As a 71-year-old company, which has spent 65 of them manufacturing automotive tyres, MRF has seen its share of both the good and bad times. Having built a reputation as a trustworthy brand, the home-grown tyre major now faces a market where uncertainty is the new normal. Koshy K Varghese , Executive Vice-President (Marketing), gives a peek into the relatively media-shy firm’s perspectives and plans. Edited excerpts:
How has demonetisation impacted the tyre industry?
Demonetisation has hit everybody. Both purchasing and investments have been held back. In a product like tyres, you need to buy a tyre at some point of time — if not today, tomorrow. There has been a postponement of purchases (in replacement market). This has led to a very significant demand compression in the after-market. That is visible across all product categories. The tyre trade operates on cash. So, bulk of retail sales used to be in cash for all companies. Retail trade was affected as many of them didn’t have PoS (point-of-sale) machines. We have been making a conscious attempt now to enable our trade partners to go cashless by helping them acquire PoS machines at a faster rate. The situation has slightly eased in January, as we find cash slowly coming back. As cash is coming, people are also getting back to buying in cash, which is probably not the intended objective.
What is the demand scenario now?
Regulatory norms are coming for trucks. BS 4 norms are coming from April 1. With that, cost of trucks is likely to go up by ₹1.5 to ₹2 lakh at least. So, truck makers expected some advancement of purchases in November and December. That didn’t happen, however. We expect there could be a spurt in truck sales in February and March with money coming in and things getting a little easier. For us, the raw material prices have suddenly gone up. In the past three years, from February 2013-January 2017, the industry has seen only price reductions. Prices dropped to the extent of ₹5,000 on a pair of truck tyres, which is a 15-16% drop. But things are changing. In the past one-and-half-months, rubber price has gone up to ₹155 per kg from ₹120 per kg. This increase has happened in a very short period. Crude prices are also likely to go up further and with that, prices of other derivatives will also increase.
Today, 67-70% of the total rubber produced in the country is consumed by the tyre industry. At the same time, there is a demand-supply gap of about 4 lakh tonnes. While the demand of the tyre industry is about 10-10.5 lakh tonnes, the domestic supply is 6-6.5 lakh tonnes. So there is a gap of 4-4.5 lakh tonnes, which needs to be filled by imports. We are caught in a situation where international prices are higher than domestic and there is a deficit in domestic supply. Therefore, there is an imminent cost push, which is what we are already seeing.
What leeway do you have now?
We are caught in a tight situation. If you don’t pass it on, your bottom line will suffer. If you pass it on, you may lose market share. We are caught in the devil-and-deep-sea situation. We expect things to get back to near normal by March. Time has come to have a re-look at our pricing.
Where are you in the marketplace?
Incidentally, 2017 is 30th year of our market leadership. We became market leader in 1987 in the replacement market where the war is happening as it accounts for 65-70% of the volumes. When I say 30 years, it means uninterrupted 30 years – from 1987 till 2017. Today, across all product categories, we have the highest market share.
That has been achieved over a period of time with a lot of grit. Products have played a role. The investments made in developing products for right applications and brand building over these years have helped.
Also, our distribution network is very wide.
We have consciously created a very strong network which we directly deal with.
Gujarat investment is a natural extension of our thought process that going forward India will continue to be a dominant consuming market. We might have a GDP drop of 1% or so, but 6-6.5% will still be substantial. Therefore, it makes business sense to invest. Some of the consuming markets are also in the North and the West. Going forward, logistics costs will increase.
With that in mind, we thought it would be appropriate to have a factory closer to where the consuming centres are. Also, some of our newer OEMs [original equipment manufacturers] such as Maruti and Honda have gone there. I think it will give us savings in logistics. Hopefully, we should have possession of land in 3-4 months time. The plant will come up in phases. The first phase may begin in 2019.
How will you define brand MRF in today’s context?
While there is brand promiscuity on one side, there is also an element of trust associated with the brands for end customers. In a recent survey, in the top 50 brands across categories and products, there was only one tyre brand and it was MRF.
MRF has been ranked very high on trust quotient. In the surveys we conduct, couple of things that come up very often are reliability and trust when it comes to brand MRF.
We continue to be a preferred brand and our objective is to ensure that this doesn’t get diluted.
What should be your focus - bottom line or top line?
It is easier to fix the bottom line but more difficult to fix top line. Once you lose market share, it is difficult to regain.
But bottom line is a function of various things – costs, efficiency in purchases and processes. Each company’s philosophy is unique. We are very clear that market share is a key parameter of success.
