Companies & Sectors
Tyre makers expected to hike prices on surging raw material costs

Industry players suggest a phased increase in prices as rubber input costs continue to impact margins

Tyre manufacturers may increase the prices of their products this month as rubber input costs continue to climb in the domestic and international markets. The increase in prices of tyres is likely to be in the range of 3%-5%, according to industry players and analysts.

"Prices of rubber have touched a fresh record level in both the international and domestic markets. Tyre companies are expected to increase prices of tyres this month. It's difficult to predict the quantum of the hike, but it could be between 3% and 5%," said an analyst at a Mumbai-based research firm, who requested anonymity.

"Of course, we are under pressure due to rising prices of rubber in the domestic market. We are monitoring the raw material prices and if rubber prices go up then it will push tyre prices too," RK Agarwal, head of marketing, Modi Tyres, told Moneylife. But Mr Agarwal did not give an estimate of the quantum of increase.

Apollo Tyres, Ceat and Bridgestone already hiked prices of their products by 1%-2% in December.

"We are expecting an average hike of 3% this month," said a Mumbai-based distributor of one of the country's major tyre makers.

On Tuesday, rubber prices touched Rs216 a kg in the Kottayam and Kochi markets. Prices have increased about 25% within the past three months in the domestic and international markets, mainly due to lower output in the main rubber-producing countries.

"Margins of tyre companies are under pressure and to maintain the current margin level tyre manufacturers will have to increase prices by 8%-10%," Surjit Arora, analyst at Prabhudas Lilladher told Moneylife.

However, such a steep increase may not be viable due to high competition not only among Indian players, but also from Chinese manufacturers. Companies may not be able to pass on the full hike and they may take a hit in operating margins in this quarter, according to analysts.

Experts suggest that the price increase will happen in a phased manner as a large one-time hike could cause lower demand. In the April- December 2010 period, tyre manufacturers increased prices by around 12%.

"One round of a price hike of 3%-5% would happen in this month, although this would not be sufficient to maintain margins," Mr Arora said.

Rubber prices have edged up daily over the past month as unseasonal rain in the major rubber-producing countries interrupted tapping and plantation work, resulting in a fall in arrivals. The slow supply in the market has agitated rubber prices globally


New CRZ norms a boon for real estate companies

The new rules allow slum rehab in the CRZ area, redevelopment of dilapidated structures in this previously no-go area and higher FSI. But benefits could take a while to come in

The new coastal regulation zone (CRZ) norms open up huge development potential for real estate companies in Mumbai. The new rules will impact the sector in three major ways. Slum development which was not permitted in CRZ areas is to be allowed. It will now become possible to redevelop dilapidated, cessed and unsafe buildings within the zone. The new norms also allow a floor space index (FSI) of 2.5 times in the CRZ areas, in line with the rest of Mumbai city. Till now it was only 1.33 times.

The CRZ area, as defined by the environment ministry, is the stretch within 500 metres of the high-tide line on the landward side. Under CRZ 1, the construction of roads, approach roads and missing link roads is allowed on stilts, to ensure that free flow of tidal water is not impacted. Under CRZ 2, building development will now be allowed on the seaward side of the CRZ stretch, with separate provision for slum rehabilitation with FSI in accordance with existing regulations (maximum 2.5 times + TDR) and government stake of 51% in such projects.

As a safeguard against corruption, the Right to Information Act (RTI) will be applicable to all such projects; the schemes of the Slum Rehabilitation Authority (SRA) will be undertaken through companies with a 51% or more government stake; the Ministry of Environment and Forests will have the right to appoint statutory auditors for redevelopment of dilapidated, cessed and unsafe buildings, while projects under the SRA scheme will be audited by the Comptroller and Auditor General (CAG). The government of Maharashtra will also set up a 'high level oversight committee'. The government sees a 51% stake in projects as a positive, but the markets view it as a negative-the players believe this will be a major deterrent for companies as it leaves 'very little room for them' and it will in fact lead to a breeding ground for kickbacks and corruption.

It is believed that as many as 47,000 families will benefit from the new norms and that 146 slum clusters will be developed with the additional FSI. Additionally, an attempt can be made to develop 620 dilapidated, unsafe and cessed structures where about 38,000 families are residing currently. Other beneficiaries may include 38 colonies of fisherfolk, located right from Colaba (in south Mumbai) to Gorai (in Borivali).

To put things in perspective, of the 437 sq km area that is Mumbai city, nearly 202 sq km is under, or is impacted by the CRZ, that is a whopping 46% of the total area, according to a research report from Kotak for its clients, published on Tuesday. The brokerage believes that assuming all the families which can be rehabilitated will be at 300 sq ft per family, with a 2.5 times FSI, there is a potential for real estate development of 89 million sq ft, "which at the current run-rate would be equal to a decade of supply in various micro markets".

