Margins of tire companies likely to fall in second and third quarters if FY19

Margins of tire companies are likely to fall by 1.5-2 percent between the second and third quarters of FY19 on rising in imports due to lack of natural rubber supply following Kerala floods, according to a report.

Domestic natural rubber production meets over 50 percent of the requirements of tire companies in the country and Kerala accounts for close to 90 percent of the total domestic rubber production.

"Floods in Kerala will disrupt domestic supply and hence tire companies will resort to higher imports to meet the rising tire demand," India Ratings said in its report. Natural rubber imports attract a duty of 25 percent.

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

The rating agency expects the margins of the tire industry to fall by 1.5-2 percent between the second and third quarters of FY19, due to a higher cost of production.

Input cost for tire firms is also expected to increase over the next two to three quarters, due to the disrupted supply of natural rubber, it said.

However, it was quick to add that tyremakers have sufficient unused working capital limits and liquidity available to meet such near-term disruptions.

Tire demand is likely to be robust for FY19 and hence the rating agency expects production and margins to start recovering by the end of December quarter.

Production is likely to be affected during the August to October period, of companies whose plants are located in Kerala, Tamil Nadu, and Andhra Pradesh.

Natural rubber prices have been increasing since May, amid low domestic production and an increase in minimum support price (MSP) for kharif crops in July.

Also, tire companies have been already facing margin pressures due to a rise in carbon black and other crude oil derivatives.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)