Analysis of The Indian Tyre Industry

Project Report On

“Sector analysis – Tyre Industry” 

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD O F 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 

SECTOR ANALYSIS – TYRE INDUSTRY ”, under my  out the project titled “ SECTOR 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 N.L.Dalmia Institute of Management Studies and Research

Page 2

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 

SECTOR ANALYSIS – TYRE INDUSTRY ”, under my  out the project titled “ SECTOR 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 N.L.Dalmia Institute of Management Studies and Research

Page 2

Analysis of the Tyre Industry

 THE SUCCESS SUCCESS OF ANY PROJECT IS THE RESULT RESULT OF HARD WORK & ENDEAVOR 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 ACHI ACHIEV EVEM EMEN ENT T TO HA HAVE VE SUCC SUCCEE EEDE DED D IN MY FINA FINAL L PROJ PROJEC ECT, T, WHICH WOULD NOT HAVE BEEN POSSIBLE WITHO THOUT THE GUID UIDAN ANCE CE OF PROF PROF.. P. L. ARYA ARYA (DIR (DIREC ECTO TOR R – N. L. DAL DALMIA MIA INSTITUTE OF MANAGEMENT STUDIES & RESEARCH) MY PROJECT GUIDE AT NLDIMSR. I ALSO EXPRESS MY APPRECIATION AND GRATITUDE TOWARDS ALL AL L THE THE FACU FACULT LTY Y MEMB MEMBER ERS S AT N.L N.L. DAL DALMIA MIA INS INSTITU TITUTE TE 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 COLL COLLEC ECTIN TING G THE THE REQU REQUIR IRED ED INFOR INFORMA MATIO TION N AN AND D CONTI CONTINU NUOU OUS S HELP DURING THE PREPARATION OF THE PROJECT.

MUKESH R. GEHANI MMS FINANCE

N.L.Dalmia Institute of Management Studies and Research

Page 3

Analysis of the Tyre Industry

Table of Contents

Sr. No.

Topics

Page nos.

1 9

Executive Summary Marketing

27

10

TyreIntroduction Technology 1.1

730

11

Factors to be considered in selecting tyre for vehicle 1.2 Evolution of the Tyre Industry

36 8

12 2

Peculiar Features of the Tyre Industry Overview of the Indian Tyre Industry

37 11

13 3

Michael Porter’s five forces model Radialisation

38 12

14 4

SWOT Analysis Tyre Retreading

41 13

15 5

Key Players Statistics 15.1 JK Tyres & Industries Ltd. 5.1 Total Tyre Production in India

43 16

15.2 MRF Tyres Ltd. 5.2 Categorywise Tyre Production in India

47 18

15.3 Apollo Tyres Ltd. 5.3 Categorywise Exports of Tyres

48 19

6

15.4 Ceat Tyres Ltd. Raw material

50

16

Sector Specifics

52 22

17

Sector Trends

18 7

6.2 Raw material availability Outlook Government Policy

53 23 53 24

8

Regional Trade agreement

25

6.1 Overview

Table of Contents

Table of Contents N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

Sr. No.

19

Topics

Page nos.

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 N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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 co nditions, 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 N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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 N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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

N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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: Industry Concentration

43 10 Large tyre companies account for over 95% of total tyre production.

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Analysis of the Tyre Industry

Radialisation Level (as a % of total tyre production)

Current

Passenger Car tyres: 95% Light Commercial Vehicles: Heavy Vehicles ( Truck & Bus ): 3%

12%

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

N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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 N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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. N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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

N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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 multiaxle 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

Truck & Bus

7309

7696

8095

8095

7913

8969

8612

Passenger Car

3283

3324

3888

4263

4571

6054

6813

N.L.Dalmia Institute of Management Studies and Research

2000

2000 - 01

Page 14

Analysis of the Tyre Industry

Jeep

780

881

1098

1342

1247

1283

1155

1133

1177

1833

1903

1917

1980

2108

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

2352

2844

3271

3945

4529

4820

5320

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

Light Comml. Veh. (L.C.V.)

