construction, the Indian tyre industry is set for an average annul growth rate of at least 8
percent. It is mature enough to withstand the threat of cheap imports arising from possible Free
Trade Agreements with countries like Thailand. The other challenge facing the Indian tyre
industry is the high import duties of raw materials, compared to its competitors in the rest of
Asia. But backed by the rising demand of the country's booming automobile sector, which
crossed the 1 million sale mark in 2004, the Indian automotive tyre sector, and indeed the rubber
industry, is set for an even brighter future.

2. Overview of ITI

Financial Year 2007-2008 (Est.)


Turnover of Indian Tyre Industry Rs. 20,000 Crores
Tyre Production (Tonnage) 11.35 lakh M.T.
Tyre Production – All Categories (Nos.) 811 Lakh
Tyre Export from India (Value) : Rs. 3000 (est) crores
Number of tyre companies: 43
Industry Concentration 10 Large tyre companies account for over 95% of total
tyre production.

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Radialisation Level - Current Passenger Car tyres: 95%


(as a % of total tyre production) Light Commercial Vehicles: 12%
Heavy Vehicles ( Truck & Bus ): 3%

Calendar Year 2007 (Est.)


Turnover of Indian Tyre Industry US $ 4600 Million
Installed Capacity (Nos.) 85 Million
Capacity Utilitsation 87%
Total Tyre Production (Nos.) 78 Million
Total Tyre Import (In 000 Nos.) 2077

Government Policy
Tyre Industry Delicenced since 1987
Export (of tyres and tubes) Freely allowed
Import (of new tyres and tubes) Freely allowed Since 2001 except Truck / Bus (Radial
Tyres), which is in the Restricted List from 24th Nov.
2008 onwards.
Import Policy for Used / Retreaded tyres: Restricted Since April, 2006

3. Radialisation

'Radialisation' in India - Current Status & Future Trends

"Rate of radialisation is actually an index of the status of road development, vehicle engineering
and the economy in general". Notwithstanding the problem areas, constraints and limitations, the
tyre companies have kept pace with the technological improvements that radialisation signifies
and offer state-of-the-art product (tyres), comparable to the best in the world.

• Radialisation can be aptly classified as the most important innovation in tyre technology.
Despite its several advantages (additional mileage; fuel saving; improved driving)
radialisation in India earlier did not catch on at a pace that was expected, since its
introduction way back in 1978. This could be attributed due to several factors, viz. Indian

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roads generally not being suitable for ideal plying of radial tyres; (older) vehicles
produced in India not having suitable geometry for fitment of radial tyres (and hence the
general, and wrong, perception that radial tyres are not required for Indian vehicle;
unwillingness of consumer to pay higher price for radial tyres etc.

• However, the situation has radically changed in recent years, especially for the passenger
car tyre segment where radialisation has crossed 97% mark and is expected to reach
100% in two to three years. In the Medium and Heavy Commercial vehical segment
current level of radialisation is upto 4%, and that in the LCV segment is estimated at
15%.

• A few years back a beginning was made in Radialisation of truck and bus and LCV tyres
and this process is gaining momentum.

Future of Radialisation

The future of radialisation will be governed by the following factors:

• Cost - Benefit Ratio


• Road Development
• Overload Control
• User Education
• Retreading Infrastructure.

4. Tyre Retreading

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RETREADING INDUSTRY IN INDIA

In the manufacture of a new tyre, approximately 75%-80% of the manufacturing cost is incurred
in tyre body and remaining 20%-25% in the TREAD, the portion of the tyre which meets the
road surface. Hence, by applying a new TREAD over the body of the worn tyre, a fresh lease of
life is given to the tyre, at a cost which is less than 50% of the price of a new tyre. This process
is termed as 'tyre retreading'.

However, the body of the used tyre must have some desirable level of characteristics to enable
retreading. Retreading cannot also be done if the tyre has already been over used to the extent
that the fabric is exposed/damaged. Retreading could be done more than once.

Types of Retreading

Retreading can be done by the following two processes:

1. Conventional Process (also known as 'mould cure' or 'hot cure' process) - In this process a
un-vulcanized rubber strip is applied on the buffed casing of the tyre. This strip takes the
pattern of the mould during the process of vulcanization;

2. Precure Process ( also known as 'cold cure')- in this process a tread strip, where the
pattern is already pressed and precure is applied to the casing. It is bonded to the casing
by means of a thin layer of specially compounded uncured rubber (known as cushion or
bonding gum) which is vulcanized by the application of heat, pressure and time.

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The present all India pattern, by type of retreading, is as follows:

Precured - 50%, Conventional 50%.

Retreading is primarly done in the Truck and Bus trye segment. On an average a Truck/Bus trye
is retreaded 1.5 times.

At present only 3-4 large companies are in the organized sector of tyre retreading .Organized
sector is classified as that comprising of companies which operate through the franchisee route.

International vs. Indian Experience in Tyre Retreading : Similarities & Differences

Similarities

As is the experience in other parts of the world, tyre retreading in India has gained greater
acceptance in the commercial segment, especially truck/bus and light commercial vehicle (LCV)
tyres, due to operational savings.

The share of passenger car tyre retreading is on the decline due to several factors, viz. fitment of
radial tyres as OE fitment giving increased mileage (encouraging owners to go in for new radial
tyres at the time of replacement, strong preference of improved aesthetics of new generation of
passenger cars (and hence new tyres) and above all, a growing concern for safety (due to driving
at increased speeds.

Differences

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In the developed countries retreading, by and large, is only through precured methods, whereas
the share of hot/conventional retreading in India is high 50%, with the share of hot/conventional
retreading in select segments, like farm tyres, being considerably higher.

Expected Future Trends in Tyre Retreading in India

Tyre retreading in the commercial vehicle segment is poised for growth in the future. This
growth will be aided by the following favourable factors and major developments taking place:

Increased level of Radialization in the commercial vehicle 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
commercial vehicles);

• National Highway Projects, especially Golden Quadrilateral Project and Highways


connecting North-South and East -West corridors (coupled with reduction in overloading
and improved condition of road network, higher level retreading will offer added
financial benefits).

5. Statistics

Past Trends

TOTAL TYRE PRODUCTION IN INDIA

F.Y. 1994 - 95 T0 2007 - 08 (in 1000’s)

1999 -
CATEGORY 1994 - 95 1995 - 96 1996 - 97 1997 - 98 1998 - 99 2000 - 01
2000
Truck & Bus 7309 7696 8095 8095 7913 8969 8612
Passenger Car 3283 3324 3888 4263 4571 6054 6813

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Jeep 780 881 1098 1342 1247 1283 1155


Light Comml. Veh.
1133 1177 1833 1903 1917 1980 2108
(L.C.V.)
Tractor Front 933 976 1040 1075 1085 1203 1186
Tractor Rear 562 663 683 785 839 903 852
Tractor Trailer 608 686 360 214 223 295 277
A.D.V. 759 673 581 528 593 589 511
Scooter 8791 9853 9545 9577 10975 10140 9385
Motor Cycle 3410 3788 4457 5582 7277 9275 11196
Moped 771 833 795 400 234 516 119
Industrial 89 95 66 143 137 172 219
O.T.R. 39 36 30 37 37 36 38
Aero 18 7 0 0 0 0 0
TOTAL 28485 30688 32471 33907 37048 41415 42471

CATEGORY 2001 - 02 2002 - 03 2003 - 04 2004 - 05 2005 - 06 2006 - 07 2007 - 08


Truck & Bus 8474 9863 10821 11092 11941 12367 13137
Passenger Car 7481 8544 9959 11862 13605 14264 16437
Jeep 1247 1384 1440 1462 1272 1368 1467
Light Comml. Veh.
2352 2844 3271 3945 4529 4820 5320
(L.C.V.)
Tractor Front 1150 1125 1148 1311 1383 1754 1814
Tractor Rear 785 825 842 1096 1134 1296 1234
Tractor Trailer 320 470 415 408 596 823 886
A.D.V. 488 456 295 197 325 381 409
Scooter 8547 9875 9274 9992 9519 9643 11604
Motor Cycle 12275 15654 16688 18127 21053 26079 27921
Moped 135 185 168 124 55 0* 0*
Industrial 214 309 295 377 514 635 733
O.T.R. 46 51 74 89 106 115 141
Aero 0 0 0 0 0 0 0
TOTAL 43514 515585 54690 60082 66032 73545 81103
*wef April 2006 Moped tyre production included in Scooter Category

