21 Apr 2022 , 01:25 PM
Following two years of contraction led by slowdown in auto sector and Covid-19 pandemic, tyre demand witnessed a recovery in FY2022 with an estimated growth of 11-13% Y-o-Y. OE demand was affected by weak 2W sales, lower PV production due to supply-side issues (semiconductor chip shortages), and high base limiting growth in tractor demand. Replacement demand was strong across product segments although there were headwinds in Q3 FY2022 in commercial segments due to factors like inflationary costs trends, weak rural sentiments, base effect etc.
Ms. Nithya Debbadi, Assistant Vice President and Sector Head, ICRA says, “Tyre industry revenues (consolidated for ICRA’s sample of tyre manufacturers) continue to breach record high levels supported by growth in domestic demand and exports and increased realisations. While domestic demand was relatively subdued in Q3 FY2022, industry revenues grew by 12.5% (Y-o-Y) supported by higher realisations. However, the industry margins continued to contract sharply amidst significant inflation in input and freight costs. While the industry has seen some price hikes, we expect the operating margin to contract by 600-800 bps YoY for FY2022. Given the elevated levels of raw material prices, margins are expected to remain under pressure for the next two quarters as well despite the price hikes by most tyre manufacturers in the recent months.”
Tyre exports from India have seen a robust growth in FY2022 supported by healthy demand from key export destinations such as the US and European nations. ICRA expects prospects for tyre exports to remain favourable in the medium term give the increasing acceptance of Indian tyres in the international markets. Tyre imports continue to remain low, supported by favourable Government regulations.
Tyre industry has been investing around 10% of its revenues in capacity expansion over the past few years. ICRA expects industry to continue to invest ~10-12% of the revenues in the medium term. While part of the capex shall be debt-funded, credit profiles of tyre manufacturers would be supported by healthy earnings and cash reserves.
Nevertheless, the industry is expected to adopt a wait and watch strategy in the near term towards new capex announcements given the uncertainty on earnings amidst the high-cost inflation.
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