Light Comml. Veh. (L.C.V.)

*wef

April

2006

Moped

tyre

production

included

N.L.Dalmia Institute of Management Studies and Research

in

Scooter

Category

Page 15

Analysis of the Tyre Industry

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

27.86

11

Light

Commercial 25.17

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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Analysis of the Tyre Industry

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

924642

15

Light

Commercial 803280

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 N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

Value

Year

% Change

(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

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

CAGR  

11%

Average Annual Compound growth rate in exports during last one decade is 11%.

Categorywise Tyre Exports -2000-01 to 2007-08

[ Nos.] CATEGORY

2001

-

2007 2002 - 03 2004 - 05 2006 - 07 02 04 06 08 1805203 2141438 223155 2503956 2408759 2276049 2431545

Truck & Bus Passenger Car 287547 364514 Jeep 40 20 Light Commercial 610692 700868 Vehicle

2003

-

2005

591494 1024561 1052874 966046 220 391 885 1420

1091715 7461

962972 1130908 1390814 1599230 1621880

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Analysis of the Tyre Industry

Tractor Front Tractor Rear Tractor Trailer Motor Cycle ADV Scooter Implements Industrial OTR Antique TOTAL

23431 51218 444 33019 170 43391 15758 15570 21468 2894 2910845

20698 72263 852 34088 20 49966 9143 20716 29079 0 3443665

18990 18202 89758 84684 1448 3686 47333 62710 0 0 120725 202656 6558 2096 10702 9885 21168 23375 0 0 41029235067038

13408 98807 3833 84908 0 289984 2447 7303 33480 0 5387502

11078 56186 8665 151677 0 320536 4045 11543 43085 0 5449560

17072 66644 17468 322630 30 45338 5637 12777 45919 0 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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Analysis of the Tyre Industry

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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Analysis of the Tyre Industry

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 *

SAPTA ( SAARC

Preferential

Nil Trading

Agreement) *

India

 Nil* 5%**

Singapore

Comprehensive

2.5%

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Analysis of the Tyre Industry

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 *

When

import

14%

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) an d/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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Analysis of the Tyre Industry

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); RTAs have assumed added significance due to slowdown of trade talks at multilateral

o

  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

a)

following

RTAs

concern

tyres

and

raw

materials

of

tyre

industry:

  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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Analysis of the Tyre Industry

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 Category

(Nos.) 2007-08

Segmentwise

Percentage

supply

(as % of Total Production) Replacement

OEMs

Export

Market

Truck/Bus

13136592

61*

20

19

Passenger Car / 17904812

45*

49

6

43

27

30

Jeep LCV

55319922

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Analysis of the Tyre Industry

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. N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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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Analysis of the Tyre Industry

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 N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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. N.L.Dalmia Institute of Management Studies and Research

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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 N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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 N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

 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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Analysis of the Tyre Industry

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. N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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 p rice. 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 N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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 N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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



Subsequent rise in replacement

Growing Automobile Industry

Increasing OEM demand

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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Analysis of the Tyre Industry



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

15.1JK 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 wellknown J K TYRE. J K Tyre along with its subsidiary Vikrant currently holds the No.1 position N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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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15.2MRF 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 N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

• MRF Radial ZVTS

• MRF Radial GP

• MRF Radial GT

• MRF Radial VT

• MRF Radial CC Bias Ply

• Legend • SW99 (ULT)

• Estate • 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 N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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. N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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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Analysis of the Tyre Industry

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. N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

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 Company Price (Rs) Mkt cap (in crs) Book Value (Rs) P/BV P/E Growth in EPS

Apoll CEAT o 130.7 1 58.60 1879. 92 200.65

Falcon(0 7-12)

GoodYear(0  JK Tyre(077-12) 09)

