Demand for Tyres to Grow by 6-7 per Cent in the Next 3 Years: ICRA

ICRA, the premier credit rating agency, has released a report which says that the demand for tyres in the Indian automotive segment will grow by 6-7 per cent over the course of next 3 years. This is a small part of a larger revival of automotive Original Equipment (OE) demand in the market. A good monsoon will lead to an increase in the demand for OEMs in the rural markets for the two-wheelers and tractor segment, says ICRA.

There have been significant investments in new capacities for truck and bus radials and two-wheeler segments over the last few years. Between FY 2010 and FY 2016, over Rs. 200 billion have been invested in the industry. In recent times, there has been an influx of cheap Chinese tyre options and uncertain input price trends, the tyre industry in India is looking to consolidate operations and make optimum use of the capacities that have already been installed. No major investments have been announced by major tyre makers in the past few months. But there are projects in yet to be completed which are worth Rs. 80 billion (Capex undertaken 2-3 years ago) and will be done in the next 12 months or so. This will help the industry to meet the likely rise in demand.

(There has been an influx of cheap Chinese tyres, which are affecting the Indian Tyre industry)

"The Truck & Bus Radial segment has seen Rs. 350 billion worth capacities over the last five to six years - this segment may get impacted if imports from China increases further", says Subrata Ray, Senior Gr Vice President, ICRA Ratings.

The ICRA had also estimated that the revenues in the domestic tyre industry de-grew by 2 per cent and similarly the realisations also fell by 6-8 per cent. This happened despite the fact that the tyre sales volumes grew by 4-5 per cent during the same period. A silver lining though, was the fact that the input costs as the prices for natural rubber fell by 15 per cent in FY 2016, leading to a 470bps operating margin expansion to 19.1 per cent. This happened even though there was an increase in the employee expenses.

Subrata Ray had more insights on the situation, saying that, "While industry wide revenues are expected to grow by 9 per cent during FY 2017, supported by around 6-7 per cent growth in volumes, operating margins are expected to contract by 250-300 bps with a modest increase in raw material (RM) prices, hike in wage costs and increased fixed costs (with large capacities getting commissioned)."

(The tyre industry is expected to grow by 6-7 per cent in terms of volumes over the next 3 years: ICRA)

He also said that the tyre industry is expected to witness a cumulative spend of Rs. 86 billion over the next three years, partly because following an outlay of Rs. 39 billion in FY 2016. Thanks to large cash balances, the net debt position is expected to be manageable and the indicators of the health of the industry such as capitalisation are expected to remain healthy. Overall, the credit profile of the tyre industry is said to be stable; key headwinds however say that the demand growth will be slower than expected.

(Source: ICRA)