The Indian tyre industry has seen a decline in imports from 240,000 car radial tyres in FY98 to 120,000 car radial tyres in FY2000. However things are changing in the current year. It is faced with the pressure of cheaper Chinese imports, which have made an inroad into the Indian tyre market.
Even though the high import duty on tyres at 38.5% along with countervailing duties acts as a strong entry barrier, countries like China and Korea have penetrated the Indian market. The main reason behind this is that despite high duties imported Chinese tyres are still cheaper due to their lower cost of production.
In the current year domestic tyre production for the period April-October 2000 at 5 m tyres was marginally lower than the figures for April-October 1999. This being mainly due to lower demand from domestic manufacturers as there has been a slowdown in the domestic automobile market and the fact that cheaper imports have flooded the market. Domestic commercial vehicle (CV) & car manufacturers cut vehicle production in the current year due to lower demand in the automobile sector.
In the past tyre imports never made a large impact on the domestic market. This being due to the fact that MNC auto majors who set up shop in India turned to the domestic market as they were cheaper and of a better quality. However at that time China was not an aggressive player in the domestic tyre market. Earlier even in the replacement market tyre imports never made an impact as most foreign importers lacked the distribution and marketing networks to penetrate the local markets.
All kinds of Chinese goods have flooded the Indian markets in the past few years. Hence tyres too are not an exception. In the current year around 50,000 Chinese tyres are likely to be imported into the market. India is facing the pressure from Chinese tyre manufacturers not only domestically but is also facing stiff competition from them in the export markets. This year tyre exports are slated to be more or less stagnant.
Lower domestic demand has taken its toll on MRF, India's largest tyre manufacturer, having a 22% market share. The company's operating margins fell from 14.4% in 3QFY00 to 10.2% in 3QFY01. Lower demand and higher raw material expenses affected the company's margins. For the 3QFY01, the company's net fell by 46% to Rs 120 m. As a result of the above factors the company's share price at Rs 1,192 is low as compared to its 52 week high of Rs 2,820. It is trading at a price to earnings multiple of 5.1x FY00 EPS of Rs 233.
Imports from China have not affected MRF to a large extent yet as the figures are fairly low. It is likely that in future if imports grow rapidly MRF and the other players which are already facing difficult times, will face even tougher times ahead.
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