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Tyres can be broadly segmented into four main categories: passenger vehicle, commercial vehicle, two/three wheeler, and agricultural tractor. There are three main demand segments for tyres: original equipment manufacturers, replacements, and exports, with replacements accounting for 60% of demand. The tyre industry relies heavily on raw material costs, which make up around 80% of operating costs. Key factors that influence the tyre industry include sensitivity to raw material prices, levels of rubber production and imports, and the shift toward radial tires.
Tyres can be broadly segmented into four main categories: passenger vehicle, commercial vehicle, two/three wheeler, and agricultural tractor. There are three main demand segments for tyres: original equipment manufacturers, replacements, and exports, with replacements accounting for 60% of demand. The tyre industry relies heavily on raw material costs, which make up around 80% of operating costs. Key factors that influence the tyre industry include sensitivity to raw material prices, levels of rubber production and imports, and the shift toward radial tires.
Tyres can be broadly segmented into four main categories: passenger vehicle, commercial vehicle, two/three wheeler, and agricultural tractor. There are three main demand segments for tyres: original equipment manufacturers, replacements, and exports, with replacements accounting for 60% of demand. The tyre industry relies heavily on raw material costs, which make up around 80% of operating costs. Key factors that influence the tyre industry include sensitivity to raw material prices, levels of rubber production and imports, and the shift toward radial tires.
Production segmentation Based on vehicle category the tyres can be grouped into four segments as passenger vehicle tyre, commercial vehicle tyre, two/three wheeler tyre and agricultural tractor tyre. Commercial vehicle consists of Medium and Heavy Commercial Vehicle (MHCV), Light Commercial Vehicle (LCV) and small commercial vehicle. While cars and jeeps occupy the passenger type vehicle, bikes and scooters dominates the small vehicle segment. Demand segmentation There are three demand segments Original Equipment Manufacturers (OEM), Replacements and Exports. OEM consists of automobile manufacturers, while the replacement segment comprised of corporate and transportation segment and individuals consumers. Major demand for tyres comes from the replacement segment which accounted for a share of 60%.
Key determining factors in the tyre industry a) Sensitivity of Indian tyre industry on raw material cost Tyre industry rely heavily on the raw material cost, since it accounts for nearly 80 % of 81.5 4.4 4.7 5.2 4.2 % Operating cost break-up (2012-13) Raw material costs Power costs Selling costs Employee costs Others 43 18 11 5 5 5 4 9 % Break-up of raw material costs (2012-13) Natural rubber NTC fabric Carbon black PBR SBR 67 12 12 9 % Tyre production mix based on tonnage (2013-14) Commercial Vehicle Passenger Vehicle Two/three wheeler Tractors 60 29 11 % Tyre demand break-up (2013-14) Replacement OEM Export operating cost. The operating cost breakup of the domestic tyre industry is depicted below: Source: CRISIL Research b) Rubber production and import In 2012-13 there was a sharp decline in domestic price of rubber due to a slight rise in rubber production with subsequently decline in the import of rubber [1] . Despite this, the operating margin improvement was lower than the decline in the price of raw material. The major reason was the spending on branding initiatives (hence increasing the selling cost), to counter the weak demand and also due to spending on efforts to promote radial tyres in the replacement markets. According to Apollo Tyres Ltd. in 2014-15, India is expected to import rubber heavily owing to decline in price in the international market and also due to increase in car sales. In 2013- 14 Apollo tyres imported 50% of its natural rubber requirement [2] . c) Radialisation By 2008-09 the passenger car segment in India has attained a 98% radialisation. Till 2005-06 the percentage of radialisation in T&B (Truck & Bus) segment was only 4%. The major factor was the upfront initial cost of investment. The major radialisation initiatives picked up by 2009-10 when dominant players begin capital expansion plans and investments. The main drivers boosting the radial tyre segment are new vehicle platforms launched by OEM, improvement in after sale services due to expansion in dealer networks and significant improvement in road and transportation infrastructure. 6 8 . 7
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RAW MATERI AL COST AS % OF OPERATI NG I NCOME
The projected radialisation in T&B segment is above 40% by 2017-18. Return of Capital Employed (RoCE) Tyre industrys RoCE sharply declined in the year 2010-11 due to increase in input costs thereby subsequently reducing the operating margin. Further the RoCE declined in 2011-12 due to high capital investments by the major players in the industry [3] .
Industry asset utilisation Despite the consistent growth in Net sales of the industry from 2009-10 to 2011-12, there was a decline in asset turnover in the same period. This is justified by the fact that major players are into huge capacity expansion [4] . Many players were into expansion activities triggered by the growth in sale of tyres which reflects a growing automobile industry and improved transportation infrastructure [5] . 3 4 4 5 8 10 16 20 0 5 10 15 20 25 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 % Radialisation in Truck & Bus segment 1 5 . 3
Industry credit profile During 2009-10 most tyre companies were into expansion mode, leading to an increasing debt level, which subsequently increases the gearing as can be seen in the graph below. With the same line of justification the interest coverage ratio dipped from more than 7 times in 2009-10 to less than 3 in 2011-12.
Profitability and cost structure In 2010-11 the natural rubber price shoots up leading to an increase in raw material cost as percentage of Net sales [6] . Corresponding impact on operating margin can be observed in the graph below. This clearly suggests the sensitivity of operating margin on the price of natural rubber.
Industry Margins The industry margins are driven by input cost and the selling expenses. The decline in margins in 2010-11 can be attributed to the heavy spending by companies in branding and promotional activities. During this period companies were expensing to counter a weak demand for tyres and also promoting radial tyres in the replacement markets.
0 2 4 6 8 10 12 14 62 64 66 68 70 72 74 76 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Profitabilty and cost (%) RM cost as % of Net sales Operating profit as % of Net sales 0 2 4 6 8 10 12 14 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Operating margin Vs. Net margin Operating margin Net margin
Porters 5 Forces 1) Bargaining power of buyers The consumers are price sensitive to product like tyres - http://www.tyretimes.com/viewnews.jsp?id=182 http://finance.yahoo.com/news/research-markets-tbr-tire-market-180300148.html http://www.businesswire.com/news/home/20140702005910/en/Research-Markets-TBR- Tire-Market-India-2014-2018#.U_EPOPmSz0w 2) Bargaining power of suppliers
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