ICRA: Stable demand from replacement and export segments support industry revenues; earnings affected by elevated input prices: ICRA

17 Jan 2022 , 01:29 PM

ICRA maintains its demand growth estimates of 13-15% YoY for FY2022 and 7-9% (CAGR between FY2022-25) for the Indian tyre industry. Following two years of contraction (down 9% each in FY2020 and FY2021) amidst sharp contraction in vehicle sales and Covid-19, tyre demand has recovered sharply in FY2022. However, the impact of the pandemic on tyre demand has been relatively less compared to other auto components. This is given its higher skew (~60%) on the after-market segment.

The tyre industry is relatively better protected from any potential impact of Omicron due to its large dependence on the stable replacement market and learnings from earlier waves.

For H1 FY2022, tyre demand grew by optically higher levels (~50% Y-o-Y) amid low base and for Q2 FY2022, the growth was 8.6% Y-o-Y on the back of a 9.3% growth in replacement segment and muted 1.5% growth in the OE segment.

With increasing acceptance of Indian tyres in the overseas markets, tyre exports from India have seen a sharp growth in the current year amidst healthy demand from destinations like the US and the European nations. Tyre imports continue to remain low on the back of Government regulations, thus favouring the domestic players.

Ms. Nithya Debbadi, Assistant Vice President and Sector Head, ICRA said, “Replacement volumes are at record-high levels with improving economic activities while OE sales are partly affected by the sluggish demand for two-wheelers and supply constraints impacting passenger vehicle production. ICRA’s sample of tyre manufacturers witnessed strong Y-o-Y growth of 25%, recording all-time high revenues in Q2 FY2022 on the back of favourable replacement and export sales volumes. Moreover, increase in realisations on the back of price hikes taken by the industry to offset the commodity inflation has also supported revenue growth.

We expect industry revenue growth of 16-20% in FY2022, driven by growth in volumes and realisations. While the demand is favourable, higher input prices (namely natural rubber and crude derivatives) keep industry margins and earnings under pressure. Though the industry has seen some price hikes, we expect a 400-600 bps contraction in the operating margins for FY2022, while it would still compare well with pre-Covid levels.”

As the demand outlook remains favourable, the tyre industry is seeing a revival in capex spend towards capacity additions. Based on the announcements, the capex spend is estimated at more than Rs. 20,000 crore over the next three years. While part of the capex shall be debt-funded, credit profiles of tyre manufacturers would be supported by healthy earnings and cash reserves. ICRA continues to maintain a Stable outlook on the sector.