Apollo Tyres hikes prices to compensate for rising costs

Apollo Tyres Ltd has bitten the price-hike bullet. The company increased tyre prices by around 1% last week, Satish Sharma, chief of India operations, said in an emailed response. The raises will provide the much needed comfort for investors, as supply constraints have been driving up domestic rubber prices, the key raw material for tyre makers. Compared with the first quarter, prices in the domestic market are higher by 12%. From a year ago, they are up 5%. Considering the quantum of the rise in raw material costs, the price hike is insignificant. The company usually sources most of its natural rubber needs from the domestic markets. Hence, the effect is likely to be felt on margins in the current quarter.

That said, the impact is likely to be cushioned by the price hikes, easing rubber prices in the international markets and strong demand in the replacement market. Thanks to oversupply and demand concerns, rubber prices in international markets are trending lower. So far in this quarter, prices of the RSS-4 rubber variety in Bangkok fell by about 11%. True, the depreciating rupee is nullifying most of the gains. But, even after allowing for the currency depreciation, imported rubber is working out to be cheaper for Apollo. In August, the company said the landed cost of the imported rubber is cheaper by 5% to the domestic rubber price.

The price difference may have changed in the past two weeks, but the trend continues to be bearish in the international rubber markets. The phase is providing a much needed reprieve for the domestic tyre manufacturers, who are stepping up imports. According to a Reuters report, natural rubber imports in August more than doubled from a year ago as tyre makers increased purchases overseas. Also, low rubber prices in the international markets are expected to result in substantial raw material cost savings at the company’s overseas plants in Africa and Europe. Last quarter, the company earned more than one-third of its revenues from international operations.

Increased raw material sourcing from international markets will help cushion the impact of high costs for Apollo Tyres. While the company continues to see benign demand conditions in the replacement market, the stock, in the near term, is likely to be influenced more by how the company completes the Cooper Tire and Rubber Co. acquisition.