By Sharad P Matade
With stable demand outlook and strong credit profile, the domestic tyre makers are expected to make significant investments in capacity addition in the coming years.
With a stable growth in original equipment (OE) and a sharp recovery in demand for replacement tyres, the Indian tyre market is estimated to have grown by 9-11% unit volume-wise and 11-13% tonnage-wise domestically in the financial year 2018-19, according to the credit rating agency ICRA.
The OE tyre segment witnessed a strong demand with a 10-12% growth in FY2018-19, as against a 13.3% growth in 2017-18, despite subdued vehicle production levels in the last six months due to ‘dip in consumer sentiments’ on the back of rise in vehicle costs and softened rural demand, ICRA says.
In the OE tyre segment, passenger vehicle manufacturers faced a tough time in FY 2018-19 when passenger vehicle sales had a mere 2.7% growth, the slowest in last four years, according to the data released by the Society of Indian Automobile Manufacturers (SIAM).
The commercial vehicles sales surged over 17% and two-wheeler sales increased by 4.85% which helped to the auto industry register 5.15% growth across all segments in FY2018-19 over the previous year.
However, SIAM maintains that in FY 2019-20, auto manufacturers will continue to have challenges on account of general elections, transition of BSVI norms and the implementation of new safety norms.
Surge in replacement market
The replacement tyre demand in 2018-19 was also higher than the previous year. According to ICRA, pick-up in infrastructure activities and rising consumption boosted the demand for replacement tyres which is estimated to have increased by 7-9% in terms of unit volume in 2018-19 as against a muted growth in FY2017-18.
However, the demand for replacement tyres slowed since November 2018 due to tight liquidity conditions, but a strong H1 has neutralised the impact.
According to ATMA, tyre production in India had a double-digit growth in H1 2018-19 (see Figures 1-3). Total tyre production in H1 FY2018-19 increased 11% over the same period of corresponding fiscal. Among categories, two and three wheeler tyre production surged 20%, while medium & heavy commercial vehicle and light commercial vehicle segments surged 24% which helped to boost the overall production.
According to ATMA, the Indian tyre industry had posted a growth of 7.5% in FY 2017-18 and an overall growth at a CGRA of 3.6% during the last six financial years ( FY13-FY18).
Boost for tyre exports
According to ICRA, tyre exports have increased at a CAGR of 12% during FY2016-18 aided by favourable demand in overseas markets and increased acceptance of the Indian tyres (especially radials). For FY 2018-19, tyre exports are estimated to have crossed Rs 120 billion, with USA and Germany, the top two markets, accounting for over 20% of total exports.
However, in number terms, overall tyre exports went up by 2% during the first half of FY2019 as against the first half of FY18. Import of cheap tyres, especially truck and bus tyres from China, had been a big headache for the Indian tyre producers, and the unprecedented imports had heavily impacted domestic tyre producers’ business.
However, imports from China declined in the last two years. Truck & Bus tyre imports went down due to the reimposition of the anti-dumping duty and Custom duty on truck & bus radial tyres in FY 2017-18. The Government of India had also announced an increase in the Custom duty on import of radial car tyres to 15% from the earlier 10%.
Raw material prices soften
ICRA says that the raw material prices increased by 3% and 11% during Q2 and Q3 FY2019 respectively, with spike in crude linked input prices. However, with oil prices crashing in November 2018, prices of these inputs have declined in recent months. Price of natural rubber (over 30% of input costs) continued to be low over the past two years, with prices falling by 4% during FY2019.
Commenting on the company’s performance in the third quarter of FY2019, Apollo Tyres Chairman Onkar S Kanwar says: “While our volumes have increased across segments and geographies, the margins were impacted due to the lag effect of the increase in raw material prices, especially crude-based ones, in the previous quarters. Comparatively, this quarter looks better, as the raw material prices have eased to some extent. In the current quarter, we are already witnessing an uptick in demand, and are hopeful of reporting a healthy growth.”
On the supply side, the tyre industry has been facing several challenges. Domestic production of natural rubber meets hardly 54% demand, while the rest is met through imports.
“Tyre industry is raw material-intensive and NR is a critical raw material. Acute shortage of NR has been hitting the industry where it hurts the most. Production planning is in serious disarray in view of volatility in availability of NR in the country,” says K M Mammen, Chairman & Managing Director of MRF Ltd, who was recently elected as Chairman of ATMA.
The Indian tyre market is always dominated by a handful of domestic tyre manufacturers. The top seven tyre companies are expected to have around 80% of the industry revenues, according to ICRA.
As usual, the replacement market continues to have a bigger demand of around 65% in tonnage and 55% in unit terms against the OEMs segment, and the truck and bus replacements share is much higher at 80%.
The tyre industry revenues grew by a strong 16% YoY during 9M FY2019, aided by volume growth across OE, replacements and exports apart from improved realization with price hikes taken in key product segments. Growing volume in both OE and replacement and rising exports are likely to boost revenues of the industry, ICRA says.
On the margin front, operating and net margins stood at 13.3% (up 60 bps YoY) and 6.2% (up 15 bps YoY) respectively during 9M FY2019. Elevated prices of crude linked inputs had restricted margin expansion amid strong revenue growth. However, with oil prices cooling off in recent months, profit margins in Q4 FY2019 and Q1 FY2020 are expected to be strong although some rollbacks on the earlier price hikes had taken place in Q4 FY2019.
“For FY 2019, the tyre industry revenue growth is pegged at 14-15% with operating and net margins of about 14% and 7% respectively, almost in line with last year. For FY 2020-22, revenue growth is projected at 9-10% with operating and net margins at 14-15% and 6-7% respectively,” says K Srikumar, Vice President and Co-Head, Corporate Ratings, ICRA.
“ICRA expects the domestic tyre demand to grow by 7-9% over the next five years (FY2019-23). With stable demand outlook and strong credit profile, domestic tyre makers will continue to invest in capacities. Based on announcements, the industry is likely to witness a capacity addition of over Rs 200 billion in the next three years,” Srikumar adds.