All tyre stocks have been buzzing of late after a fall in rubber prices, which dipped as low as Rs 95 a kg in September, after hitting a 44-month low. In an interview to CNBC-TV18, Koshy Vargheese, Executive Vice-President - Marketing at MRF , said the fall in rubber prices have come post a slide in crude oil prices.
He said the slowdown in demand in China has contributed to softening of rubber prices, but feels the sustainability of pick-up in demand will be known post-Diwali.
Typically for MRF, the positive impact of correction in rubber prices is felt with a quarter's lag. The recent correction in prices and stable pricing scenario in the replacement market bode well for margins across players.
MRF has been able to manage better margin profile compared to its peers due to higher share of replacement market, balanced product portfolio and premium pricing across most segments.
Vargheese said that typically the company maintains inventory levels of one month and feels that if the current trend in auto industry continues, "it would be a fair assumption that 9-10 percent revenue growth may not be off the mark".
Below is the transcript of Koshi Vargheese's interview with Latha Venkatesh & Reema Tendulkar on CNBC-TV18.
Reema: The last update that we had was rubber prices at Rs 95 per kg. Have they fallen more since then and can you tell us what the impact will be on MRF in the upcoming quarter?
A: As far as rubber prices are concerned, they took a dip which was hovering around Rs 200 per kg and came down – that's also because international prices have been depressed, they are currently around Rs 110 per kg odd prices. So that along with the softening of petroleum prices probably converged and helped the tyre industry and that's the reason why bottomlines are looking healthier than what they were in the past.
Latha: If you have to do some crystal ball gazing – what is the sense you are getting. You will have this positive raw material price phenomenon for another year at least?
A: The volatility in rubber is unpredictable; in fact few years ago it was as high as Rs 240. Today subdued price to a large extent is because things are at low ebb in China. China is one of the largest buyers of natural rubber globally, is having some sort of a depression in the automotive sector and that's the reason why prices are depressed - that could change any day therefore, the prices being stable is anybody's guess and it has never been stable, it always had a yo-yo as far as this is concerned so it's anybody's guess.
Latha: What is the percentage of synthetic rubber that companies like yours use because we are seeing a secular decline in crude prices as well?
A: As I mentioned it's a convergence of both petroleum prices being soft as well as natural rubber. Normally both do not converge; one time petroleum prices are higher and natural maybe down and that is probably the reason why the bottomline look healthy.
If you look at natural rubber, most of our large tyres, which are commercial tyres and off the road tyres consume a large component of natural rubber while tyres which are used on the road which is passenger and other tyres which use more of synthetic, so it all depends on what is the product mix that you have but by and large natural rubber consumption is much more than synthetic rubber for us at this point.
Latha: So its 2/3rd, 1/3rd?
A: A product mix decides that. It increases your production of passengers and two-wheeler obviously synthetic will go up, but in our case what you said would be true.
Reema: Can you tell us what is MRF's sensitivity to a decline in rubber prices, for instance if they fallen 10 percent on a blended basis according to your product mix, how much can it benefit your margins and will it benefit follow-through immediately or do companies like MRF have an inventory and therefore the benefit on margins might not happen in the upcoming quarter?
A: We always keep an inventory which is a normal practice across this industry and each company decides what is appropriate but about a month's inventory is regularly what people do keep, so any volatility in prices is buffered to that extent upward or downward. However, beyond that we cannot hold because it's a high value item, it also ages, it degrades, so rubber by itself you cannot hold inventory beyond a month or so, so beyond that you are subject to the volatility of the market and in some sectors you passed on these prices; in institutional and some sectors you pass on prices. So, we have index prices with some of the OEMs. It's not that you retain all that you get, it goes through the system.
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