MRF

25.09

145.97

53.17

61.25

119.51

3106.5 0 1317.1 6 2325.8 3

5.21

0.40

2.78

1.88

0.67

1.34

29.71 81.52

1.37 415.32 %

22.91 7.31%

6.99 -12.24%

3.75 308.67%

7.73 116.39 %

148.00

114.85

79.60

81.21

264.96

326.84

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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 2207. 01

42.72

6.46

16.42

21.21

809.23

220.44 15.66

363.84 4.47

1274.61 4.77

401.75 2348.1 8

Enterprise Value (in crs) EV/EBIDTA ROE Debt Mcap + Debt EBIDTA (Rs. In Crores)

4.58 17.85 % 460.6 5 2340. 57 481.5 0

2.73 28.95 % 617.35 818.00 296.64

Ke 3.32% RFR 145.78 RM 226.99 BETA 14.08 Ke

27.77%

12.50% 8.50% 0.0021.90%914.95 0.9618 264.96 1241.79 51 81.42 267.29 21.39%

5.06 17.42 % 848.09 2165.2 5 463.61

19.2 FCFF  a. Apollo Tyres Ltd 

MARKET PRICE(rs.) NO. OF SHARES(Cr) MV OF EQUITY DEBT EV WACC

131.11042 88 4.885 640.47444 49 460.65 1101.1244 16.137%

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Analysis of the Tyre Industry

ASSUMPTION: GROWTH FOR THE NEXT 5YRS Long term Growth Rate AND THEREAFTER CONTINUES AT THIS GROWTH RATE

ROC equals wacc in long term terminal roc terminal rr dec/year

GROWTH

RR* NOPLAT RREINV

FCFF

200 8 11. 27 % 119 .36 % 275 .11 328 .37 53. 26

200 9 11.2 7% 119. 36% 306. 11 365. 37 59.2 6

11.27 % dec/ye 4% ar

1.45%

16.137% 16.137% 24.788% 18.91%

201 0 11. 27 % 119 .36 % 340 .60 406 .54 65. 94

201 1

201 2

11.2 7%

11.2 7%

119. 36% 378. 98 452. 35 73.3 7

119. 36% 421. 69 503. 32 81.6 4

201 3 11. 27 % 119 .36 % 469 .20 560 .04 90. 84

201 4

201 5

201 6

201 7

201 8

9.81 %

8.36 %

6.91 %

5.45 %

4.00 %

100. 45% 515. 25 517. 55

81.5 3% 558. 33 455. 21

62.6 2% 596. 90 373. 76

43.7 0% 629. 45 275. 08

24.7 9% 654. 63 162. 27

2.30

103. 12

223. 14

354. 37

492. 36

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Analysis of the Tyre Industry

 TV

WACC

16. 137 %

DF

PV HG Period

 TV

DISC TV  TOTAL VALUE EXCESS CASH INV non core operating capital

 TOTAL

DEBT NO. OF SHARES

EV Value per share

16.1 37% 0.86 105 2 39. 758 4 405 6.65 7 105 5.43 3 101 5.6 75 191. 892 6 302. 71 411. 09

16.1

16.13

16.13

16.1

16.13

16.13

16.13

16.13

16.13

37%

7%

7%

37%

7%

7%

7%

7%

7%

0.7 414 1

0.63 839 2

0.54 968 8

0.4 733 1

0.40 754 4

0.35 091 7

0.30 215 7

0.26 017 3

0.22 402 2

109 9.18 7 460. 65 4.88 5 638. 537 2 130. 71

b. CEAT Tyres Ltd.

N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

MARKET PRICE(rs.) NO. OF SHARES(Cr) MV OF EQUITY DEBT EV WACC WTS. 61.94% 38.06%

226.9655309 3.424 777.12997 77 477.6 1254.7300 16.610%

COST

Ke RFR RM

21.39% 8.83%

BETA

8.50% 21.90% 0.9618 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 terminal roc terminal rr

