From the Annual Report, 2016-17 of MRF Tyres:
The demonetization initiative of the Government in November 2016 caused a ripple effect across the business value-chain and the brunt of the impact was felt by sections of the trade and customers in smaller markets. While it is true that substantial lost ground was recovered by end January 2017, but lingering after effects continue to be seen till the end of fiscal 2017 and likely for some more time.
The tyre industry is a classic derived demand business and is directly affected by the performance of the automotive manufacturing sector, growth in which, in turn, is clearly a function of the overall growth in the economy. The Indian tyre industry grew by a modest 3.6% and is estimated to be around Rupees 55,000 Crore in 2016-17.
The trucking transportation business is somewhat scattered and is driven by small operators numbering nearly 2.6 million. This business, has historically transacted in cash and will face difficulties going forward in a digital era with increasing pressure to use alternate, and modern methods of payments viz. in Digital / Cheques/NEFT etc., to reduce cash dependence.
The Small Commercial Vehicles (SCV) category has seen its previously high numbers take a fall over the years which was further hit during the year by the demonetization exercise, as this segment is totally dependent on cash for day-to-day running. However, the SCV segment is expected to grow in the future due to zoning and traffic regulations, creating greater access restrictions in urban areas for the bigger vehicles.
Natural Rubber continues to be one of the core raw materials for the Indian tyre industry as against Synthetic Rubber which is the norm in the rest of the world. The high Customs duty on Natural rubber, which makes it one of the highest duty structures on Natural Rubber anywhere in the world, continued to adversely impact the cost structure. …..
…..A permanent solution for the inverted tax / duty structure on Natural Rubber imports has still not been found, thereby creating a situation which will precipitate to alarming proportions, considering the increasing prices of Natural Rubber.
[My comment: This inverted duty structure is a rather peculiar feature of India. If someone can enlighten me as to how India got here – including political economy reasons – I will be grateful.]
The proposed roll-out of the cap on the age of commercial vehicles, will have a significant impact on the segment’s radialisation drive. The New Motor Vehicles Act is also expected to be passed and if it does, it will have significant impact on over loading of vehicles and how tyres and vehicles are configured in the industry to meet geographical peculiarities of the logistics business.