Indian tyre industry is expected to post a higher volume growth of 8-10% for FY2018. The growth says an ICRA research note will be supported by robust growth pick-up across all industry sub-segments. Automobile production in FY2018 is expected to rise strongly by 14%plus, up from 5.2% in FY2017 and 3.2% in FY2016. Thus a strong traction in OEM volumes during Apr’17-Jan’18 coupled with the traction in replacement markets post the Goods and Service Tax (GST) upheaval, the volume growth estimates for tyres has been scaled up from an earlier 7-8% to 8-10%.
Subrata Ray, Sr. Group Vice President, Corporate Sector ratings, ICRA said, “With stronger than expected volume uptick in M&HCV tyres (OEM and replacement segments), tyre tonnage demand is estimated to grow by ~8% (up from 7%). In unit terms, Truck and bus (T&B) replacement demand is expected to grow by 4-5% during FY2018, up from the 3% de-growth in FY2017, supported by pickup in infrastructure activity around the county. ICRA’s five-year volume estimations indicate that FY2019-20 would continue to be strong years for the industry. While radicalization in T&B would promote higher re-treading and therefore could lead to slower demand for new tyres, benefits from the visible trend towards higher tonnage multi-axle vehicles with increasing number of tyres will support T&B volumes.”
On the exports front, USA, Germany and the UAE continue to remain the key destinations while South American markets have shown a strong recovery. Exports (in volumes) grew by 12% during 8MFY2018, riding on the healthy demand across product segments, mainly premium tyres. Export volumes are estimated to grow by 10-12% for FY2018 and ~8-9% during FY2019-22 with favourable demand outlook and rising competitiveness of Indian tyre makers, both in terms of quality and pricing. However low cost Chinese tyres in overseas markets, especially post the removal of ADD by USA on Chinese tyres in February 2017, remains a key challenge.
As for imports, the same have declined by 31% (volume-wise) in FY2018 post demonetization and re-imposition of Anti-dumping duty (ADD) on import of new Chinese Truck and Bus radial (TBR) tyres. This is for a period of five years effective from September 18, 2017. In a further boost to the domestic TBR players, the customs duty on TBR imports has been increased from 10% (effective duty on imports from several countries under various free trade agreements results in a lower rate of 0-9%) to 15% in the Union Budget of 2018-19. The 500 bps increase in import duty will further curtail the import of Chinese TBR tyres thus benefiting the domestic T&B tyre manufacturers.
Capacity addition is likely to continue in the industry given the large cash balances, strong accrual position and favourable demand scenario. ICRA note says that players have lined up Rs. 25,000 crore of incremental capex plans over the next five years.
Industry revenues grew by a sharp 18.6% (Y-o-Y) during Q3FY2018 compared to 12.6% growth in the preceding quarter. While this comes on a fairly lower base (demonetisation impacting demand in Q3FY2017), the quarter also witnessed a strong growth in sales volumes across product categories, especially in the OE segments despite subdued realisations. As mentioned, this was on the back of sharp rise in exports, gradually declining imports and fading impact of GST related concerns.
Industry-wide operating margins had slipped sharply in Q1FY2018 to four-year lows of ~8% following the sudden spike in both domestic and global natural rubber (NR) prices and higher than normal NR stocking by auto OEs during Feb/March 2017. However, the margins improved in Q3FY2018 as NR prices have declined sharply in the last four months ending February 2018 and have remained range-bound at Rs. 125-130/kg. Global NR prices continue to trade at a discount of ~14% averaging at Rs. 117 per kg for 11MFY2018. Over the next three months, ICRA expects the domestic NR prices to trend in the range of Rs. 130-140 per kg.
Amongst other key inputs, the prices of crude derivatives have been gradually rising in recent months, albeit with a lag. After a 33% jump in crude oil priced between Oct-17 and Jan-18, the same have declined by ~5% in Feb-2018 with higher US shale oil production in recent months. The prices of synthetic rubber (SR) are up by 29%, carbon black (CB) up by 35%, and caprolactum by 14%. Overall, ICRA expects the prices of crude derivatives to rise by over 20% in Q4FY2018 due to the time lag effect of the oil prices increase and CB shortage issues. Further with the additional cess on customs duty of imported products, input costs on imported raw materials are expected to increase from April 2018, though it is expected to be largely passed on. Higher RM costs will impact the operating margins of players.
“We expect the industry (represented by ICRA’s sample of seven major tyre companies) to grow by 10-12% (value) during FY2018 supported by strong volumes from OEMs, price hikes (Jan-May’17), pick-up in replacement demand and benefits of the ADD implementation on Chinese TBR in Sept-17 which lead to a pickup in sales for domestic companies. Operating margins are estimated to contract to ~13% in FY2018 before stabilizing at ~14% during FY2019-22. Despite heavy capex in the coming five years (FY2018-22), 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,” Subrata Ray added.