Tyre makers are likely to witness a 6-7 percent volume growth over the next three years, largely driven by two-wheelers and tractors coupled with growing replacement sales in the commercial vehicles segment, says a report.
The optimism comes from a likely 9 percent revenue growth in the current fiscal year if Monsoon behave the way it has been projected, and 6-7 percent volume growth, a report by rating agency Icra said.
But it warned that this will not result in better bottomlines as operating margins are expected to contract by 250-300 bps with a modest increase in raw material prices, hike in wages and increased fixed costs with large capacities getting commissioned.
Last fiscal saw rising cheap imports pulling down revenue of seven major tyre companies by 2 percent, led by a 6-8 percent fall in realisations, despite volume growth of 4-5 percent last fiscal year. This also came on top of a 15 percent fall in input costs, primarily natural rubber prices in 2015-16, which gave a whopping 470 bps operating margin expansion to 19.1 percent.
Tyre makers have invested Rs 20,000 crore to build new capacities in truck & bus radial (TBR) and twowheeler segments between FY2010 and FY2016, the report said but noted that rising imports of cheap Chinese tyres and uncertain input price trends have put the industry in a spot forcing them to consolidate operations and optimally utilise these new capacities and have decided not to add any new capacity.
On top of it, projects worth over Rs 8,000 crore are expected to be completed over the next 12 months which should help tyre makers gear up to meet the likely rise in demand.
"The TBR segment has seen huge capacity additions over the last five-six years--this segment may get impacted if imports from China increases further," Subrata Ray, senior group vice-president at Icra Ratings, warned.
"Following an outlay of Rs 3,900 crore in 2015-16, the tyre industry is expected to witness a cumulative spend of Rs 8,600 crore in the next three years. But given the large cash balances, net debt position is expected to be moderate and capitalisation and coverage indicators are expected to remain healthy and so will be the overall credit profile.
Key headwinds include slower than expected demand growth, any sharp increase in raw material prices and intensifying competition from China", he warned.
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