Wheel of fortune

To use a slightly worn-out but entirely true turn of phrase, TVS Srichakra, the tyre manufacturing arm of the $6.5-billion TVS Group, has been on a roll. The company, which is the market leader in the two-wheeler and three-wheeler domestic OEM tyre market, has seen its revenue grow by 25% and net profit rise by 27% over a five-year period, helped in part by falling rubber prices, better inventory management and lower debt.

Over the past couple of years, while passenger car and truck sales have been on the wane, the two-wheeler and three-wheeler segments have fared much better. Of course, the fact that the company focuses only on the two-wheeler and three-wheeler segment has worked in its favour. TVS Srichakra is the largest supplier to OEMs such as Honda Motorcycle and Scooter India, TVS Motor Company, Hero MotoCorp, Bajaj Auto and Yamaha Motor Company.

“While competitors such as MRF and CEAT have a presence across segments, our bread and butter comes from the two-wheeler and three-wheeler markets. We have made a conscious decision to stay in this segment, as it gives us the opportunity to work closely with manufacturers on the technology and development process. We are able to offer them specifically designed tyres for every new model of theirs. It is a collaborative effort between us and the vehicle manufacturers,” says P Vijayaraghavan, director, TVS Srichakra, who has been with the company since its inception in 1983.

To keep up with growing demand in the two-wheeler segment, the company has been on a continuous capacity expansion spree. It has two manufacturing facilities, one in Madurai, Tamil Nadu, and the other in Pantnagar, Uttarakhand, with a combined capacity to produce 2.3 million tyres per month. In FY15, overall capacity increased from 1.7 million tyres per month to 2 million tyres per month.

Now, that capacity will rise to 2.3 million tyres per month. With capacity utilisation at over 90%, the company is drawing up plans for increasing capacity over the next year, details of which are likely to be finalised in early 2016. Srichakra currently has a network of over 3,000 dealers across the country. “You can get a TVS tyre within a 5-km radius anywhere. Also, we have always focused on rural or semi-urban areas and that strategy has paid off since income levels in rural areas have been steadily increasing and we have been able to cater to their needs with our dealer network,” says Vijayaraghavan.

Driving growth

While 57% of TVS Srichakra’s revenue comes from OEM sales, about 30% comes from the replacement market and 13% from exports, which mainly consist of off-road tyres and forklift and agricultural tyres under the EuroGrip brand, to over 80 countries. The company also exports two-wheeler tyres in smaller quantities to countries in South America, Africa and southeast Asia.

“With two-wheeler manufacturers now exporting their vehicles to these countries, there is a growing demand for Indian tyres because the terrain is similar. Indian tyres are some of the best in the world because they are designed for the Indian load as well as road factor,” says Vijayaraghavan. The company is the third-largest player in the after-market segment, which taps TVS distribution network for spare parts through group companies such as TV Sundaram Iyengar & Sons, Madras Auto Service and IMPAL.

The company is looking to increase its revenue from the after-market segment (having higher margin) and helping them achieve this is the replacement cycle, which is steadily declining. This figure has come down from three years to around two years now despite better technology because consumers are riding a lot more on their daily commutes to work and on the weekends. 

While new model launches have contributed to the company’s revenue, a lot of the margin gain for TVS Srichakra has come from softening natural rubber prices. The average price of natural rubber has decreased from Rs.190 per kg in FY11 to Rs.140 per kg in FY15.

“With a surplus of 316,000 tonne, natural rubber prices are unlikely to see any significant increase in the near term, which should lead to stable margins for tyre manufacturers,” says Jagannadham Thunuguntla, head of research, Karvy Group.

While the gains have been passed on to the customers, the company has also benefited from better inventory management. “When natural rubber prices don’t fluctuate, stocking becomes easier. In the past, we have borne the brunt of volatile rubber prices. While the entire industry has benefitted from the decline in raw material prices, we have also managed to keep power and interest costs down and hope to maintain this financial discipline in the coming quarters as well,” says Vijayaraghavan.

Apart from declining operating costs, interest costs during FY12-15 have also fallen by 50%, leading to Ebitda margin almost doubling from 5.8% in FY13 to 10.8% in FY15.

Fiscally fit... so far

While maintaining financial discipline is in the company’s hands, increasing competition from Chinese imports could make it hard for it to maintain price discipline. Unlike truck and bus radials, where the prices of Chinese imports are almost 20-25% lower, the price differential in two-wheeler tyres is not significant enough to force consumers to switch to imports. There is a reason for that, too.

“China, Brazil and India are the largest manufacturers of two-wheeler tyres, but since all of them have a huge domestic market that consumes most of the production, there is little left for the export market,” says Paras Chowdhary, non-executive director, CEAT. But what happened in the truck and car tyres space can happen in the two-wheeler tyre industry as well.

“With new players entering the market, competition is always going to increase, and we are not worried about that. We would like to see these companies compete on technology rather than price. Competing on price only kills the industry,” says Vijayaraghavan. Dealers say that apart from the price differential not being significant, consumers are still not choosing Chinese tyres over Indian tyres as they don’t have robust after-sales service.  

Vijayaraghavan also points out that with almost all major tyre manufacturers, including TVS, expanding their capacity and newer players like Maxis setting up plants in India, the supply side will continue to grow. But even better news is that with new model launches on the rise and the replacement period coming down, the market will be able to absorb this increasing supply. Two-wheeler manufacturers, too, are increasing their overall capacity.

For instance, Honda is looking to increase capacity from the current 4.6 million units per year to 6.4 million units over the next two years. According to TVS Srichakra, its focus on the two-wheeler and three-wheeler segment will help it differentiate itself from the competition. “When it comes to two-wheeler tyres, the company has the advantage of having the highest profit per kg tyre compared to other segments. So, it is a highly profitable business to be in,” says Chowdhary.

After introducing tubeless tyres, TVS Srichakra is looking to introduce radial tyres for motorcycles in 2016. The company has introduced 10 new models for the after-market segment and eight new models for the OEM market segment during the year.

The two-wheeler industry, which grew by 7.8% in FY14 and 9.8% in FY15, has seen lacklustre growth in H1FY16, but Vijayaraghavan believes the second half of the financial year will be much better. “Overall, I expect 2-3% growth in FY16 and am confident we will see much better numbers next year,” he says. Karvy’s Thunuguntla expects the two-wheeler and three-wheeler segment to grow at an average of 11.7% during FY14-17.

“We expect the demand for automobiles to improve over the next two-three years, as we think the economic environment will improve, with softer interest rates improving consumer confidence.Given that TVS Srichakra is a market leader in the two-wheeler and three-wheeler OEM segment, we expect the company to benefit from a better demand environment, leading to higher sales,” he says.

The company has managed to grow faster than the industry growth, as its larger clients like Honda have also managed to beat industry growth. With rubber prices likely to remain soft and interest cost low, the company is likely to improve its profitability. While revenue growth is expected to be around 12% over the next two years, net profit growth is expected to be higher at 22%, helped by better cost management, lower interest cost and benign rubber prices.