Classification of tyre

Tyres can be broadly segmented as follows:

Production segmentation
Based on vehicle category the
tyres can be grouped into four
segments as passenger vehicle
tyre, commercial vehicle tyre,
two/three wheeler tyre and
agricultural tractor tyre.
Commercial vehicle consists of
Medium and Heavy Commercial
Vehicle (MHCV), Light Commercial
Vehicle (LCV) and small
commercial vehicle. While cars
and jeeps occupy the passenger
type vehicle, bikes and scooters dominates the small vehicle segment.
Demand segmentation
There are three demand
segments Original Equipment
Manufacturers (OEM),
Replacements and Exports. OEM
consists of automobile
manufacturers, while the
replacement segment comprised
of corporate and transportation
segment and individuals
consumers. Major demand for
tyres comes from the
replacement segment which
accounted for a share of 60%.

Key determining factors in the tyre industry
a) Sensitivity of Indian tyre industry on raw material cost
Tyre industry rely heavily on the raw material cost, since it accounts for nearly 80 % of
81.5
4.4
4.7
5.2
4.2
% Operating cost break-up
(2012-13)
Raw material
costs
Power costs
Selling costs
Employee
costs
Others
43
18
11
5
5
5
4
9
% Break-up of raw material
costs (2012-13)
Natural rubber
NTC fabric
Carbon black
PBR
SBR
67
12
12
9
% Tyre production mix based on tonnage
(2013-14)
Commercial Vehicle
Passenger Vehicle
Two/three wheeler
Tractors
60
29
11
% Tyre demand break-up (2013-14)
Replacement
OEM
Export
operating cost. The operating cost breakup of the domestic tyre industry is depicted below:
Source: CRISIL Research
b) Rubber production and import
In 2012-13 there
was a sharp
decline in
domestic price of
rubber due to a
slight rise in
rubber production
with subsequently
decline in the
import of rubber
[1]
. Despite this,
the operating
margin
improvement was
lower than the
decline in the price
of raw material. The major reason was the spending on branding initiatives (hence
increasing the selling cost), to counter the weak demand and also due to spending on efforts
to promote radial tyres in the replacement markets.
According to Apollo Tyres Ltd. in 2014-15, India is expected to import rubber heavily owing
to decline in price in the international market and also due to increase in car sales. In 2013-
14 Apollo tyres imported 50% of its natural rubber requirement
[2]
.
c) Radialisation
By 2008-09 the passenger car segment in India has attained a 98% radialisation. Till 2005-06
the percentage of radialisation in T&B (Truck & Bus) segment was only 4%. The major factor
was the upfront initial cost of investment. The major radialisation initiatives picked up by
2009-10 when dominant players begin capital expansion plans and investments. The main
drivers boosting the radial tyre segment are new vehicle platforms launched by OEM,
improvement in after sale services due to expansion in dealer networks and significant
improvement in road and transportation infrastructure.
6
8
.
7

7
0
.
6

7
1
.
3

6
8
.
2

7
2
.
3

6
6
.
1

8
1
.
5

7
4
.
5

7
1
.
7

2
0
0
4
-
0
5

2
0
0
5
-
0
6

2
0
0
6
-
0
7

2
0
0
7
-
0
8

2
0
0
8
-
0
9

2
0
0
9
-
1
0

2
0
1
0
-
1
1

2
0
1
1
-
1
2

2
0
1
2
-
1
3

RAW MATERI AL COST AS % OF OPERATI NG
I NCOME


The projected radialisation in T&B segment is above 40% by 2017-18.
Return of Capital Employed (RoCE)
Tyre industrys RoCE sharply declined in the year 2010-11 due to increase in input costs thereby
subsequently reducing the operating margin. Further the RoCE declined in 2011-12 due to high
capital investments by the major players in the industry
[3]
.

Industry asset utilisation
Despite the consistent growth in Net sales of the industry from 2009-10 to 2011-12, there was a
decline in asset turnover in the same period. This is justified by the fact that major players are into
huge capacity expansion
[4]
. Many players were into expansion activities triggered by the growth in
sale of tyres which reflects a growing automobile industry and improved transportation
infrastructure
[5]
.
3
4 4
5
8
10
16
20
0
5
10
15
20
25
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
% Radialisation in Truck & Bus segment
1
5
.
3

2
4
.
3

1
5
.
9

1
4
.
4

1
6
.
9

2008- 09 2009- 10 2010 - 11 2011- 12 2012- 13
ROCE (%)

Industry credit profile
During 2009-10 most tyre companies were into expansion mode, leading to an increasing debt level,
which subsequently increases the gearing as can be seen in the graph below. With the same line of
justification the interest coverage ratio dipped from more than 7 times in 2009-10 to less than 3 in
2011-12.

Profitability and cost structure
In 2010-11 the natural rubber price shoots up leading to an increase in raw material cost as
percentage of Net sales
[6]
. Corresponding impact on operating margin can be observed in the graph
below. This clearly suggests the sensitivity of operating margin on the price of natural rubber.


Industry Margins
The industry margins are driven by input cost and the selling expenses. The decline in margins in
2010-11 can be attributed to the heavy spending by companies in branding and promotional
activities. During this period companies were expensing to counter a weak demand for tyres and
also promoting radial tyres in the replacement markets.





0
2
4
6
8
10
12
14
62
64
66
68
70
72
74
76
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Profitabilty and cost (%)
RM cost as % of Net sales Operating profit as % of Net sales
0
2
4
6
8
10
12
14
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
Operating margin Vs. Net margin
Operating margin Net margin












Porters 5 Forces
1) Bargaining power of buyers
The consumers are price sensitive to product like tyres -
http://www.tyretimes.com/viewnews.jsp?id=182
http://finance.yahoo.com/news/research-markets-tbr-tire-market-180300148.html
http://www.businesswire.com/news/home/20140702005910/en/Research-Markets-TBR-
Tire-Market-India-2014-2018#.U_EPOPmSz0w
2) Bargaining power of suppliers