Some observations on the company:
Volumes were up 10% during the year (FY17) but Raw Material costs were down 6.34%. Despite selling 10% more tyres, revenues were down 10% and PBT was down 26% from Rs.284 crore in FY16 to Rs.211 crore in FY17. Realizations are under pressure, and the market is becoming fiercely competitive. Commission & discounts had already gone up 35% from Rs.100 crores in FY15 to Rs.135 crores in FY16 pointing to the same. The figure for FY17 is not disclosed in Annual Report but likely to be quite high.
There is a flurry of new players entering the 2/3 wheeler tyre market, and existing ones are increasing capacity. CEAT commissioned a greenfield facility at Nagpur. It will reach full capacity this year and more expansion is planned. Apollo Tyres launched two wheeler tyres last year and claims to have crossed 1 million units this year. It has announced a new plant costing Rs.500 crores in Andhra Pradesh dedicated to 2/3 wheeler tyres. JK Tyres acquired a loss making plant from the Birlas and claim to have turned it around this year. The plant produces 10 million tyres per annum. Others like Balkrishna and Bridgestone have also announced their entry in the 2/3 wheeler tyre segment recently. There seems to be a supply glut and so pricing pressure is likely to continue.
To its credit, at TVS Srichakra a lot of capex has gone on stream last couple of years. Around Rs.160 crore is reported to have gone into enhancing capacity by 200,000 tyres per month. Financial details of the Michelin tie-up are not known, but must have cost close to Rs.200 crores for a reportedly 3.6 million tyres per annum facility. Hopefully, this should drive volume growth, though how much of that will flow to the bottom line is anybody’s guess. Margins on the Michelin arrangement are not known. Advertising & Promotions have also increased in recent times, from around Rs.10-15 crore per year few years back to Rs.40-50 crore per year in the last two years. We have seen high profile ad campaigns on TV and Sports sponsorships.
Meanwhile, Long Term Debt on books continues to be more than Rs.100 crore and total indebtedness has increased, largely due to bank borrowings of more than Rs.250 crores to fund inventories. DSO has increased from 27 days to 35 and inventories have doubled. But amidst all this, company invested Rs.40 crore in Preference Shares of a group company last year and continues to hold the same. It also carries “investment property” worth Rs.25 crore on the Balance Sheet. Promoter drawing high salary & commission is another thing I don’t like. Overall, the Annual Report reveals very little and is quite a disappointment.
CRISIL estimates 7-9% growth in the OEM segment and 9% growth in the after-market segment for 2/3 wheeler tyres. ICRA estimates 6-8% CAGR for the two wheeler tyre industry upto 2019. But supply seems rising faster, so tough times will likely continue. The only saving grace is that rubber prices are expected to be benign, though here too competition will eat into any margin gains.
If anybody is attending the AGM later this month, please post your report.
(Note: Invested. Data collated from various sources in public domain & in some cases my own calculations. Do your own research before investing)