Tyre demand to see 6-7% volume growth in 3 yrs


Tyre demand to grow 6-7% in three years


  Over the next three years, research and rating agency, ICRA, expects the domestic tyre demand to report a six-seven per cent volume growth, supported by a broad-based revival in automotive original equipment manufacturers (OEM) demand.

The pick-up in rural expenditure with good monsoon would translate into higher OEM demand for the rural-centric two-wheeler (2W) and tractor segments. Growing fleet on ground and higher miles driven/freight moved would drive replacement sales, stated the report.

Domestic tyre makers have invested significant amounts in new capacities in Truck & Bus Radial (TBR) and 2W segments, over the last several years. As a result, between FY10 and FY16, the industry witnessed the completion of Rs 20,000-crore investments. However, with increasing influx of cheaper Chinese tyres and uncertain input price trends, the sector is now looking to consolidate operations and optimally utilise the recently installed capacities. Therefore, no major new capacity addition plans have been announced by tyre majors over the past few months.

That said, projects worth about Rs 8,000 crore (capital expenditure undertaken two-three years ago) are expected to be completed over the 12 months which should help tyre makers meet the likely rise in demand.

“The TBR segment has seen Rs 350-billion capacities over the past five to six years – this segment may get impacted if imports from China increases further,” says Subrata Ray, senior group vice-president, ICRA Ratings.

In line with ICRA research estimates, revenues in the domestic tyre industry (ICRA’s sample of seven major tyre companies) de-grew by two per cent led by a six-eight per cent fall in realisations although volumes grew by four-five per cent.

The sector benefited significantly from the fall in input costs; natural rubber prices fell by 15 per cent during FY16, leading to a 470 bps operating margin expansion to 19.1 per cent. This was despite the increase in employee expenses.

“While industry wide revenues are expected to grow by nine per cent during FY17, supported by around six to seven per cent growth in volumes, operating margins are expected to contract by 250-300 bps with a modest increase in raw material  prices, hike in wage costs and increased fixed costs (with large capacities getting commissioned),” added Ray.

“Given the large cash balances, net debt position is expected to be moderate and the capitalisation and coverage indicators are expected to remain healthy. Overall, the credit profile of the tyre industry is expected to remain stable; key headwinds however include slower than expected demand growth, any sharp increase in raw material prices and intensifying competition from China”, added Ray.