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Current Statistics

Categorywise Tyre Production in India


Financial Year 2007-08 & 2008-09(April-September)
(In Lakh Nos.)
Tyres for: 2007-08 2008-09 % Change
Truck & Bus 65.57 67.93 4
Passenger Car 80.06 88.36 10
Jeep 7.40 7.38 0
Light Commercial 25.17 27.86 11
Vehicle
Tractor Front 9.17 10.32 13
Tractor Rear 6.30 7.28 16
Tractor Trailer 4.42 4.29 -3
Animal Drawn Vehicle 1.49 1.51 1
Scooter / Moped 55.65 50.95 -8
Motor Cycle 134.11 153.49 14
Industrial 3.31 3.44 4
Off the Road (OTR) 0.69 0.77 12
Total 393.34 423.58 8

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Categorywise Export of Tyres


Financial Year 2007-08 & 2008-09(April-September)
(in Nos.)
Category 2007-08 2008-09 % Change
Truck & Bus 1280939 1061929 -17
Passenger Car 540745 530372 -2
Jeep 2320 6018 159
Light Commercial 803280 924642 15
Vehicle
Tractor Front 7810 4307 -45
Tractor Rear 30761 23233 -24
Tractor Trailer 8650 17064 97
Motor Cycle 164105 193466 18
Scooter 226506 250815 11
Implements 2009 3090 54
Industrial 7704 4285 -44
OTR 22634 22742 0.5
ADV 30 0 -100
Antique 0 0 0
Total 3097493 3041963 -2

Exports

Export Realisation/Value

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Value
Year % Change CAGR
(Rs./crores)
1993-94 606 22
1994-95 680 12
1995-96 719 6
1996-97 832 16
1998-98 907 9
1998-99 808 (-)11
11%
1999-00 864 7
2000-01 1190 38
2001-02 1100 (-)8
2002-03 1250 14
2003-04 1460 17
2004-05 1834 26
2005-06 2383 29
2006-07 2850 20
2007-08 (Est.) 3000 5
Average Annual Compound growth rate in exports during last one
decade is 11%.

Categorywise Tyre Exports -2000-01 to 2007-08

[ Nos.]
2001 - - 2003 2005 - 2007 -
CATEGORY 2002 - 03 2004 - 05 2006 - 07
02 04 06 08
Truck & Bus 1805203 2141438 223155 2503956 2408759 2276049 2431545
Passenger Car 287547 364514 591494 1024561 1052874 966046 1091715
Jeep 40 20 220 391 885 1420 7461
Light Commercial
610692 700868 962972 1130908 1390814 1599230 1621880
Vehicle

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Tractor Front 23431 20698 18990 18202 13408 11078 17072


Tractor Rear 51218 72263 89758 84684 98807 56186 66644
Tractor Trailer 444 852 1448 3686 3833 8665 17468
Motor Cycle 33019 34088 47333 62710 84908 151677 322630
ADV 170 20 0 0 0 0 30
Scooter 43391 49966 120725 202656 289984 320536 45338
Implements 15758 9143 6558 2096 2447 4045 5637
Industrial 15570 20716 10702 9885 7303 11543 12777
OTR 21468 29079 21168 23375 33480 43085 45919
Antique 2894 0 0 0 0 0 0
TOTAL 2910845 3443665 41029235067038 5387502 5449560 6094116

6. Raw Material

6.1 Raw Materials of Tyre Industry - Overview (FY 2007-08)

Tyre Industry is highly raw-material intensive. Raw materials cost accounts for approx. 62% of
tyre industry turnover and 70% of production cost

Given below is the composition of raw-materials as a percentage (%) of Total Raw Material Cost:
Natural Rubber 41%
Nylon Tyre Cord Fabric 18%
Carbon Black 10%
Rubber Chemicals 5%
Butyl Rubber 5%

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PBR 6%
SBR 5%
Others 10%
57% of total Natural Rubber consumption is by the Tyre Sector, balance by rubber based non-tyre
industries.
Total weight of raw-materials consumed by tyre industry – 13.39 Lakh M.T.
Total Cost of Raw Materials consumed by tyre industry – Rs.12,500 Crores

6.2 Raw Material Availability


No domestic Production of Butyl Rubber, Polyester Tyre Cord and Styrene Butadiene Rubber of
tyre grades, i.e., 1502 and 1712.
Production of Nylon Tyre Cord Fabric, Polybutadiene Rubber, Rubber Chemicals, Steal Tyre
Cord insufficient to meet domestic demand.
Tyre industry imports raw materials on account of the following factors:
duty-free imports permitted against export of tyres; domestic demand not sufficient to meet
complete requirement; technical and commercial considerations; business strategy to have
multiple sources of supply.

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7. Government Policy

Trade Policy - Tyres & Raw Materials

• All categories of tyres can be exported freely


• All categories of new tyres can be imported freely except Truck / Bus (Radial Tyres),
which is in the Restricted List from 24th Nov. 2008 onwards.
• No WTO Bound Rates for Tyres & Tubes
• All raw materials required for the manufacture of tyres can be imported freely (OGL)
except Carbon Black, which is in the Restricted List from 24th Nov. 2008 onwards.

Custom Duties : Tyres


Normal rate of Basic Customs Duty (MFN) 10%
Preferential/ concessional Customs Duty under Trade Agreements
* Asian Pacific Trade Agreement 8.60%
(formerly known as Bangkok Agreement)
* Indo Sri Lanka Free Trade Agreement Nil
* SAPTA ( SAARC Preferential Trading Nil*
Agreement) 5%**
* India Singapore Comprehensive 2.5%

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Economic Cooperation Agreement (CECA)

For details please refers to Preferential Tariff Table for Tyres/ Raw-Materials of Tyre Industry
(Ref. Section on RTAs)

Excise Duty: Tyres


All categories of Tyres 14%

* When import from Bangladesh, Bhutain, Maldivies and Nepal.


** When import from Pakistan and Sri Lanka.

8. Regional Trade Agreements

REGIONAL TRADE AGREEMENTS (RTAs) AN OUTLINE WITH REFERENCE TO


TYRE INDUSTRY
Trade Agreements are broadly on the following lines:

o RTAs (Regional Trade Agreements, can be bi-lateral or plurilateral)


o RTAs aim to establish a Preferential Trade Area (PTA) and/or a Free Trade Area (FTA)
o Framework Agreement (setting the ground for establishing a Free Trade Area) generally
precedes complete FTA.
o In case of simultaneous applicability of more than one RTA, trade can take benefit only
under one Agreement
o RTAs are WTO compatible.

The following are the important and integral components of any RTA:
o Rules of Origin : prescribing minimum value addition in exporting country;

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Preferential/Concessional Rate of Import Tariff: specified as extent/percentage of


concession on the MFN rate (i.e. applied/basic rate of normal customs duty);

o RTAs have assumed added significance due to slowdown of trade talks at multilateral
platforms (WTO), each industry/sector trying to source/sell globally, intense
competition, progressive reduction in import tariffs etc.
Tyre Industry Related (key features and practical dimension)

The following RTAs concern tyres and raw materials of tyre industry:

a) Asia Pacific Trade Agreement (Bangkok Agreement) Tyres and inner tubes can be
imported from signatories to the Bangkok Agreement (please see list attached) at concessional
rate of customs duty for signatories to the Agreement and specific details, please refer to the
statement given below).

b) Indo-Sri Lanka Free Trade Agreement Tyres can be imported at nil customs duty. Natural
Rubber is in the Negative List of India. Several other raw-materials of tyre industry are eligible
for duty concessions of varying magnitude.

c) SAPTA (SAARC Preferential Trading Agreement) Truck & Bus, LCV and Jeep tyres and
select raw-materials of tyre industry can be imported into India at concessional/Nil rate of duty
from signatory countries, (viz. Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka)
Reference statement given below.

d) India-Singapore Comprehensive Economic Co-operation Agreement: Truck and bus,


passenger car (bias) and other tyres can be imported into India at concessional custom duty rate
of 5%.

e) India-Nepal Trade Treaty Select raw-materials of tyre industry eligible for concession in
customs duty when imported from Nepal under the Treaty. For details please statement of
customs duty concessions, given below:

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9 . Marketing

Categorization

Segmentwise Tyre Supplies (2007 - 08)

Tyre supplies are broadly to the following segments:

• Replacement Market (aftermarket)


• Original Equipment Manufacturers (OEMs), i.e. vehicle manufacturers
• Export
• State Transport Undertakings (STUs) (primarily for Bus tyres)
• Government Purchases
Estimated supplies of key tyre categories to various segments are given in the following
table:

Production Segmentwise Percentage supply

(Nos.) (as % of Total Production)


Category
2007-08 Replacement OEMs Export
Market
Truck/Bus 13136592 61* 20 19
Passenger Car / 17904812 45* 49 6
Jeep
LCV 55319922 43 27 30

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Tractor Front 1814391 61 38 1


Tractor Rear 1233611 39 56 5
Scooter / Moped 11603930 48 48 4
Motor Cycle 27920746 52 47 1

* Includes supply of 1.37% of Truck /Bus Tyres and 0.09% Passenger Car tyres to
Governments/STUs

Dealers

Dealers : Multi Brand (different companies); Single Brand; Company owned exclusive
showrooms.

