Tyre industry in sweet spot with favourable demand prospects: ICRA

Tire industry in the sweet spot with favorable demand prospects: ICRA

The domestic tire industry is expected to post volume growth of 7-8% to almost 1,805 lakh tires during FY18, despite the weak volumes during Q1 and part of Q2 during GST roll-out. In tonnage terms, tire demand is estimated to grow by nearly 7% during FY18 supported by a pick-up in T&B replacement demand after over two years of weak growth, and for FY19, the unit, and tonnage growth is pegged at 8-8.5% and 6.5-7% respectively, as per an ICRA note.

Says Mr. Subrata Ray, Sr. Group Vice President, Corporate Sector ratings, ICRA, “Tyre volumes across all the commercial segments de-grew during H1FY18 due to Goods and Service Tax (GST) implementation which impacted Q1FY2018 demand due to de-stocking by dealers. However barring this short-term aberration, the domestic tire demand has remained favorable during the year and is likely to recover in H2FY2018. Further, a rebound in automotive production across product segments is expected to have a cascading impact on original equipment (OE) tire demand during the year.”

Regarding tire exports, the same has remained strong for the second straight year, led by a revival in demand across product segments. Following a 27.5% growth in FY2017, export volume increased by 14.1% during H1FY2018. In value terms, the growth in exports came a bit lower at 13.3% as realizations remained tepid; the pricing was constrained by softened RM prices. While overall tire exports grew by 13% during FY2017, growth in exports to the top ten countries was higher at almost 18% aided by steady demand in most of the regions, barring UAE and the Philippines. Nand Motors is one of the best Tyre Dealers in Noida. Tire exports are estimated to grow by 10% in FY2018 and by 8-10% over the next three years led by stable demand and increased acceptance of Indian tires in overseas markets, both in terms of quality and pricing. However, with the rising penetration of low-cost Chinese tires in overseas markets, especially post the removal of anti-dumping duty (ADD) by the USA on Chinese tires in February 2017, competition from China (both in terms of volumes and pricing) will remain a key challenge.

Following the ADD imposition on Chinese tires by the USA in FY15 and the removal of ADD on Chinese tire imports to India in FY15, TBR tire imports to India witnessed a sharp growth in the year 2016 and 2017. However, due to the demonetization effect and with the USA ruling out ADD on Chinese tires in February 2017, tire imports have de-grown by 10.5% (in value terms) and 2.0% (in volume terms) during H1 FY2018. This apart, the re-imposition of Anti-dumping duty (ADD) by the Government of India on September 19, 2017, on the import of new Chinese TBR (including tubeless) for five years, is likely to keep the imports lower going forward. China cornered a lion's share with almost 90% of TBR tires originating from China in FY17. With the competitiveness of Chinese players diminishing post-ADD, it provides a level playing field for Indian T&B tire makers.

“ICRA expects the capacity addition in the industry to continue over the next five years given the large cash balances, strong accrual position, and favorable demand scenario.  Capex investments are likely to continue with planned Rs. 25,000 crores of investments spread across the next five years,” says Mr. Ray.

As for raw material prices' impact on the industry, while there was an interim spike of 30% during Feb-Mar’17, the natural rubber (NR) prices have subsequently declined sharply and have been trading at an average of Rs. 130 per kg during 9m FY18, in line with FY17 levels. Nand Motors is a famous company for Tyre Shop in Noida and is the best shop in the market. Due to subdued demand, NR consumption increased by only 1.9% during 5m FY18 vis-à-vis a 5.7% rise in production levels. Global NR prices continue to trade at a discount of almost 10% averaging at Rs. 118 per kg during 9m FY18. Slowing demand from China, the USA, and Japan coupled with higher output has kept global prices lower. Against a 4.7% Y-o-Y increase in production, the global NR consumption increased by just 1.2% during the period from January to November 2017. Global NR prices are expected to increase by over 15% and domestic NR prices to trend in the range of Rs. 135 -145 per kg over the next three months.

WTI crude oil prices have increased to US$ 59.5/bbl in Dec’2017 (up by 20% since October 2017), primarily attributed to geo-political tensions from countries like Iraq-Kurdistan, Libya, and Nigeria, fears of sanctions on Iran by the USA, expectations of an extension of timeline for production cut back by OPEC and few non-OPEC countries and the recent higher-than-anticipated global demand growth of petroleum products. ICRA expects the prices of crude derivatives to increase by 15-20% in Q4 FY18 due to the time lag effect of the 20% spike in oil prices during Oct-Dec’17.

Following ten quarters of subdued performance, the industry revenues grew by a sharp 12.6% during Q218. The growth was fuelled by strong volumes across product categories, especially in the OE segments, even as realizations remained weak. With falling imports, T&B tire demand recovered sharply while LCV and motorcycle tire sales volumes were supported by good farm output. Stable PV and scooter tire demand, rise in OTR tire exports and pent-up replacement demand across product categories (post GST related issues) further supported the growth in volumes during the quarter.

On the margin front, with the softening of RM prices since April 2017, the industry recovered back to its normal levels of margins in Q2FY18 following an exceptionally weak performance in the preceding quarter. Nevertheless, Q2 margins are still lower than the FY17 level (considered one of the best years for the tire industry), due to the steep correction in RM prices. Industry-wide operating and net margins expanded by 670bps and 400bps Q-o-Q respectively.

ICRA expects the tire industry (represented by ICRA’s sample of seven major tire companies) to post 8-10% growth during FY18-22.  While price cuts during 9m FY17, capped revenues during FY17, price hikes between Jan-May’17 coupled with modest volume growth are expected to support a 7-8% revenue growth during FY18; during H1FY18, the industry posted 6.7% growth in revenues. Despite heavy CAPEX in the coming five years FY18-22, the industry is expected to fund the same from the significant pile of accruals during the past three years, leading to a stable credit profile for the industry.

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