Tyre industry to grow 8-10 per cent in FY2018

Buoyant on a robust growth across all industry sub-segments, the Indian tyre industry is expected to post a higher volume growth of 8-10 per cent for FY2018, according to a research note by ICRA.

Automobile production in FY2018 is expected to rise strongly by 14 per cent, up from 5.2 per cent in FY2017 and 3.2 per cent in FY2016. Thus a strong traction in Original Equipment Manufacturer (OEM) volumes during April 2017 to January 2018 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 per cent to 8-10 per cent.

''With stronger than expected volume uptick in M&HCV tyres (OEM and replacement segments), tyre tonnage demand is estimated to grow by about 8 per cent (up from 7 per cent). In unit terms, Truck and Bus (T&B) replacement demand is expected to grow by 4-5 per cent during FY2018, up from the 3 per cent de-growth in FY2017, supported by pickup in infrastructure activity around the county,'' said Subrata Ray, Senior Group Vice President, Corporate Sector ratings at ICRA.

''ICRA's five-year volume estimations indicate that FY2019-20 would continue to be strong years for the industry,'' he said.

''While radialisation 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,'' he added.

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 per cent during 8 months of FY2018, riding on the healthy demand across product segments, mainly premium tyres.

Export volumes are estimated to grow by 10-12 per cent for FY2018 and about 8-9 per cent 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 per cent (volume-wise) in FY2018 post demonetisation 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 per cent (effective duty on imports from several countries under various free trade agreements results in a lower rate of 0-9 per cent) to 15 per cent 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 per cent (Y-o-Y) during Q3FY2018 compared with 12.6 per cent 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.

''We expect the industry (represented by ICRA's sample of seven major tyre companies) to grow by 10-12 per cent (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 about 13 per cent in FY2018 before stabilising at about 14 per cent 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,'' Ray added.