Reduction in import duty on raw materials is also possible

Current industry status

The tyre industry is currently witnessing a dream run in terms of increased offtake, improved realisations and enhanced exports. However, the surge in the raw material costs, including natural rubber at present, and the possibility of US war with Iraq may apply breaks on the industry's margins.

The prices of tyres and tubes have increased by around 5 per cent in the current year while the raw rubber prices have zoomed by 16% during this period as reflected by change in Wholesale price index of the above items. Nevertheless, better demand due to sustained improvement in the offtake from OEM and replacement market has enabled the industry to record impressive 18.2% surge in tyre production to 381.24 lakh units in the nine months ended Dec 02. As a result, the industry is witnessing improvement in profitability, despite surge in input costs. However, further increase in input costs, especially that of oil based raw materials may put pressure on margins.

The industry witnessed 15% increase in production of truck / bus tyres and passenger tyres to 72.73 lakh units and 63.27 lakh units respectively in the nine months ended Dec 02 over the corresponding previous year period. The production of motor cycle tyres zoomed by 30% to 115.34 lakh tyres while jeep tyre production rose by 11% to 10.48 lakh units during the above period. The exports also grew by 15% to 24.57 lakh unit during this period, inclusive of 15.46 lakh tyres of truck and bus tyres.

Prevailing tax rates and provisions

Truck, bus, passenger car tyres etc

Industry expectations

Reduce Excise duty

The automotive tyre manufacturers Association (ATMA) has suggested that the excise duty on bus / truck / passenger car tyres be reduced from 32% at present to 16%. Inclusive of other taxes / levies, the tax incidence on these tyres is more than 50%.

Reduce customs duty on inputs

ATMA has sought for reduction in customs duty on natural rubber and butyl rubber to 10%. Currently, 70% of the passenger car tyres are radial tyres, while only 2% of HCV tyres and 10% of LCV tyres are radial tyres. In order to boost radialisation, ATMA has sought for waiver of customs duty on steel tyre cord and polyester tyre cord, which currently attract a basic customs duty of 25%.

Impose duty on ADV tyres

ATMA has sought for imposition of excise duty of 8% on tyres for animal drawn vehicles. Currently, these tyres are exempt from excise duty.

Market/Analyst expectations

There is a strong case for reduction of excise duty on bus / truck and passenger car tyres from 32% to 16%. Further, in line with Kelkar committee recommendations, the import duty may also be reduced, benefiting the industry by way of reduced cost of imports.

Best Pre-budget Buys/Sells

Both on excise (duty on tyres) and customs (duty on inputs), the industry is likely to be benefited. Further, if the excise duty on passenger cars are reduced, it will lead to greater demand for cars, and as a corollary will lead to greater demand for passenger car tyres. Leading players like Apollo Tyres, J K Industries and MRF are likely to be benefited by the above proposals, if incorporated in the budget.

Summary

The tyre industry has been witnessing robust growth in demand, coupled with marginal rise in prices. While much of the gains have been eroded on account of surge in natural rubber prices, the balance may be lost if the oil based raw material prices surge. Nevertheless, the industry’s profitability is better in the current year over the previous year in view of improved capacity utilisation and increase in realisations/reduction in discounts. The budget benefits may help the industry to cushion the adverse impact of US-Iraq war on the cost of its raw materials and quantum of exports.

Run-up to the Budget 2003

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