Research agency ICRA says an uptick in rural expenditure along with a good monsoon would translate into higher OEM demand for the rural-centric two-wheeler and tractor segments.
04 Jul 2016 | 4518 Views | By Autocar Pro News Desk
Thanks to a broad-based revival in automotive OE demand, the domestic tyre industry is likely to see 6-7% volume growth. Research agency ICRA says an uptick in rural expenditure along with a good monsoon would translate into higher OEM demand for the rural-centric two-wheeler and tractor segments.
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Thanks to a broad-based revival in automotive OE demand, the domestic tyre industry is likely to see 6-7% volume growth. Research agency ICRA says an uptick in rural expenditure along with a good monsoon would translate into higher OEM demand for the rural-centric two-wheeler and tractor segments.
A growing fleet on ground and higher miles driven/freight moved would drive replacement sales.
Over the past decade or so, domestic tyre makers have invested significant amounts in new capacities in the truck and bus radial (TBR) and two-wheeler segments. As a result, between FY2010 and FY2016, the industry witnessed the completion of investments worth over Rs 20,000 crore. However, with the increasing influx of cheaper Chinese tyres and uncertain input price trends, the industry 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. Meanwhile, projects worth over Rs 8,000 crore billion (with capex undertaken 2-3 years ago) 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 truck and bus radial segment has seen Rs 35,000 crore worth of capacities over the last five to six years – this segment may get impacted if imports from China increases further,” said Subrata Ray, senior group vice-president, ICRA Ratings.
As per ICRA research estimates, revenues in the domestic tyre industry de-grew by 2%, led by a 6-8% fall in realisations although volumes grew by 4-5%. The industry benefited significantly from the fall in input costs; natural rubber prices fell by 15% during FY 2016 leading to a 470 bps operating margin expansion to 19.1%. This was despite the increase in employee expenses.
“While industry-wide revenues are expected to grow by 9% during FY2017, supported by around 6-7% 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.
“Following an outlay of Rs 3,900 crore in FY2016, the tyre industry is expected to witness a cumulative spend of Rs 8,600 crore in the next three years (FY17-19). However, 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,” concluded Ray.