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Kerala Floods: Kerala floods may wash away tyre companies’ profitability

NEW DELHI: Kerala’s ravaging floods are likely to give tyre companies a serious headache in coming one or two quarters, say analysts.

Kerala makes up close to 85 per cent of domestic natural rubber production, and the incessant rains mean production is likely to take a hit.

According to ATMA’s (Automotive Tyre Manufactures Association) earlier estimates, domestic rubber output was expected at 600,000 mt in FY19, with imports at 5,00,000 mt. With large-scale destruction of rubber trees, imports are expected to temporarily go up. And that could lead to compression of gross margins.

Also, tyre companies with plants in Kerala — Apollo Tyres and MRF — are staring at production losses due to lack of civic amenities and low employee attendance, said Emkay Global Securities in its research report.

Last week, Apollo Tyres said its production operations at plants in Kerala have been disrupted due to the ongoing flooding in the state. The company has two plants in Perambra and Kalamassery. Till then, production loss due to the natural calamity stood at nearly 1,500 mt, said an ETAuto report.

Shares of Apollo Tyres have declined 12 per cent since August 1 till Friday (August 24) while those of MRF have shed 7 per cent during the window.

Brokerage Emkay Global Securities in its report said, “Assuming 10 per cent shift in rubber procurement mix towards imported rubber, the raw material cost… could increase by 25 bps for Apollo Tyres.”

India Ratings in its recent research report stated that the margin of tyre companies is likely to shrink by 1.5-2 per cent between the second and third quarters of FY19 as imports rise because of lack of natural rubber supply in the aftermath of the floods.

“Floods in Kerala will disrupt domestic supply and hence, tyre companies will resort to higher imports to meet the rising tyre demand,” India Ratings said in its report.

Natural rubber imports attract a duty of 25 per cent.

“Additionally, with a depreciating rupee, imports are likely to be more expensive and will hurt margins of tyre companies amid a rise in rubber procurement costs,” it said.

Input cost for tyre firms is seen to harden over the next 2-3 quarters on disruptions of natural rubber supply, it said.

However, the ratings agency is optimistic about tyre demand and sees it to turn robust for FY19. It expects production and margins to start reviving by the end of the December quarter. Production is likely to take a beating during August-October, particularly for those whose plants are located in Kerala, Tamil Nadu and Andhra Pradesh, reported PTI citing the report.

The automotive sector’s volume is also come under strain in the wake of the disaster. “Near-term sales volume is likely to be impacted across segments. Kerala accounts for 8 per cent, 5 per cent, 4 per cent and 3 per cent of volume in PV, 3W, 2W and CV, respectively,” said Emkay Global Securities.

Tyre-Financials

CLSA’s assessment is the rains will lead to weaker sales for companies such as Eicher Motors, Maruti and Ashok Leyland.




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