Wednesday, August 7, 2013

Low prices prop-up margin


For the April-June quarter Apollo Tyres Ltd. reported better-than-expected earnings. Sales saw a marginal 0.8% growth, even during the sluggishness in the automobile industry. Sales were driven by the Europe and African operations. Compared with a year ago, natural rubber prices during the quarter were 13% lower. This reduced the cost of raw materials, which in turn helped the company improve the operating profit margin.

Rubber prices are increasing in the domestic market. Adverse weather conditions and heavy rains in some parts of Kerala have affected rubber production, which reduced supplies in the market, driving the benchmark RSS-4 grade rubber towards `.200 per kg. Prices in the international market, on the other hand, continue to remain low, which is currently trading at `.152.87 per kg in Bangkok.

The one bright spot for companies was low commodity costs, which meant low input costs and brought much-needed succour to margins at a time when demand is lukewarm. But even that comfort may not last, thanks to the rupee depreciation and the spike in short-term interest rates. Margins seem to be under pressure again.

Tyre companies may step up imports. But duties, freight and the sharp fall in rupee means that the potential cost saving can be limited. Automobile companies in India may resist the price hikes as sales continue to remain sluggish.

Heavy rains disrupting rubber tapping in Kerala and the growers are holding on to the available stock in anticipation of further rise in natural rubber prices. Besides supply and demand factors, the market will also be influenced by the performance on the Tokyo Commodity Exchange and the Shanghai Futures Exchange. Tommorrow, most probably TOCOM will cross ¥250 a kg mark.

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