Tyre makers raise prices by around 15% in FY22, but that's not enough
Premium- To maintain healthy margins, tyre companies would have to further hike prices in the replacement segment by 6-8%, JM Financial said
Tyre manufacturers continue to battle input cost inflation with price increases, but the continued surge in raw material prices is making it tough for companies to avoid a margin compression. For the sector, raw material consumption cost has risen by more than 5% sequentially so far in Q4FY22, showed an analysis by JM Financial Institutional Securities Ltd. Compared to the year-ago levels, the cost has shot up by 22%.
In response to this, so far in this financial year, companies have raised prices by 12-15%, including the ones announced in the months of February and March, said the JM report. However, that may not be sufficient to offset margin pressure.
"Our analysis suggests that in order to maintain healthy margins, tyre companies would have to further hike prices in the replacement segment by 6-8%. As the price hike lags RM cost inflation, we believe that 1QFY23 margins are likely to be affected (with a quarter’s lag) while 4QFY22 margins are expected to remain at 3Q level," said the JM Financial report dated 8 March.
Meanwhile, demand for tyres in the months of January and February remained muted. However, tyre dealers are hopeful of demand recovering in the month of March, especially in the replacement segment, since summer is seasonally strong season for the tyre industry.
Apart from rising raw material prices, another risk for the sector could emerge from relaxations in import restrictions for tyres.
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In the last one month, stocks of key tyre makers Apollo Tyres Ltd, Ceat Ltd and JK Tyre & Industries Ltd have declined around 10-25%, mainly on the concern of rising input costs.
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