16.610% 16.610% 24.081%

N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

dec/year

GROWTH

RR* NOPLAT RREINV FCFF  TV

WACC

DF

10.16%

200 8 8.5 5% 74. 86 % 238 .48 178 .52 59. 96 16. 610 %

200 9 8.55 %

201 0 8.55 %

201 1 8.55 %

201 2 8.55 %

74.8 6% 258. 88 193. 79 65.0 9

74.8 6% 281. 03 210. 37 70.6 6

74.8 6% 305. 07 228. 36 76.7 0

16.6 10% 0.85 755 6

16.61

DISC TV

508 .18 08 287 0.88 6 720. 074

 TOTAL VALUE EXCESS

122 8.2 55 -

PV HG Period

 TV

201 4 7.64 %

201 5 6.73 %

201 6 5.82 %

201 7 4.91 %

201 8 4.00 %

74.8 6% 331. 16 247. 90 83.2 7

201 3 8.5 5% 74. 86 % 359 .49 269 .10 90. 39

64.7 0% 386. 97 250. 37 136. 59

54.5 5% 413. 02 225. 29 187. 73

44.3 9% 437. 06 194. 02 243. 05

34.2 4% 458. 53 156. 98 301. 54

24.0 8% 476. 87 114. 84 362. 03

16.61

16.61

16.6

16.61

16.61

16.61

16.61

16.61

0%

0%

0%

10%

0%

0%

0%

0%

0%

0.73 540 2

0.63 064 8

0.54 081 6

0.4 637 8

0.39 771 7

0.34 106 4

0.29 248 2

0.25 081 9

0.21 509 2

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Analysis of the Tyre Industry

4.96 18 9.6

CASH INV non core operating capital

21.8 1 125 4.70 3

 TOTAL

DEBT NO. OF SHARES

477. 6 3.42 4

EV Val per share

777. 103 1 226. 96

c. MRF Tyres Ltd. MARKET PRICE(rs.) NO. OF SHARES(Cr) MV OF EQUITY DEBT EV WACC WTS. 35.89% 64.11%

3123.26 0.424 699.6 1249.48 1949.0800 13.341%

COST 21.39% 8.83%

Ke RFR RM

8.50%

BETA

21.90% 0.9618 51

Ke

21.39%

N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

ASSUMPTION: GROWTH FOR THE NEXT 5YRS

13.71 % dec/ye 4% ar

Long term Growth Rate AND THEREAFTER CONTINUES AT THIS GROWTH RATE

ROC equals wacc in long term terminal roc terminal rr dec/year

GROWTH

RR* NOPLAT RREINV FCFF

200 8 13. 71 % 184 .59 % 210 .71 388 .95 178

1.94%

13.341% 13.341% 29.984% 30.92%

200 9

201 0

13.7 1%

13.7 1%

184. 59% 239. 60 442. 28 202.

184. 59% 272. 45 502. 91 230.

201 1 13. 71 % 184 .59 % 309 .80 571 .85 262

201 2

201 3

201 4

201 5

201 6

201 7

201 8

13.7 1%

13.7 1%

11.7 7%

9.83 %

5.94 %

4.00 %

184. 59% 352. 27 650. 24 297.

184. 59% 400. 56 739. 39 338.

153. 67% 447. 69 687. 96 240.

122. 75% 491. 68 603. 52 111.

7.8 8% 91. 83 % 530 .44 487 .08 43. 36

60.9 0% 561. 96 342. 26 219. 70

29.9 8% 584. 44 175. 23 409. 20

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Analysis of the Tyre Industry

.24

68

46

.06

98

83

27

84

13.3 41% 0.88 229 6

13.34

13.3

13.34

13.34

13.34

13.34

13.3

1%

41%

1%

1%

1%

1%

41%

1%

1%

0.77 844 7

0.6 868 2

0.60 597 9

0.53 465 3

0.47 172 2

0.41 619 9

0.3 672 1

0.32 398 8

0.28 585 4

 TV

WACC

13. 341 %

DF

EV

972 .72 1 438 0.86 8 141 9.35 446 .62 93 1.45 6 68.5 6 212. 11 304. 535 3 124 9.48 0.42 4 944. 945

