ICRA has come out with its report on Indian tyre industry. The research firm, expects the subdued conditions in the domestic auto industry and the weak export outlook to the EU to curb demand growth in 2012-13 and Indian tyre industry revenues to grow by ~13-14% during 2012-13.
Impact of demand slowdown on profitability partly offset by softer input costs
Demand contraction results in deceleration in sales growth
- Subdued OEM demand, modest replacement demand and relatively muted exports affect the sales growth of the domestic tyre industry during current fiscal. Price hikes were possible only to the extent of 1.5-2.5% with dropping input costs. But the profitability was supported by sharp depreciation in the INR (against USD) despite relatively muted export volumes
- Global tyre industry also witnessed significant contraction in volumes during the first nine months of CY 2012, led by falling replacement demand in major geographies.
Steady decline in input costs boosts margins
- Natural rubber prices trending downwards during the past 18 months; prices currently hover at ~Rs. 162 per kg. Prices of other key inputs, which are largely crude dependant, have also softened in the past few months, in line with the drop in crude prices.
- Lower input costs have resulted in margin expansion for many tyre players; although landed cost for imported raw material was impacted by the depreciating INR.
Capacity additions continue on the radial segment
- Over last two years, cross ply tyres gives way to more advanced radial tyres, especially in the M&HCV segment
- Domestic tyre capacities grew by over 16% on a compounded basis during the last three years (FY 10-12).
- Capacities worth Rs. 35.9 billion were commissioned during 2011-12 and the industry stands poised for an incremental investment of Rs. 54.2 billion during 2012-13; however ICRA expects spillage of this capacity addition to the ensuing fiscal owing to the ongoing demand slowdown in auto industry.
- Industry wide operating margins have expanded (y-o-y) / (or) have been stable (q-o-q) during Q1, 2012-13 to touch 10.3% supported by favourable input costs.
- Net margins moderated by 40 bps on a q-o-q basis to 3.4% with rise in fixed costs. With the industry in an expansion mode, significant debt funded capacities are coming on line. Apart from the higher fixed costs, with bulk of capacities coming up in radial (T&B) tyres, pricing pressure is set to intensify in the next 2-3 years.
Short term outlook
- Consensus opines that the falling raw material prices are a positive for the industry, with demand playing the spoilsport.
- ICRA expects the subdued conditions in the domestic auto industry and the weak export outlook to the EU to curb demand growth in 2012-13. Volume growth in the OEM segment expected to taper off to ~4.5-5.0% while the replacement demand estimated to grow by 5-7%.
- Despite contraction in OEM demand, with modest replacement demand and strong export revenues, ICRA expects the Indian tyre industry revenues to grow by ~13-14% during 2012-13.
- On the margin front, ICRA expects stable margins for the industry with support from moderating input costs, better product mix-higher share of non-truck and replacement demand although increasing share of OEM T&B radials, which are currently underpriced in the market, shall impact the margins.
Medium term outlook
- In line with ICRA’s view for the automotive industry, we expect tyre demand to revive over the medium term.
- Over the next three years, ICRA expects the expansion in industry margins to be driven by the following critical factors -
1. Kick off of replacement demand for truck & bus radials (TBR); which provides a significant upside to margins and industry wide boost to return indicators.
2. Addition of large TBR capacities; expected to intensify competition and create a demand supply imbalance in the coming 2-3 years. ICRA expects these additional TBR capacities to be employed gainfully by 2015/16. As the demand-supply skew inverts, tyre companies will experience a fillip to margins.
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