Dealers of commercial vehicle tyres and passenger segment tyres are different, though some
overlap does exist.

Dealers of commercial vehicle tyres also financing purchase of tyres for commercial vehicles
and agricultural tyres.

Dealers are also an important link between the tyre companies and the end consumers and
replacement / warranty schemes are implemented by the companies through the dealers.

Distribution

The distribution system consists of distributors, followed by large dealers and also small/sub
dealers. Some tyre companies also follow a system of appointing C&F agents, in place of
distributors.

Replacement Market: Tyre companies sell tyres through widespread dealer distribution net-
work ( over 5000 in the country ), either through exclusive dealer of the companies or through
multi-company dealers.

OEM: Direct supply by tyre companies through negotiations.

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STU: Direct supply by tyre companies through tender system.

Government: Direct supply by tyre companies through tender system.

Export: Through dealers in the exporting countries.

Import: Some tyre companies also import tyres for the domestic market. Such imports are
generally from the principal company overseas or from technical collaborator or from tyre
companies with which it has an alliance for a particular line of tyres, for example, passenger car
tubeless tyres;

With tyre import freely allowed (except Truck / Bus (Radial Tyres)) import of various categories
of tyres is also taking place.

Tyres are imported by importing agents and then marketed through the dealers who are
marketing Indian tyres also.

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10. Tyre Technology

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1. Tyre with Cotton (reinforcement) Carcass :


In the starting phase of proper Bias or Cross ply tyre, cotton plies were used as main
reinforcing material (end of 19th and early 20th Century). Cotton reinforcing material had
inherent problems of low strength and high moisture regainer. Leading to large number of
plies to get the requisite casing strength for the tyre weight of the tyre and poor heat
dissipation. This, in turn, gave an adverse impact on Tyre weight and buck rendering poor
performance.

2. Tyre with Rayon (reinforcement) Carcass :


With the development of viscose and rayon the strength of reinforcing material went up and
found application in tyres in early 20th Century. Due to higher strength of rayon it was
possible to reduce number of plies and weight of the tyre. Since less number of plies were
needed to match cotton strength, concept of ply rating developed. It was also possible to
have higher ply ratings now.

3. Tyre with Nylon (reinforcement) Carcass :


Persuent to development and introduction of Polymide (Nylon) the strength and flexing
behavior of reinforcing materials improved substantially resulting in further reduction of
number of plies, consequently the weight of the tyres. This development substantially
improved the heat and impact resistance of the carcass leading to better tyre performance
and higher durability. Nylon casing gave a boost to retreadability. Thus effective cost of the
tyre in operation became much more economical.

Development of Tyre Technology due to change in Reinforcing material is basically in the


case of Cross Ply or Bias Tyres. Bias tyre has cotton, Rayon or Nylon Cords, bound as plies
and each ply (i.e. Cords) cross each other at a definite angle anchoring at the bead.

4. Radial (Construction) Tyre - Textile/Textile belt (Rayon/Nylon/Polyester) :


Inspite of continuos development in Bias Tyre Technology, inherent problem of high heat
development and poor life remains a continuos challenge.

In early 1950s new concept of Tyre design was developed namely "RADIAL" wherein plies

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were made highly flexible by keeping the cords at 90 and in order to improve tyre life,
inextensible (stiff) belts were placed on the top of the Carcass under the tread. This led to
stiffer tread portion, leading to higher Tread life (Mileage) and much more comfortable ride
due to flexible carcass. This was the beginning of 'Revolution' in tyre technology.

Initially Radial tyres were introduced with Casing Plies as well as belt material of textiles.
Continuous development in Radial Concept led to further improvements as explained
below.

5. Radial (Construction) Tyre - Textile/Steel belts :


Once Steel Tyre cord got developed it found its immediate application in Belt material,
keeping casing plies of Textile, to further improve durability.

6. Radial (Construction) Tyre - Textile/Glass Fibre Belt :


Similarly, development of glass fibre which is practically inextensible, led to application in
passenger and Light Commercial Vehicle tyres with Textile Casing, providing corrosion
free radial Tyre belt material.

7. Low Aspect Ratio (Cross Ply or Bias) Tyre :


A new concept of low aspect ratio (ratio between section height and section width) of the
tyre in cross ply construction was introduced for higher speed and better performance.

8. Tubeless Tyre (Cross Ply) :


Concept of tubeless tyre in cross ply construction wherein an inner liner compound based
on chlorobutyl or Halo Butyl which is impermeable to gases, was introduced eliminating the
usage of tubes. This concept could not find sustained application in India due to bad roads
and poor handling/maintenance of Rims other than in OTR range. However, Tubeless tyres
are produced for Export Market.

Gradually this concept will become fully acceptable with the advent of new generation
vehicles and improved service facilities.

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9. Radial (Construction) Tyre - Textile/Aramid Belt :


Due to poor roads and inadequate vehicle maintenance, Steel belts had corrosion problem
due to cuts and chips in the tread. This led to trials with Aramid belt (Textile material with
very high strength and Low extensibility).

However, this could not find any sustained use.

10
Radial (Construction) Tyre - All Steel :
.
In developed countries, Radial Truck/Bus tyres use steel wires in casing as well as in Belts
to achieve the optimum advantage of radial construction. In India also this construction was
tried since late 1970s by Indian Companies using tyres of collaborators. This could not
succeed.

Indian companies started experimentally since late 1980s (themselves or with collaborators)
which continues and the product has found gradual entry into low load application.

11
Tubeless Tyre - Radial Construction :
.
As in the case of Bias Tyres, the concept of tubless tyre was extended to radial construction
and introduced in later half of the century in Developed countries. A tubless tyre not only
has tube eliminated but provides for smoother ride and vehicle handling. This is slowly
entering into the Indian market with the advent of new generation vehicles.

12
Low Aspect Ratio - Radial (Construction) Tyres :
.
The concept of low aspect ratio tyre, after gaining the experience from cross ply
construction, was introduced in Radial construction also. The present trend of tyre
development for high speed tyre is being pursued in this direction. Tyres with aspect ratio

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upto 0.65 are being manufactured today enabling Indian Industry to adopt high speed rating
e.g. 190 kmph, 210 kmph etc.

13
High Performance Passenger Car Radial Tyre :
.
High Performance Passenger Car radial tyres not only have very low aspect ratio (0.65 -
0.35) but also have substantial changes in construction. Very low aspect ratio enables use of
large diameter wheels which, in turn, allows better stability at high speeds. The tyre contour
is based on the cross section of a fully loaded tyre and this reduces the energy losses within
the tyre and reduced dynamic fatigue. High performance Passenger tyres are made with
speed rating upto ZR indicating speed capability in excess of 240 kmph. In India, this
concept has not yet been found popular though customers are demanding tyres upto 220
kmph (V Rating).

14
Run Flat (Puncture Proof) Tyre - New Concept :
.
A new concept of run flat tyre (puncture proof) was introduced by Continental in early
1980s wherein the basic construction of the rim and bead was changed by which on loosing
air the tyre tread sits on the rim thus enabling one to drive at a reasonable speed for a long
distance till the flat tyre could be attended to.

This revolutionises the OE need for a new vehicle as the Stepney tyre can also be dispensed
off. However, there is very slow progress of this concept. This has not been tried in India so
far.

15 Fuel economy/low rolling resistance tyre - special compound :


.
Tremendous work is being carried out towards the development of tyres with modified
special compounds, besides tyre construction aspect, to reduce rolling resistance thus
gaining in fuel consumption. However, the ultimate advantage is obtained by Radial
Construction which is gradually findig its well deserved place in Indian Industry.

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16
Green Tyre (Environment Friendly) :
.
This is the latest development in Passenger Radial tyres. These tyres have a rolling
resistance appreciably lower than normal tyres. These tyres have high proportion of non
petroleum based material used in their construction and are called environment friendly or
'green tyres'.

This concept is well perceived and will gradually find its application world over, including
India.

11. Factors to be considered in selecting tyre for vehicle

1. Vehicle Type and Use


When specifying a tyre, analyze the size and type of the vehicle to determine whether it is
better to use standard original equipment (OE) tyre or whether optional tyre should be
selected. Options in tyre sizes are limited by vehicle clearances and rim widths. Also one has
to consider the proposed type of operation to determine tyre service conditions. For instance
a dump truck tyre may be used to haul gravel over highway from pit to the job or to haul
gravel exclusively in the pit for construction. Since the operating conditions vary widely,
tyres should be selected carefully to assure maximum tyre life and safety of operation.