Val per share

312 3.26

PV HG Period

 TV DISC TV  TOTAL VALUE EXCESS CASH INV non core operating capital

 TOTAL DEBT NO. OF SHARES

13.34

13.34

19.3 FCFE  a. Apollo Tyres Ltd.

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Analysis of the Tyre Industry

MARKET PRICE NO. OF SHARES(Cr)

MV OF EQUITY

186.64806 Rs per 75 share 4.885 cr

911.7758

KE

21.390%

Ke RFR RP BETA

8.50% 21.90% 0.9618 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 terminal roc terminal rr dec/year

21.390% 21.390% 23.376% 10.29%

N.L.Dalmia Institute of Management Studies and Research

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Analysis of the Tyre Industry

GROWTH

RR NOPLAT RREINV

FCFE  TV

WACC

DF

PV HG Period

 TV

DISC TV

 TOTAL VALUE

200 8 10. 87 % 126 .31 % 275 .11 347 .49 72. 38 21. 390 %

200 9

201 0

201 1

201 2

201 3

201 4

201 5

201 6

201 7

201 8

10.8 7%

10.8 7%

10.8 7%

10.8 7%

10.8 7%

8.52 %

5.00 %

105. 72% 338. 19 357. 54 19.3 5

95.4 3% 374. 96 357. 82

85.1 4% 415. 73 353. 94

74.8 4% 460. 94 344. 98

54.2 6% 548. 74 297. 72

7.3 5% 43. 96 % 589 .07 258 .97

6.17 %

116. 02% 305. 02 353. 87 48.8 5

9.7 0% 64. 55 % 505 .64 326 .39

33.6 7% 625. 44 210. 58

23.3 8% 656. 71 153. 51

17.1 4

61.8 0

115. 96

179 .25

251. 02

330 .10

414. 86

503. 20

21.3 90% 0.82 379 2

21.39

21.39

21.39

21.39

21.3

21.39

21.3

21.39

21.39

90%

0%

0%

0.2 121

0.17 472 7

0.14 393 8

0%

0%

0%

0%

90%

0%

0.67 863 4

0.55 905 3

0.46 054 4

0.37 939 2

0.3 125 4

0.25 746 8

291 .81 43 307 0.21 8 536. 448 9 828. 263 2

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Analysis of the Tyre Industry

191. 892 6 302. 71 411. 09 911. 775 8

EXCESS CASH INV non core operating capital

 TOTAL NO. OF SHARES

4.88 5

EV

911. 775 8

Val per share

186. 65

b. Ceat tyres ltd.

MARKET PRICE NO. OF SHARES(Cr)

314.004387 Rs per 8 share 3.424 cr

MV OF EQUITY

1075.1510

KE Ke RFR RP

21.390%

BETA

8.50% 21.90% 0.9618 51

Ke

21.39%

ASSUMPTION: GROWTH FOR THE NEXT

2.58%

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Analysis of the Tyre Industry

5YRS dec/ye 5% ar

Long term Growth Rate AND THEREAFTER CONTINUES AT THIS GROWTH RATE

ROC equals KE in long term terminal roc terminal rr dec/year

GROWTH

RR NOPLAT RREINV FCFE  TV WACC

0.48%

21.390% 21.390% 23.376% 0.05%

200 8 2.5 8% 23. 86 % 238 .48 56. 91 181 .57

200 9 2.58 %

201 0 2.58 %

201 1 2.58 %

201 2 2.58 %

201 3 2.58 %

201 5 3.55 %

23.6 2% 270. 92 63.9 9 206. 93

201 4 3.0 7% 23. 57 % 279 .23 65. 82 213 .41

23.8 1% 244. 64 58.2 6 186. 38

23.7 7% 250. 96 59.6 4 191. 32

23.7 2% 257. 45 61.0 6 196. 39

23.6 7% 264. 10 62.5 1 201. 59

21.