Kotak says that if all works out well, "a case can be made for a win-win scenario for both-developers and property buyers. Buyers could benefit from lower residential property prices due to increased supply (led by higher FSI available; while developers could benefit on greater volumes and an internal rate of return (IRR) similar to current redevelopment projects, as long as constant property prices are factored when the bid is submitted to SRA (Slum Rehabilitation Authority)."

Up until now, due to existing prohibitive norms, most SRA projects took place only in north Mumbai-mostly inland. However, the new norms will allow such projects throughout the coastal city.

While all this sounds great on paper, Kotak believes that any meaningful impact will be 3-5 years away. "We are not turning bullish on property developers focusing on rehabilitation projects on the back of this, as we believe any meaningful NAV accretion will be at least three years away, while  project completion could be 5-7 years away and we await progress in government-developer partnerships." Even market watchers believe that it will take at least six months to a year before policy changes are incorporated in the city's development plan for redevelopment to start.

For now, it looks like HDIL, with around 49 million sq ft of developed and ongoing slum rehabilitation projects (largely the Mumbai airport SRA work) is the biggest beneficiary of the new norms, Kotak says. One drawback is that it has very little presence in south Mumbai.

The slum problem in Mumbai is huge. According to some estimates, the city has a 60% slum area, where unhygienic conditions and the lack of basic amenities causes epidemics (malaria, dengue, even cholera) all the year round. Some say that around 50% of Mumbai's 14 million people live in slums.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.)


Infosys will set tone for IT Q3; revenue guidance expected to be upped

Expect IT to zoom if Infosys’ sequential growth is above 7%, ups it dollar revenue guidance for the year above 26%, and gives positive vibes on IT budgets and discretionary spending

Expectations are high on Q3 results and all eyes are focused on information technology, particularly Infosys, which is traditionally among the first to announce its performance. The sector generates special interest because of some important factors like volume growth, (broad-based is better than concentrated), pricing trend (that is not expected to improve), revenue growth in discretionary spend areas (positive expectations), the deal pipeline (and size), net hiring (has been going up), utilisation and attrition. Attrition, which was upwards of 20% for the IT sector in the September quarter, is expected to come down to below 18% for the December quarter.

Strong dollar revenue growth is expected from Tier-1 companies. However, it may not be as strong as it was in the September quarter. TCS, Wipro, Infosys and HCL Technologies are expected to post 5-6% quarter-on-quarter growth.

The banking, financial services & insurance, and retail verticals will probably continue to lead demand revival, while telecom and manufacturing may remain subdued. (The four verticals make up 80% of the business of Indian IT companies.)

The rupee appreciation is expected to play spoilsport. Motilal Oswal says in its preview of the IT sector, "In 3QFY11 the rupee appreciated about 3.3% sequentially and this is expected to play a key role in a 30-50 basis points drop in margins for top-tier companies. Companies like Infosys and TCS have a near 40 basis points EBIT sensitivity to a one percentage point change in the rupee/dollar. We expect no revival in HCL Tech's EBITDA margins, though it has maximum upside on margins due to levers like utilisation, SGA (selling, general and administrative expenses) and the employee pyramid." However, not everybody is expecting a margins drop.

There are no real hopes of any price increase this quarter. Headcount additions are expected to be strong.

Infosys Technologies (Q3)

Infosys, India's second largest IT company by sales, had given guidance for dollar revenue growth of 3.4%-4.4% quarter-on-quarter, but most expect it to produce one of the strongest figures among Tier-1 IT companies at more than 6%. Margins are expected to appreciate a bit; volumes could be higher by more than 6%. Infosys will probably manage margins by controlling SGA expenses. CLSA believes that the absence of visa costs should drive a positive surprise on margins.

It is expected to upgrade its dollar revenue guidance (24-25% in 2QFY11). However, this upgrade may not be very aggressive given that fourth quarter (March) revenues usually tend to decelerate over the December quarter. Rupee EPS guidance could be revised upwards of Rs 120 (currently at Rs 117).

HCL Technologies (Q2)

HCL's infrastructure management segment is expected to give good returns. Forex losses may be behind it from this quarter onwards.

TCS (Q3)
Like Infosys, TCS is expected to grow more than 6% (revenue in dollars) quarter-on-quarter with a 6% plus volume growth. Motilal says, "TCS' continued cost aggression over the past six quarters leaves it with limited cushion for margin upsides."

Wipro (Q3)

Revenue growth is expected at around 5.5% at the higher end of its guidance. Watch out for impact of promotions on IT margins, attrition and the next quarter's guidance.

Even though large-cap IT stocks look fairly valued at 20-23 times their one-year forward earnings, there is a lot of interest in them at the moment because of the belief that there is an upside for their earnings. The two biggest risks for the sector continue to be the significant rupee appreciation and a sudden fall in US growth rate.


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