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BE Corporation
M&A: An option or a compulsion for MRF?
Blame it on the rising raw material cost or the inverted duty structure, MRF is now exploring opportunities for acquiring companies outside the country, all to protect shrinking margins and remain profitable. But, is it really the right strategy?
Issue Date - 24/11/2011
Although MRF, India’s largest tyre manufacturer, entered the business much earlier than most of its competitors, it chose not to invest any money in building plants or acquiring companies abroad. Instead, it has focussed on building its brand in international markets. But not anymore. Blame it on the rising raw material cost or the inverted duty structure, MRF is now exploring opportunities for acquiring companies (as well as rubber plantations) outside the country, all to protect shrinking margins and remain profitable.

While the company is yet to announce full results for the year ended September 30, 2011, Arun Mammen, the Managing Director of MRF took a lot of pride in announcing (at a press meet in Chennai recently) that the company’s turnover has crossed Rs.100 billion mark in FY2010-2011 (the first Indian tyre manufacturer to do so in any financial year) at a growth rate of about 30 % over the previous year on the back of buoyant demand. Though the topline has not posed a serious problem for MRF (the topline of the company has doubled from Rs.50 billion in 2007) so far, the bottomline has taken a dip due to high raw material costs. MRF reported a net profit of Rs.2.2 billion for the nine month ending June 30, 2011 against a net profit of Rs. 2.7 billion during the corresponding period last year, a decline of 19.08%. And not just MRF; in fact, the tyre manufacturing industry, as a whole, has been operating at a margin of 1-1.5% for the last one year or so.

The reason is simple. The rubber prices have gone up from Rs.140 a kg to Rs.235 in the domestic market over the last one year. Although prices have plateaued now, they are still high for an industry that is marred with an inverted duty structure – a scenario where it costs more to import rubber (20% import duty) than importing a brand new tyre by paying just 7% import duty.

Further, the removal of anti-dumping duty by the government on truck and bus radials (TBRs) imported from China and Thailand from August 2011 onwards has only made the situation worse for tyre manufacturers, including MRF, in India. The move is expected to make imported tyres not only cheaper by almost 15-20%, but will also limit the pricing power of domestic players in replacement TBR market thereby further impacting their margins.

Notwithstanding the concerns of relatively lower distribution reach and inconsistency in quality of the imported tyres, the attractive price point is expected to pose a serious threat to domestic tyre manufacturers particularly in the replacement segment where MRF happens to be one of the dominant players, placing large Chinese tyre manufacturers like Giti Tire Company Ltd. and, Weifang City Gunaite Rubber Co. Ltd. in direct competition with it. “It was said that the imports of rubber is being discouraged because of the larger interest of the domestic rubber growing community. But one cannot understand that if this was the intention why there has been a rise in the imports of finished tyres from other countries, how is it going to help the domestic industry?” questions Rajiv Budhiraja, Director General, Automotive Tyre Manufacturers’ Association.

In such a scenario the only option left with MRF (and others too!) is to go for overseas buyouts, both in terms of plant and plantations, and particularly in countries like Thailand, Cambodia and Vietnam where the raw material is available in abundance. This will not only offset the rising raw material cost (in turn easing off the pressure from their bottomline), but will also bring Indian tyre manufacturers back on a level playing field.

Shortage of rubber in the country has also challenged the company to consider options outside. In fact, the production of natural rubber fell behind consumption by more than 85,000 tonnes in FY2010-11. While the production of natural rubber stood at 8,61,950 tonnes in FY2010-11, its consumption stood at 9,47,715 tonnes (as per Rubber Board data). Even during the first five months of current financial year, the production has been 3,11,200 tonnes against a consumption 4,00,995 tonnes. Thus, MRF’s decision to buy a rubber plantation abroad is justified as it will help the company to get a better hold on its raw material supply chain in the long-run.

Further, for the uninitiated, MRF’s arch rival Apollo Tyres is also eying Europe to augment its international presence after its acquisition of Dunlop’s operations in Africa in 2006 failed to deliver the desired results. Primarily, the small size of the African market (around 35 million units) has forced Apollo to move its focus towards the European market. In fact, Vredestein, a Netherlands based tyre manufacturer bagged by Apollo in 2009, is expected to spruce up the overall revenues from exports for Apollo Tyres to over 70% from the current level of 40%. This makes it all the more important for MRF to go for a kill in the international market as exports still account for only 10% of its total sales.

Well, MRF’s immediate plan is to augment its presence in markets akin to India, such as South East Asia and China, where it’s already supplying tyres. With a cash reserve of Rs.16.44 billion reported at the end of FY2009-10, MRF is planning to fund its inorganic growth plans with a mix of borrowings and internal accruals. But then, a global footprint requires products tuned to markets. Is MRF ready to take up that challenge?

Pawan Chabra           

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