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Rubber Cost push pressures tyre cost; price hike looms

Price Hike, MRF Ltd, Apollo Tyres, JK Tyre, Ceat Ltd,

MUMBAI (Reuters) - Indian tyre companies are gearing up for a second round of price hikes in three months in an effort to mitigate margin pressures as prices of rubber continue to climb sharply, officials and analysts said.

Leading tyremakers such as MRF Ltd, Apollo Tyres, JK Tyre & Industries and Ceat Ltd are mulling an increase in both car and truck radial tyres in the next one month, officials say.

"There is a cost-push definitely and price increase is one of the options. The severity of this cost-push is so high it is a question of how we manage it," said Koshy Varghese, executive director at MRF, India's top tyre maker by sales.

Rubber prices, which make up half the cost of a tyre, have shot up 11 percent in the second half of the calendar year on a shortfall in domestic production and high import duty. They have shot up 21 percent over the past one month alone.

India's rubber output fell 6.5 percent during April-November while consumption rose 3.5 percent, widening the gap between production and consumption, according to the Rubber Board. Tyre makers, who benefited from lower material costs in the first six months of 2009, have already gone in for a price increase in Oct-Nov when costs started rising. Officials say a second price hike is inevitable, given the cost scenario.

"Given the situation currently we would have no alternative but to revise prices upwards again. The increase in rubber prices has been very significant and it is not possible to keep absorbing it," said Sunam Sarkar, Chief Financial Officer of Apollo Tyres, the country's second largest tyre firm.

JK Tyre, India's third largest tyre maker, is also planning to raise prices by 3 to 5 percent in December, an official said.

"Rubber prices are troubling everybody. We have not yet increased, but we will have to. It will be anywhere in the range of 3-5 percent. We will be able to finalise later this month," said A.S. Mehta, director-marketing at JK Tyre.

Ceat, which raised prices in October by 3 percent, is also planning another price hike this month, Managing Director Paras Chowdhary said.

MARGIN PRESSURE

Tyre makers have benefited from a surge in automobile sales in India, helping them report higher revenues in the past two quarters but profits may be crimped due to margin pressure.

"Sales are looking good as OEM (original equipment manufacturer) sales are robust and replacement demand is expected to be reasonable. But the problem is on the cost front," said Vaishali Jajoo, analyst at Angel Broking.

Car sales rose 61 percent to 133,687 units in November from 83,121 a year earlier, helped by an improving economy, easier availability of loans and festive demand.

A reviving economy has helped firms like Apollo Tyres raise its FY10 sales forecast but worries about margins persist.

"There will definitely be a slight impact on margins as the increases never really shield us off as we try and absorb some of it before passing it on," Apollo Tyres Sarkar said.

"Costs of rubber has gone up more than 20 percent in the last one month. I don't think even a 8-10 percent hike will be sufficient to offset the increase in raw material prices," Angel Broking's Jajoo said.

(Editing by Sunil Nair)

(For more news on Reuters Money visit http://www.reutersmoney.in)

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