2. Load
From the safety point of view, the overloading of tyres should be carefully avoided,
otherwise dangerous conditions exists. Misapplication of tyre from the load capacity is

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prevented for original equipment on new vehicles, which require manufacture of motor
vehicles and trailers to affix a label that include the gross Axle Weight Rating on the front
and all other axles. The total load per tyre must not exceed the manufacturers specified tyre
load-carrying capacities at corresponding inflation pressures for both the tyre and the rim.

3. Speed and Continuity of Operation


The right tyres used on the vehicle ensure various speeds at which the vehicle runs without
discontinuance of the vehicle run.

4. Tyre/ Rim Combination


It is of utmost importance that appropriate Tyre/Rim combinations are met. These
combinations are specified by the tyre manufacturer in their selection manuals and should be
complied to.

12. Peculiar Features of the Tyre Industry

• High Capital Cost


This sector is capital intensive. A 1.5 million tyre per annum radial tyre plant costs Rs8
billion, while 1.5 million crossply tyre plant would cost Rs 4-5 billion

• Distribution Network-
With typically higher margins in the replacement market, companies need to invest in brand
building and distribution network, which acts as an effective entry barrier. A nation wide
distribution network and strong brand recalls are factors critical to tyre sales. Domestic
companies enjoy the advantage of an existing distribution network and so will however
spend higher on marketing, distribution and advertising to maintain brand visibility among
foreign majors.

• Cyclical

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Due to high minimum economic size, demand supply mismatches constantly exist. Tyre
industry has a derived demand due to dependence on a cyclical auto industry. Prices of petro-
based raw material and natural rubber also tend to be cyclical.

• Technology Incentive
Tyre manufacturing involves sophisticated technology and now with the advent of radial
tyres, technology has assumed importance in tyre manufacturing. Global spending on R & D
is growing (more than Rs. 10 billion per annum by each major producer). All foreign cars
introduced in India are launched on redial tyres.

• Retreading
As only the outer surface of the tyre wears out, tyres are usually retreated and used again.
Truck tyres are usually retreated twice, while other tyres are retreated around 4 times.

13. Michael Porter’s five forces model

1) Bargaining power of supplier

Bargaining power of suppliers can be segregated in two parts according to the demand of
industry.

Rubber

There are two reasons behind this being low first one is most of the tyre firms get150 days credit
for buying the rubber from international market which is not the case if they buy it from
domestic rubber growers. And the second reason is, this credit is being offered at LIBOR, which
is the London Inter-bank Offered Rate. It is the rate of interest at which banks borrow funds from
other banks.

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Other Petro chemical based material (Carbon black, Nylon tyre cord etc.)

The power of suppliers is high in this category as India is limping back in case of Petro based
raw materials like carbon black and chemicals which account low in quantity terms but are high
cost generators. Also the price of NTC fluctuates in line with the prices of Caprolactam (a
petroleum derivative)-it¡¦s main raw material. The prices of these materials are beyond control of
tyre industry.

2) Bargaining power of buyers

This can be seggeregated into two parts as follows.

OEM's

The OEMs are always in strong position when the bargaining power of buyers is concerned. The
reason behind this is most of them are having contract with their relative tyre manufacturer under
which the prices of tyre remains stable for this OEM irrespective of market price. The benefits
are given to them as they are buying in bulk and the relation gives the tyre firms some thing
called brand association.

Replacement

The scene in replacement segment is quite reverse as the bargaining power for the replacement
segment is moderate due to the fact that the buyers are not that strong as compared to OEMs.
The demand in buses and truck segment is always high because of Indian poor road conditions
apart from this the purchase is made in small units.

3) Threat of substitute
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It is moderate or as the industry is facing opposition from retreading sector all over the globe.
This cheaper option, around 20-25% of the original tyre cost, is present in developed countries
since some decade back. And this is heading to wards strong position here in India too.

4) Threat of new entrants

The threat of new entrant is moderate or can be described as low because the industry is highly
capital intensive and the level of technological expertise required is also highly specific.

But if we see from domestic (Indian) industry's point of view, this better can be defined as high.
The reason being, global tyre industry is already seeing mergers and acquisitions in order to
restructure. And as of now India and China going to be the hub of activities as far as tyre
industry is concerned due to low production cost as well as other relevant benefits. So for any of
the global big shot Indian company will be a good option to go for.

5) Industry rivalry

High, because gradually the overseas players are expanding their wings over Indian tyre industry
and also a limited and every player is moving towards automated technology, like ERP and
SCM.

Apart from the aforementioned reason, the industry is seeing high competitive scenario at present
because of various reasons like rising input costs, low realizations from growing OEM segment
where the vehicle manufacturers are not ready to share the burden of tyre firms, the portion of
replacement pie continuously taken away by the retreading sector which is slowly but firmly
rising its head and that to in high realization segment of Bus-Truck tyres and last but not the least
the unorganized sector is always there to give head ache to these established players like CEAT,
JK, Apollo and MRF etc.

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14. SWOT Analysis

Strengths

 Established brand names (key in the replacement market)

 Extensive distribution networks - For example Apollo Tyres has 118 distinct
offices, 12 distribution centres and 4250 dealers.

 Good R&D initiatives by top players

Weakness

 Cost Pressures - The profitability of the industry has high correlation with the prices
of key raw materials such as rubber and crude oil, as they account for more than 70% of the
total costs

 Pricing Pressures - The huge raw material costs have resulted in pressure on the
realisations and hence, the
players have been vouching to increase the prices, although, due to competitive pressures, they

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have not been able to 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

 Growing Economy Growing Automobile Industry Increasing OEM demand


Subsequent rise in replacement accounts for demand

 With continued emphasis being placed by the Central Government on development of


infrastructure, particularly roads, agricultural and manufacturing sectors, the Indian economy
and the automobile sector/ tyre industry are poised for an impressive growth. Creation of road
infrastructure has given, and would increasingly give, a tremendous fillip to road transportation,
in the coming years. The Tyre industry would play an important role in this changing road
transportation dynamics
 Access to global sources for raw materials at competitive prices, due to economies of
scale.

 Steady increase in radial Tyres for MHCV, LCV

Threats

 Continuous increase in prices of natural rubber, which accounts for nearly one third of
total raw material costs
 Cheaper imports of Tyres, especially from China, selling at very low prices, have been
posing a challenge. The landed price is approximately 25% lower than that of the
corresponding Indian Truck/ LCV tyres. Imports from China now constitute around 5%
of market share
 With crude prices scaling upwards, added pressure on raw material prices is expected

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 Ban on Overloading, leading to lesser wear and tear of tyres and subsequent slowdown
in demand. However, this would only be a short-term negative
 Cyclical nature of automobile industry

15. Key Players

While the tyre industry is mainly dominated by the organised sector, the unorganised sector
holds sway in bicycle tyres. The major players in the organised tyre segment consist of MRF,
Apollo Tyres, Ceat and JK Industries, which account for 63 per cent of the organised tyre
market. The other key players include Modi Rubber, Kesoram Industries and Goodyear India,
with 11 per cent, 7 per cent and 6 per sent share respectively. Dunlop, Falcon, Tyre Corporation
of India Limited (TCIL), TVS-Srichakra, Metro Tyres and Balkrishna Tyres are some of the
other players in the industry. MRF, the largest tyre manufacturer in the country, has strong brand
equity. While it rules supreme in the industry, other players have created niche markets of their
own

15.1 JK Tyres

"Excellence comes not from mere words or


procedures. It comes from an urge to strive and deliver

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the best. A mindset that says, when it is good enough, improve it. It is a way of thinking that
comes only from a power within." - H.S.Singhania

JK tyre, a Division of JK Industries is the flagship company under the umbrella of JK


Organization. The advent of JK Organization on the industrial landscape of India almost
synchronizes with the beginning of an era of industrial awareness - an endeavor for self reliance
and the setting up of a dynamic Indian industry. This was way back in the middle of the 19th
century. And the rest that followed is history.
JK Organization has been a forerunner in the economic and social advancement of India. It
always aimed at creating job opportunities for a multitude of countrymen and to provide high
quality products. It has striven to make India self reliant by pioneering the production of a
number of industrial and consumer products, by adopting the latest technology as well as
developing its own know-how. It has also undertaken industrial ventures in several other
countries.

J.K. Tyre has been at the forefront of the radial revolution in India. Since inception, we have
been regularly releasing high quality, high technology products, which have withstood the
test of time and are forerunners in the industry today. Our leadership position in the industry can
be attributed to the mantra of offering high technology products and services to the customer. In
J.K. Tyre, it is our philosophy to continuously anticipate and understand the customer
requirements, convert them into performance standards for our products and services, and
meet these standards every time.

