Lower input prices to lift operating margins; strong cash accruals to buoy debt metrics.
06 Sep 2023 | 3778 Views | By Autocar Pro News Desk
Indian tyre makers' production volume is expected to climb 6-8 percent year on year to a new high of 2.7 million tonnes in FY2024, driven mostly by higher replacement demand and consistent demand from commercial vehicles (CVs) and passenger vehicles (PVs). However, exports could see a decline, as per the ...
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Indian tyre makers' production volume is expected to climb 6-8 percent year on year to a new high of 2.7 million tonnes in FY2024, driven mostly by higher replacement demand and consistent demand from commercial vehicles (CVs) and passenger vehicles (PVs). However, exports could see a decline, as per the latest update released by rating agency CRISIL.
While production volume growth will be lower this fiscal year than in fiscal years 2022 and 2023, it will still be greater than the decadal average of 4 percent. Rising personal mobility preferences and commercial vehicle volume recovery drove a considerable increase in volume following the Covid-19 epidemic.
Due to the softening prices of key raw materials, which are mostly linked to crude, operating margins should see a sharp expansion of 300-400 basis points to 13–14 percent this fiscal year. Their higher profitability and moderate capital expenditure should improve their debt metrics this fiscal year.
A CRISIL Ratings analysis of India’s top six tyre manufacturers who account for 80 percent of the sector’s Rs 85,000 crore revenue, indicates as much. The sector derives 60 percent of its volume from the replacement market, 30 percent from original equipment manufacturers (OEMs), and 10 percent from exports.
Poonam Upadhyay, Director, CRISIL Ratings said: “We foresee 7-9 percent growth in replacement demand in the current fiscal year, primarily from the CV segment. This follows continuing investments in infrastructure and enhanced bus fleet utilisation, with workplaces seeing more people returning to office after the pandemic. Replacement demand will also find traction from the high on-road stock of passenger vehicles and two-wheelers.”
Demand from OEMs is expected to rise by 6-8 percent on rising sales of two-wheelers, CVs, and PVs.
On the other hand, demand from the tractor segment — which was buoyant last fiscal and sales volume reached an all-time high — is expected to be flattish because of high-base effect and monsoon vagaries.
Besides, exports, especially off-road machine used for agriculture and construction activity, which account for the bulk of exports could decline by 4-6 percent due to weak demand from Europe and the United States.
However, manufacturers will benefit from lower prices for key raw materials this fiscal year. Natural rubber and crude-linked inputs such as carbon black and nylon tyre cord account for 70 percent of their total cost. Last fiscal year, prices of these raw materials were high until the third quarter, which curbed the operating margin to 10 percent.
Nitin Bansal, Associate Director, CRISIL Ratings, “We expect operating margins in the 13–14 percent range this fiscal year due to price hikes in some categories and moderation in the prices of key inputs and freight costs. But the decline in exports, which are typically more profitable, will limit further improvement. Yet, operating margin will be in line with the decadal average and higher than the sub-10 percent seen in the past two fiscals.”
According to CRISIL, with capacity utilisation at 75–80 percent, tyre makers are expected to incur capital expenditure mainly towards maintenance and debottlenecking. The rating agency expects the sector’s capital expenditure to be at Rs 4,000 crore this fiscal, compared with Rs 4,500 crore on average in the preceding three fiscals.
Stronger cash accrual, riding on higher volumes and profitability, will help temper the need for significant debt funding from Capex, leading to improved debt metrics. Gearing is expected to improve to 0.4 times as of March 31, 2024, from 0.6 times as of March 31, 2023, and the interest coverage ratio to 6-7 times this fiscal from 4-5 times last fiscal. That said, any surge in raw material prices and lower demand due to inadequate monsoons can change the equation.