21.3

21.39

21.39

21.39

21.39

21.3

N.L.Dalmia Institute of Management Studies and Research

201 7 4.52 %

201 8 5.00 %

23.5 2% 289. 15 68.0 1 221. 13

201 6 4.0 3% 23. 47 % 300 .81 70. 61 230 .20

23.4 2% 314. 40 73.6 5 240. 75

23.3 8% 330. 12 77.1 7 252. 95

21.39

21.3

21.39

21.39

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Analysis of the Tyre Industry

390 %

DF

PV HG Period

 TV

DISC TV

 TOTAL VALUE EXCESS CASH INV non core operating capital

 TOTAL NO. OF SHARES

90% 0.82 379 2

0%

0%

0%

0%

90%

0%

0.67 863 4

0.55 905 3

0.46 054 4

0.37 939 2

0.3 125 4

0.25 746 8

90%

0%

0%

0.2 121

0.17 472 7

0.14 393 8

779 .04 23 154 3.32 8 269. 660 5 104 8.70 3 4.96 18 9.6 21.8 1 107 5.15 1

EV

3.42 4 107 5.15 1

Val per share

314. 00

c. MRF Tyres Ltd.

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Analysis of the Tyre Industry

MARKET PRICE NO. OF SHARES(Cr)

MV OF EQUITY

537.4402

KE Ke RFR RP

Rs per 3415.55 share 0.424 cr

21.390%

BETA

8.50% 21.90% 0.9618 51

Ke

21.39%

ASSUMPTION: GROWTH FOR THE NEXT 5YRS

Long term Growth Rate AND THEREAFTER CONTINUES AT THIS GROWTH RATE

ROC equals KE in long term terminal roc terminal rr dec/year

41.92 % dec/yea 5% r

9.38 %

21.390% 21.390% 23.376% -33.44%

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Analysis of the Tyre Industry

GROWTH

RR NOPLAT

RREINV FCFE  TV WACC

DF

PV HG Period

 TV

DISC TV

 TOTAL VALUE

200 8

200 9

201 0

201 1

201 2

201 3

201 4

201 5

41.9 2%

41.9 2%

41.9 2%

41.9 2%

41.9 2%

41.9 2%

32.5 4%

23.1 5%

311. 07% 210. 71 655. 47 866. 18

277. 63% 122. 38 339. 76 462. 13

244. 18% 71.0 8 173. 55 244. 63

210. 74% 41.2 8 86.9 9 128. 27

177. 29% 23.9 7 42.5 0 66.4 8

143. 85% 13.9 2 20.0 3 33.9 5

110. 40%

76.9 6%

9.39 10.3 7 19.7 6

7.22 5.56 12.7 7

201 6 13. 77 % 43. 51 % 6.2 2 2.7 1 8.9 3

21.3 90%

21.3 90% 0.82 379 2

21.39

21.39

21.39

21.39

21.39

21.39

21.3

0%

0%

90%

0%

0%

0.31 254

0.25 746 8

0.2 121

0.17 472 7

0.14 393 8

0%

0%

0%

0%

0.67 863 4

0.55 905 3

0.46 054 4

0.37 939 2

201 7

201 8

4.38 %

5.00 %

10.0 7%

23.3 8%

5.95

6.25

0.60

1.46

6.55

4.79

21.39

21.39

674 .42 94 29.2 162 8 5.10 486 3 679. 534 2

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Analysis of the Tyre Industry

EXCESS CASH INV non core operating capital

 TOTAL

1.45 6 68.5 6 212. 11 537. 440 2

NO. OF SHARES

0.42 4

EV Val per share

537. 440 2 341 5.55

20. Results Company

Actual Price

 Apollo Tyres Ltd.

Share Valuation Method Comment  (as

31/03/08) Rs. 41.30

Ceat Tyres Ltd.

Rs. 109.25

 MRF Tyres Ltd.

Rs. 3989.05

on FCFF FCFE FCFF FCFE FCFF FCFE

130.71 Undervalued   186.65 Undervalued  226.96 Undervalued   314.00 Undervalued  3123.26 Overvalued   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, N.L.Dalmia Institute of Management Studies and Research

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