This has resulted in development of many innovative products from the most modern,
technologically advanced production facilities, some of which are listed below:

• First manufacturer to launch "T" rated tyres in 1994-Ultima.


• First manufacturer to launch "H" rated tyres in 1996-97-Ultima 210 H.
• First manufacturer to launch Dual Contact High Traction Steel radials- Aqua sonic
• First manufacturer to introduce India's first range of eco-friendly coloured tyres.
J K Industries Ltd. (JKI), the leader in the Indian Tyre Industry and manufacturers of well-
known J K TYRE. J K Tyre along with its subsidiary Vikrant currently holds the No.1 position

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in the 4 Wheeler tyre segment with a market share of 20.8 %. J K Tyre and Vikrant continue to
be the leaders in the commercial tyre segment which constitute 70% of the Tyre Market with the
highest market share in the Indian Tyre Industry. J K Tyre maintains its dominant position in the
Passenger Car Radials. J K Tyre is a preferred supplier with most of the OEMs. J K Tyre has
launched several new products including recently launched Tractor Radial Tyre. J K Tyre is in
the process of further expanding its Passenger Radial capacity to strengthen its position further.

A greater thrust on exports is yielding good results. J K Tyre along with Vikrant holds its No.1
position being the highest exporter of Tyres in the country with exports to over 60 countries
across 6 continents. J K Tyre has tied up with a leading tyre manufacturer in China & is
outsourcing tyres for its international markets. These initiatives shall be further intensified in the
coming months. J K Sugar achieved growth of 31 % in the cane crushed for the season. J K
Sugar is also implementing expansion. The 1st phase of capacity expansion up to 4300 TCD is
already complete. J K Agri Genetics, the makers of "J K SEEDS" has continued to perform well
and maintain its leadership in the Hybrid Seed Industry. The expected revival in the Indian
economy, particularly the transport and automobile sector should lead to further strengthening
the company's operations in the coming months. Today, JK Tyre's products compete with the
best international players in the premium international bias market in more than 55 countries in 6
continents. JK Tyre had obtained international accreditation for its products in the US, Europe,
South America and the Middle East.

JK Tyre, a division of the Hari Shankar Singhania group's flagship JK Industries, has increased
its share in the commercial tyre market to 24.5 per cent from April to September 2001. The
company's market share was 22.4 per cent during 2000-01, as per the data available with the
Automotive Tyre Manufacturers Association (Atma). JK Tyre is the largest player in the
commercial segment of the domestic tyre market. The commercial vehicles segment accounts for
almost 70 per cent of the Rs 10,000 crores tyre market in India.

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JK Tyres Plants, Head offices and regional Offices

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15.2 MRF TYRES

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MRF TYRES, India's No. 1 tyre manufacturing company manufactures an


extensive range of superior quality tyres in six production facilities in India.
MRF exports its products to over 75 countries worldwide - a standing
testimony to MRF's outstanding leadership JK Tyre is a leading exporter of
tyres from India and roughly accounts for about 26% of the total tyre exports
from India (along with its associate Vikrant Tyres Limited). The company caters to a host of
impressive clients. It has signed on to be the sole supplier for auto giants like General Motors,
Fiat and Ford in India.

HISTORY

In 1946, a young entrepreneur, K. M. Mammen Mappillai, opened a small toy balloon


manufacturing unit in a shed at Tiruvottiyur, Madras (now Chennai).In 1952, MRF ventured into
the manufacture of tread rubber. And with that, the first machine, a rubber mill, was installed at
the factory. This step into tread-rubber manufacture was later to catapult MRF into a league that
few had imagined possible. With the success achieved in tread rubber, MRF entered into the
manufacture of tyres. MRF established a technical collaboration with the Mansfield Tire &
Rubber Company of USA. In 1967, MRF became the first Indian company to export tyres to
USA - the very birthplace of tyre technology. In 1973, MRF scored a major breakthrough by
being among the very first in India to manufacture and market Nylon tyres. Then MRF entered
into a technical collaboration with the B.F. Goodrich Tyre Company of USA.MRF tyres were the
first tyres selected for fitment onto the Maruti Suzuki 800 - India's first small, modern car. MRF
was the clear market leader in every tyre segment.

In addition, by readers of the A & M magazine, MRF was considered as one of India's most
admired Marketing Companies. Then MRF was chosen for fitment on the Daewoo Cielo, Ford
Escort, Opel Astra and Fiat Uno, showing its world-class quality and appeal. A special factory
dedicated entirely to the manufacture of radials was started at Pondicherry.

Brands

Steel Belted Radial


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• MRF Radial ZVTS • MRF Radial GP

• MRF Radial GT • MRF Radial VT

• MRF Radial CC

Bias Ply

• Legend • Estate

• SW99 (ULT) • Twin Tread

15.3 Apollo Tyres Ltd

Apollo Tyres Ltd (ATL) is one of the leading tyre manufacturing companies in India. ATL
manufactures automobile tyres, tubes & flaps and is well entrenched in the T&B (truck and bus)
tyre replacement segment, which comprises the bulk of the market. However, it’s presence in the
fast growing passenger car and two-wheeler segments are low. One other point of concern is the
less than cordial state of industrial relations in the company. After coming out of a prolonged
agitation in FY99, the company’s workers in Baroda went on a strike recently. In FY2000,
thanks to the upturn in the automotive segment, ATL has posted a sales growth of 17%yoy in the
first nine months of the year. However, rising cost of material inputs and increased competition
has put pressure on operating margins. The company has, however, succeeded in holding on to
its market share by affecting a change in product mix with production of more car radials.

ATL has grown rapidly in the last decade, and from being a marginal player, it has raced ahead
to become the third largest player in the tyre industry. ATL management has been quick to spot
opportunities and has displayed remarkable market savvy. In FY2000, ATL has tied up with
Castrol Ltd and Kotak Mahindra Finance Ltd to provide multiple product opportunities to its
exclusive dealers. The management has not been found wanting when it comes to introducing
new products to tap growing segments in the auto industry.

Amazing performance

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A marginal player in the tyre industry a decade ago, Apollo Tyres leads the replacement market
in the heavy vehicle and car radials segments. "The focus is to increase our market share to 25
per cent from 15-18 per cent in all the market segments."

Bus and truck tyres account for a lion’s share of the industry's revenues. Since the OE market is
margin-sensitive, all the action is focused on the lucrative replacement market, especially in the
heavy vehicles segment. According to Satish Sharma, product manager at Apollo Tyres, "The
size of the truck tyre replacement market is 4 lakh tyres per month, and our share in that is 25per
cent." Though the volume will be small, talks have been initiated with Volvo India.

Apollo Tyres is also giving MRF Ltd, the leader in the car tyres market, a run for its money. Its
Apollo Excel tyres, rolled out from its Baroda plant, have received an excellent response in the
marketplace, according to the company. In the OE segment MRF has been losing its hold to
Bridgestone. And in the replacement market, Apollo Tyres has become a major threat. Apollo
Tyres is now negotiating with Hyundai Motors and Hindustan Motors for OE sales. In the two
wheeler market, Apollo is focusing on the motorcycle tyres market.

To boost sales, Apollo Tyres has tied up with Castrol India and Kotak Mahindra Finance. Apollo
Tyres dealers will stock Castrol lubes and improve their earnings. The tie-up with Kotak
Mahindra will facilitate sales by providing finance for tyre purchases, for the first time in India.
Apollo Tyres has increased its ad budget to Rs 35 crores from Rs 25 crores earlier, in order to
push sales. According to the Apollo management, the company sells 1.1 lakh of the 5 lakh car
radials sold per month in India today.

At present, the company's tyres are fitted as OE in Hindustan Motors’ Ambassador and
Contessa models, in tractors from Tafe, Punjab Tractors and Mahindra & Mahindra, and
trucks made by Ashok Leyland and Telco.

15.4 CEAT TYRES LTD.

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Analysis of the Tyre Industry

Ceat Ltd, a part of the RPG Goenka group, is the second largest tyre
manufacturer in the country after MRF. Ceat manufactures truck &
bus, passenger car, scooter and LCV tyres. The company is a
dominant player in the truck & bus and passenger car tyre segments
with a market share of 14% and 17% respectively. In FY2000, Ceat
did well to posting a 21%yoy sales growth in the replacement market for truck & bus tyres. It is
presently focusing on catering to the fast growing passenger car and two-wheeler industry.
Towards this, it is commissioning a new radial tyre factory in June 2000.

