CCI Penalty Unlikely To Impact Tyre Companies' Near-Term Cash Flows

India Ratings and Research (Ind-Ra) believes that the penalty imposed by the Competition Commission of India (CCI) is unlikely to have a significant impact on the FY22 cash flows of the tyre manufacturing companies rated by the agency, including Apollo Tyres Ltd (IND AA+/ Stable), CEAT Ltd (IND AA/Stable), and JK Tyre & Industries Ltd (IND A/ Stable), as the companies are reviewing the order and exploring legal recourse against the same, as per their stock exchange filings. Ind-Ra does not factor a pay-out of the penalty in FY22 in its base case rating projections.

However, given the raw material price inflation witnessed during FY22 and the ongoing capex of a few tyre companies, a penalty pay-out, if it materialises, could increase the leverage in the interim. Ind-Ra opines the impact of the penalty pay-out would be higher for entities with elevated net debt/EBTIDA levels and could delay their deleveraging plans.

As per the order dated 2 February 2022, the CCI has imposed a penalty of 5% on average standalone turnover for FY12-FY14 on five tyre companies (also including MRF Ltd and Birla Tyres Ltd) as well as their association i.e. the Automotive Tyre Manufacturers Association (ATMA) for indulging in cartelisation to increase the prices of truck and bus tyres sold in the replacement market during 2011-12.

While the order was passed by the CCI in August 2018, it has been revealed only after the appeal of MRF Ltd was dismissed by the Madras High Court and the special leave petitions filed in the Supreme Court by the tyre companies were dismissed in January 2022. In addition, a penalty of INR0.8 million was imposed on ATMA, which has also been directed to disengage and disassociate itself from collecting wholesale and retail prices through the member tyre companies or otherwise.