Being the second largest selling brand in India with a market share of 14.6 per cent, Ceat caters
primarily to the replacement market. Due to the strong growth in the OEM sector, the share of
the replacement market in the total revenue of the company has fallen. Ceat is part of the RPG
group, which is diversified, with presence in major sectors like power, fertilizers,
pharmaceuticals, tyres, computer, telecom, financial services etc. The group stumbled trying to
grow via diverse platforms and has many companies that have turned sick. But lately the strategy
seems to be one of restructuring and consolidation. The group is divided into 4 broad areas -
rubber & allied products, power, electronics & telecom and chemicals. Ceat’s investments in its
subsidiaries have also come down this fiscal which is a sign of prudence on the management.

Since inception in 1958, CEAT has been at the forefront of Indian Tyre industry. It has
established itself as one of the Top Manufacturers of Superior quality tyres. Their endeavor to
continually improve business processes & ensure conformance to the established quality
standards has earned a high reputation with their esteemed customers. CEAT is committed to the
Customers by delivery of outstanding products & services at the most affordable prices.

Amidst the rapidly changing business scenario, they have now established an additional
communication platform to interact with each other. In this seamless world, they recognize the
importance of linking themselves with the cyber age.

Ceat, a part of the RPG Enterprise, is planning to set up a production facility to manufacture
truck radial tyres at an investment of around Rs 200-250 crore. The tyre manufacturing company
is also investing around Rs 75-80 crore to expand its capacity for passenger car radial tyres.

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Though the life (number of months in use) of radial tyres for trucks is expected to last 35-40%
longer, company officials said the tyres would cost 15-20% more. Development in the road
infrastructure is cited as a major reason for possible shift to truck radial tyres. Almost the entire
truck demand is now cross ply or bias ply tyres. On the passenger car radial tyres, Mr. Paul said,
“We plan to invest Rs 75-80 crore to ramp up the passenger car radial capacity to one lakh
units.” At present, the company enjoys only 6% market share in the passenger car radial market.
In the two and three wheeler market, Ceat had increased its capacity to five lakh units per month
during the last year (from 60,000 units) by roping in three dedicated third party manufacturers —
who now contribute 80% of this capacity. He said the company had drawn up plans to increase
its market share in the motorcycle segment by 9% to 20% in ‘03-04 and consolidate its presence
in the scooters segment (25% market share). “We have achieved a major breakthrough by
signing an OE contract with a major south-based two wheeler manufacturer. Such contracts will
give boost to the two and three wheeler market.”

However, the production growth in the automobile sector over the past few years should provide
a boost to the replacement market in the coming years and Ceat could be a major beneficiary
thereof. With the advent of multinationals like Goodyear, Michelin, Bridgestone and
Continental, a major shakeout in the industry is imminent and the same could result in Ceat,
which is already operating on thin margins, being hived off as a joint venture with Goodyear,

16. Sector specifics

The tyre industry is a major consumer of the domestic rubber production. Natural rubber
constitutes 80 per cent of the material content in Indian tyres. Synthetic rubber constitutes only
20 per cent of the rubber content of a tyre in India. World wide, the ratio of natural rubber to
synthetic rubber is 30:70. Apart from natural and synthetic rubber, rubber chemicals are also
widely used in tyres.

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Most of the RSS-4 grade natural rubber required by the Indian tyre industry is domestically
sourced, with only a marginal amount being imported. This is an advantage for the industry,
since natural rubber constitutes 25 per cent of the total raw material cost of the tyres.

The two types of synthetic rubber used in tyres are Poly Butadiene Rubber (PBR) and Styrene
Butadiene Rubber (SBR). The former is used in most of the tyres, while the latter is mainly used
in the radials for passenger cars. Synthetic rubber accounts for 14 per cent of the raw material
cost. Unlike in the case of natural rubber, India imports 60 per cent of its synthetic rubber
requirements.

Apart from rubber, major raw materials are nylon tyre cord and carbon black. The former is used
to make the tyres strong and impart tenacity to it. The latter is responsible for the colour of the
tyre and also enhances the life span of the tyre. Nylon tyre cord comprises 34 per cent, while
carbon black accounts for another 13 per cent of the raw material cost. In India, the carbon black
used is of the N660, N220 and N330 variety.

To sum up, the tyre industry is highly raw-material intensive, with raw material costs accounting
for 70 per cent of the cost of production. Fortunately for the industry, the rubber and carbon
black prices have taken a beating recently, which means lower costs for the tyre industry. The
export-import policy allows free import of all types of new tyres and tubes. However, import of
retreaded tyres, either for use or for reclamation of rubber is restricted. This has led to used tyres
being smuggled into the country under the label of new tyres. Though tyre import and all raw
materials for tyres except natural rubber are under open general license (OGL), only import of
natural rubber from Sri Lanka is eligible under OGL.

17. Sector trends

Crossply tyres have been used in India for several decades. In these tyres, the ply cords run
across each other or diagonally to the outer surface of the tyre. Rayon and nylon tyre cords are
used as the reinforcing medium. These tyres can be retreaded twice during their lifetime and are
hence preferred by Indian transport operators who normally overload their trucks. A vehicle with
the normal carrying capacity of around 12 tonnes is usually loaded with double the capacity.

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Moreover, one also has to contend with the bad suspensions and bad road conditions. No
wonder, 95 per cent of the tyres used in India are crossplies.

Radial tyres have their cords running radially from bead at 90 degrees angle to the rim or along
the outer surface of the tyre. The reinforcing mediums used in these tyres are polyester, nylon,
fibreglass and steel. Hence, these tyres are 20 per cent more expensive than the crossplies. But
they have a longer life and provide lower fuel consumption. The unhealthy condition of the
Indian roads has resulted in radial tyres accounting for only 5 per cent of the tyre industry as
against a global trend of 60 per cent. With two-thirds of the capacity of all major tyre
manufacturers being reserved for radials, this is a real cause for concern.

18. Outlook

Globally, the OEM segment constitutes only 30 per cent of the tyre market, exports 10 per cent
and the balance from the replacement market. In India, the scenario is quite different. Nearly 85
per cent of the total tyre demand in the country is for replacement. This anomaly has placed the
retreaders in a better position than the tyre manufacturers. Retreading is looming over the tyre
industry as a colossal threat. The Coimbatore based Elgi Tyres and Tread Ltd., the largest
retreader in India, is giving the tyre barons sleepless nights.

Simply put, rethreading is replacing the worn-out tread of the old tyre with a new one. The
popularity of rethreading stems from the fact that it costs only 20 per cent of a new tyre but
increases its life by 70 per cent to 80 per cent. Most of the transporters in India retread their tyres
twice during its lifetime, while a few fleet owners even retread thrice. In their zealousness to
economise costs, they overlook the reality that retreading reduces the quality of the tyre. It is
highly popular in the South unlike in the North where the transporters overload their trucks and
have to ply their vehicles in a rough terrain an environment in which buying a new tyre is the
best option. Though retreading has penetrated 25 per cent of the tyre market, it has not made
much of a dent in the rapidly growing two-wheeler and passenger car segments.

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Analysis of the Tyre Industry

19. Valuation

19.1 Relative Valuation

Apoll Falcon(0 GoodYear(0 JK Tyre(07-


Company CEAT MRF
o 7-12) 7-12) 09)
130.7 3106.5
Price (Rs)
1 58.60 148.00 114.85 79.60 0
1879. 1317.1
Mkt cap (in crs)
92 200.65 81.21 264.96 326.84 6
2325.8
Book Value (Rs)
25.09 145.97 53.17 61.25 119.51 3
P/BV 5.21 0.40 2.78 1.88 0.67 1.34
P/E 29.71 1.37 22.91 6.99 3.75 7.73
Growth in EPS - 415.32 7.31% -12.24% 308.67% 116.39
81.52 % %
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Analysis of the Tyre Industry

%
PEG -36.44 0.33 313.45 -57.15 1.22 6.64
EPS (Rs.) 4.40 42.72 6.46 16.42 21.21 401.75
Enterprise Value 2207. 2348.1
(in crs) 01 809.23 220.44 363.84 1274.61 8
EV/EBIDTA 15.66 4.47 4.77
4.58 2.73 5.06
17.85 28.95 Ke
3.32% 27.77% 12.50% 17.42
ROE
% % RFR 8.50% %
460.6 145.78
RM 0.0021.90%914.95
Debt
5 617.35 0.9618 848.09
2340. 226.99
BETA 264.96 1241.79
51 2165.2
Mcap + Debt
57 818.00 5
EBIDTA (Rs. In 481.5 14.08 81.42 267.29
Ke 21.39%
Crores) 0 296.64 463.61

19.2 FCFF

a. Apollo Tyres Ltd

131.11042
MARKET PRICE(rs.) 88
NO. OF SHARES(Cr) 4.885
640.47444
MV OF EQUITY 49
DEBT 460.65
EV 1101.1244

WACC 16.137%

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Analysis of the Tyre Industry

ASSUMPTION: GROWTH FOR THE NEXT 5YRS 11.27


Long term Growth Rate %
AND THEREAFTER CONTINUES AT THIS dec/ye
GROWTH RATE 4% ar 1.45%

ROC equals wacc in long


term 16.137%
terminal roc 16.137%
terminal rr 24.788%
dec/year 18.91%

200 200 201 201 201 201 201 201 201 201 201
8 9 0 1 2 3 4 5 6 7 8
11. 11. 11.
27 11.2 27 11.2 11.2 27 9.81 8.36 6.91 5.45 4.00
GROWTH % 7% % 7% 7% % % % % % %
119 119 119
.36 119. .36 119. 119. .36 100. 81.5 62.6 43.7 24.7
RR* % 36% % 36% 36% % 45% 3% 2% 0% 9%
275 306. 340 378. 421. 469 515. 558. 596. 629. 654.
NOPLAT .11 11 .60 98 69 .20 25 33 90 45 63
328 365. 406 452. 503. 560 517. 455. 373. 275. 162.
RREINV .37 37 .54 35 32 .04 55 21 76 08 27
- - - - - -
53. 59.2 65. 73.3 81.6 90. - 103. 223. 354. 492.
FCFF 26 6 94 7 4 84 2.30 12 14 37 36

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Analysis of the Tyre Industry

TV
16.
137 16.1 16.1 16.13 16.13 16.1 16.13 16.13 16.13 16.13 16.13
WACC % 37% 37% 7% 7% 37% 7% 7% 7% 7% 7%
0.86 0.7 0.63 0.54 0.4 0.40 0.35 0.30 0.26 0.22
105 414 839 968 733 754 091 215 017 402
DF 2 1 2 8 1 4 7 7 3 2
-
39.
PV HG 758
Period 4
405
6.65
TV 7
105
5.43
DISC TV 3
101
TOTAL 5.6
VALUE 75
191.
EXCESS 892
CASH 6
302.
INV 71
non core -
operating 411.
capital 09

109
9.18
TOTAL 7

460.
DEBT 65
NO. OF 4.88
SHARES 5
638.
537
EV 2
Value per 130.
share 71

b. CEAT Tyres Ltd.

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Analysis of the Tyre Industry

MARKET PRICE(rs.) 226.9655309


NO. OF SHARES(Cr) 3.424
777.12997
MV OF EQUITY 77
DEBT 477.6
EV 1254.7300

WACC 16.610%

WTS. COST
61.94% 21.39%
38.06% 8.83%

Ke
RFR 8.50%
RM 21.90%
0.9618
BETA 51

Ke 21.39%

ASSUMPTION: GROWTH FOR THE NEXT


5YRS
Long term Growth Rate
AND THEREAFTER CONTINUES AT THIS
GROWTH RATE

8.55%
dec/ye
4% ar 0.91%

ROC equals wacc in long


term 16.610%
terminal roc 16.610%
terminal rr 24.081%

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Analysis of the Tyre Industry

dec/year 10.16%

200 200 201 201 201 201 201 201 201 201 201
8 9 0 1 2 3 4 5 6 7 8
8.5 8.55 8.55 8.55 8.55 8.5 7.64 6.73 5.82 4.91 4.00
GROWTH 5% % % % % 5% % % % % %
74. 74.
86 74.8 74.8 74.8 74.8 86 64.7 54.5 44.3 34.2 24.0
RR* % 6% 6% 6% 6% % 0% 5% 9% 4% 8%
238 258. 281. 305. 331. 359 386. 413. 437. 458. 476.
NOPLAT .48 88 03 07 16 .49 97 02 06 53 87
178 193. 210. 228. 247. 269 250. 225. 194. 156. 114.
RREINV .52 79 37 36 90 .10 37 29 02 98 84
59. 65.0 70.6 76.7 83.2 90. 136. 187. 243. 301. 362.
FCFF 96 9 6 0 7 39 59 73 05 54 03
TV
16.
610 16.6 16.61 16.61 16.61 16.6 16.61 16.61 16.61 16.61 16.61
WACC % 10% 0% 0% 0% 10% 0% 0% 0% 0% 0%
0.85 0.73 0.63 0.54 0.4 0.39 0.34 0.29 0.25 0.21
755 540 064 081 637 771 106 248 081 509
DF 6 2 8 6 8 7 4 2 9 2

508
PV HG .18
Period 08
287
0.88
TV 6
720.
DISC TV 074

122
TOTAL 8.2
VALUE 55
EXCESS -

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Analysis of the Tyre Industry

4.96
CASH 18
INV 9.6
non core
operating 21.8
capital 1
125
4.70
TOTAL 3

477.
DEBT 6
NO. OF 3.42
SHARES 4

777.
103
EV 1
Val per 226.
share 96

c. MRF Tyres Ltd.

MARKET PRICE(rs.) 3123.26


NO. OF SHARES(Cr) 0.424
MV OF EQUITY 699.6
DEBT 1249.48
EV 1949.0800

WACC 13.341%

WTS. COST
35.89% 21.39%
64.11% 8.83%

Ke

RFR 8.50%

RM 21.90%
0.9618
BETA 51

Ke 21.39%

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Analysis of the Tyre Industry

ASSUMPTION: GROWTH FOR THE NEXT 13.71


5YRS %
dec/ye
Long term Growth Rate 4% ar 1.94%
AND THEREAFTER CONTINUES AT THIS
GROWTH RATE

ROC equals wacc in long


term 13.341%
terminal roc 13.341%
terminal rr 29.984%
dec/year 30.92%

200 200 201 201 201 201 201 201 201 201 201
8 9 0 1 2 3 4 5 6 7 8
13. 13.
71 13.7 13.7 71 13.7 13.7 11.7 9.83 7.8 5.94 4.00
GROWTH % 1% 1% % 1% 1% 7% % 8% % %
184 184 91.
.59 184. 184. .59 184. 184. 153. 122. 83 60.9 29.9
RR* % 59% 59% % 59% 59% 67% 75% % 0% 8%
210 239. 272. 309 352. 400. 447. 491. 530 561. 584.
NOPLAT .71 60 45 .80 27 56 69 68 .44 96 44
388 442. 502. 571 650. 739. 687. 603. 487 342. 175.
RREINV .95 28 91 .85 24 39 96 52 .08 26 23
FCFF - - - - - - - - 43. 219. 409.
178 202. 230. 262 297. 338. 240. 111. 36 70 20

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Analysis of the Tyre Industry

.24 68 46 .06 98 83 27 84
TV
13.
341 13.3 13.34 13.3 13.34 13.34 13.34 13.34 13.3 13.34 13.34
WACC % 41% 1% 41% 1% 1% 1% 1% 41% 1% 1%
0.88 0.77 0.6 0.60 0.53 0.47 0.41 0.3 0.32 0.28
229 844 868 597 465 172 619 672 398 585
DF 6 7 2 9 3 2 9 1 8 4

-
972
PV HG .72
Period 1
438
0.86
TV 8
141
DISC TV 9.35
446
TOTAL .62
VALUE 93
EXCESS 1.45
CASH 6
68.5
INV 6
non core -
operating 212.
capital 11
304.
535
TOTAL 3
124
DEBT 9.48
NO. OF 0.42
SHARES 4
-
944.
EV 945

Val per 312


share 3.26

19.3 FCFE

a. Apollo Tyres Ltd.

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Analysis of the Tyre Industry

186.64806 Rs per
MARKET PRICE 75 share
NO. OF SHARES(Cr) 4.885 cr

MV OF EQUITY 911.7758

KE 21.390%

Ke
RFR 8.50%
RP 21.90%
0.9618
BETA 51

Ke 21.39%

ASSUMPTION: GROWTH FOR THE NEXT


5YRS
Long term Growth Rate
AND THEREAFTER CONTINUES AT THIS
GROWTH RATE

10.87
%
dec/ye
5% ar 1.17%

ROC equals KE in long


term 21.390%
terminal roc 21.390%
terminal rr 23.376%
dec/year 10.29%

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Analysis of the Tyre Industry

200 200 201 201 201 201 201 201 201 201 201
8 9 0 1 2 3 4 5 6 7 8
10.
87 10.8 10.8 10.8 10.8 10.8 9.7 8.52 7.3 6.17 5.00
GROWTH % 7% 7% 7% 7% 7% 0% % 5% % %
126 64. 43.
.31 116. 105. 95.4 85.1 74.8 55 54.2 96 33.6 23.3
RR % 02% 72% 3% 4% 4% % 6% % 7% 8%
275 305. 338. 374. 415. 460. 505 548. 589 625. 656.
NOPLAT .11 02 19 96 73 94 .64 74 .07 44 71
347 353. 357. 357. 353. 344. 326 297. 258 210. 153.
RREINV .49 87 54 82 94 98 .39 72 .97 58 51
- - -
72. 48.8 19.3 17.1 61.8 115. 179 251. 330 414. 503.
FCFE 38 5 5 4 0 96 .25 02 .10 86 20
TV
21.
390 21.3 21.39 21.39 21.39 21.39 21.3 21.39 21.3 21.39 21.39
WACC % 90% 0% 0% 0% 0% 90% 0% 90% 0% 0%
0.82 0.67 0.55 0.46 0.37 0.3 0.25 0.17 0.14
379 863 905 054 939 125 746 0.2 472 393
DF 2 4 3 4 2 4 8 121 7 8

291
PV HG .81
Period 43
307
0.21
TV 8
536.
448
DISC TV 9

828.
TOTAL 263
VALUE 2

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Analysis of the Tyre Industry

191.
EXCESS 892
CASH 6
302.
INV 71
non core -
operating 411.
capital 09
911.
775
TOTAL 8

NO. OF 4.88
SHARES 5

911.
775
EV 8

Val per 186.


share 65

b. Ceat tyres ltd.

314.004387 Rs per
MARKET PRICE 8 share
NO. OF SHARES(Cr) 3.424 cr

MV OF EQUITY 1075.1510

KE 21.390%

Ke
RFR 8.50%
RP 21.90%
0.9618
BETA 51

Ke 21.39%

ASSUMPTION: GROWTH FOR THE NEXT 2.58%

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Analysis of the Tyre Industry

5YRS
dec/ye -
Long term Growth Rate 5% ar 0.48%
AND THEREAFTER CONTINUES AT THIS
GROWTH RATE

ROC equals KE in long


term 21.390%
terminal roc 21.390%
terminal rr 23.376%
dec/year 0.05%

200 200 201 201 201 201 201 201 201 201 201
8 9 0 1 2 3 4 5 6 7 8
2.5 2.58 2.58 2.58 2.58 2.58 3.0 3.55 4.0 4.52 5.00
GROWTH 8% % % % % % 7% % 3% % %
23. 23. 23.
86 23.8 23.7 23.7 23.6 23.6 57 23.5 47 23.4 23.3
RR % 1% 7% 2% 7% 2% % 2% % 2% 8%
238 244. 250. 257. 264. 270. 279 289. 300 314. 330.
NOPLAT .48 64 96 45 10 92 .23 15 .81 40 12
56. 58.2 59.6 61.0 62.5 63.9 65. 68.0 70. 73.6 77.1
RREINV 91 6 4 6 1 9 82 1 61 5 7
181 186. 191. 196. 201. 206. 213 221. 230 240. 252.
FCFE .57 38 32 39 59 93 .41 13 .20 75 95
TV
WACC 21. 21.3 21.39 21.39 21.39 21.39 21.3 21.39 21.3 21.39 21.39

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Analysis of the Tyre Industry

390
% 90% 0% 0% 0% 0% 90% 0% 90% 0% 0%
0.82 0.67 0.55 0.46 0.37 0.3 0.25 0.17 0.14
379 863 905 054 939 125 746 0.2 472 393
DF 2 4 3 4 2 4 8 121 7 8

779
PV HG .04
Period 23
154
3.32
TV 8
269.
660
DISC TV 5

104
TOTAL 8.70
VALUE 3
-
EXCESS 4.96
CASH 18
INV 9.6
non core
operating 21.8
capital 1

107
5.15
TOTAL 1

NO. OF 3.42
SHARES 4
107
5.15
EV 1

Val per 314.


share 00

c. MRF Tyres Ltd.

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Analysis of the Tyre Industry

Rs per
MARKET PRICE 3415.55 share
NO. OF SHARES(Cr) 0.424 cr

MV OF EQUITY 537.4402

KE 21.390%

Ke
RFR 8.50%
RP 21.90%
0.9618
BETA 51

Ke 21.39%

-
ASSUMPTION: GROWTH FOR THE NEXT 41.92
5YRS %
-
dec/yea 9.38
Long term Growth Rate 5% r %
AND THEREAFTER CONTINUES AT THIS
GROWTH RATE

ROC equals KE in long


term 21.390%
terminal roc 21.390%
terminal rr 23.376%
dec/year -33.44%

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Analysis of the Tyre Industry

200 200 201 201 201 201 201 201 201 201 201
8 9 0 1 2 3 4 5 6 7 8
-
- - - - - - - - 13. -
41.9 41.9 41.9 41.9 41.9 41.9 32.5 23.1 77 4.38 5.00
GROWTH 2% 2% 2% 2% 2% 2% 4% 5% % % %
-
- - - - - - - - 43. -
311. 277. 244. 210. 177. 143. 110. 76.9 51 10.0 23.3
RR 07% 63% 18% 74% 29% 85% 40% 6% % 7% 8%
210. 122. 71.0 41.2 23.9 13.9 6.2
NOPLAT 71 38 8 8 7 2 9.39 7.22 2 5.95 6.25
- - - - - - - -
655. 339. 173. 86.9 42.5 20.0 10.3 - 2.7 -
RREINV 47 76 55 9 0 3 7 5.56 1 0.60 1.46
866. 462. 244. 128. 66.4 33.9 19.7 12.7 8.9
FCFE 18 13 63 27 8 5 6 7 3 6.55 4.79
TV
21.3 21.3 21.39 21.39 21.39 21.39 21.39 21.39 21.3 21.39 21.39
WACC 90% 90% 0% 0% 0% 0% 0% 0% 90% 0% 0%
0.82 0.67 0.55 0.46 0.37 0.25 0.17 0.14
379 863 905 054 939 0.31 746 0.2 472 393
DF 2 4 3 4 2 254 8 121 7 8

674
PV HG .42
Period 94
29.2
162
TV 8
5.10
486
DISC TV 3

679.
TOTAL 534
VALUE 2
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Analysis of the Tyre Industry

EXCESS 1.45
CASH 6
68.5
INV 6
non core -
operating 212.
capital 11
537.
440
TOTAL 2

NO. OF 0.42
SHARES 4

537.
440
EV 2
Val per 341
share 5.55

20. Results

Company Actual Share Valuation Method Comment


Price (as on
31/03/08)
Apollo Tyres Ltd. Rs. 41.30 FCFF 130.71 Undervalued
FCFE 186.65 Undervalued
Ceat Tyres Ltd. Rs. 109.25 FCFF 226.96 Undervalued
FCFE 314.00 Undervalued
MRF Tyres Ltd. Rs. 3989.05 FCFF 3123.26 Overvalued
FCFE 3415.55 Overvalued

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Analysis of the Tyre Industry

21. Conclusion

The industry, already bogged by over capacity, is facing a severe threat of dumping of cheap
tyres by South Korea. Under the Bangkok agreement, signed between India and South Korea in
1976, import of tyres from the latter into India would attract a concessional duty of 33 per cent as
against the normal tariff of 40 per cent.

Two years ago, the industry estimated the growth in the passenger car radial demand at 20 per
cent per annum. However, the auto recession has hit them badly. But South Korea made a killing
by dumping cheap car radial tyres and walked away with 11 per cent of the tyre market.

Another threat to the industry is the price of its raw materials, most of which are petroleum by-
products. Carbon, synthetic rubber and nylon tyre cord are offshoots of petrochemicals. Thus, the
future of the industry will swing with the supply of crude oil.

The biggest threat, however, is yet to fully materialise. It will be from global majors like
Bridgestone and Michelin, which control 36 per cent of the global tyre market. These players
have set up their bases in Southeast Asia and the slump of the markets in this region, coupled
with the vast growth potential of the Indian market, is beckoning them towards India.
Bridgestone has tied up with ACC for a 100 per cent radial tyre unit and Michelin is also
marketing its products through retail outlets. The industry is driven more by volumes than by
margins and each of the big five in the global tyre industry Continental, Michelin, Goodyear,

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Analysis of the Tyre Industry

Pirelli and Bridgestone generate an annual tyre production equivalent to the total demand of the
Indian market. These MNCs have deep pockets and can easily withstand losses for 2-3 years.
Their financial muscles also permit them to invest in R&D, which is beyond the reach of the
average Indian tyre manufacturer.

Amongst the Indian Tyre Manufacturers, Apollo tyres and Ceat Tyres Ltd. are undervalued
whereas MRF Tyres Ltd. is overvalued.

22. Bibliography
• ATMA Tyre manual

• www.atmaindia.org

• www.way2wealth.com

• www.nseindia.com

• www.indiainfoline.com

• www.timesofindia.com

• www.economictimes.com

• www.ceattyres.com

• www.mrftyres.com

• www.jktyre.com

• www.apollotyres.com

• www.domain-b.com

• www.buzzle.com

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