Driven by a strong demand for vehicles across all segments, an overall recovery in macro economic factors and underlying structural demands are expected to propel tyre industry growth. The industry is expected to register a 9% to 10% compounded annual growth rate (CAGR) in volume during FY 2010-12.
Supported by industry?s 90% operating capacity utilisation levels, the tyre industry growth will be primarily driven by 9% CAGR in replacement market, followed by 10% CAGR in original equipment manufacturer and around 12% CAGR in exports during the said period, said an Angel Securities analysis.
Consequently, the installed capacity of the industry is expected to grow from an estimated 3,948 tonne per day to 5,113 tonne per day by 2012. The overall expected investment by the industry will be around Rs 6,000 crore during this period, said the analysis. Tyre majors such as MRF, Apollo, JK Tyres and Ceat have already drawn ambitious plans with the total investment of over 5,000 crore.
Barring temporary fluctuations in FY 2009, the auto industry has been witnessing a healthy growth in the last few years. Though the demand growth has now largely stabilised on a higher base, vehicle offtake momentum is likely to persist. Riding on the upstick on the auto sales, the tyre offtake from the OEMs has started picking up which will augur well for the tyre industry.
Moreover, the rising levels of industrial and agricultural production, infrastructure and road development, growing income levels and increasing propensity to consume are expected to keep the domestic vehicle as well as tyre momentum buoyant, the analysis pointed out.
The replacement segment, which constitutes 60% of the industry and a key focus area for the manufacturers due to higher margins, would continue to grow faster owing to the high growth in vehicle sales seen over the last few years.
The high capacity utilisation levels of around 90% over the last three to four years typically show the strong demand and constraints on the supply side. The greenfield and brownfield projects announced by the tyre majors would materialise in the next two years and major portion of the investments will be on radial tyre capacity expansions.
Amidst the continuous surge in natural rubber prices in the last five years, tyre companies have been maintaining their pricing discipline and managed to clock better margins at hike prices. Given the surging demand, higher utilisation levels and pricing discipline will enable tyre companies to pass on the input cost inflation going forward.
Though the sharp movement in average price of raw material, especially rubber, continues to maintain an inverse relationship with operating margins and can have an impact on the near-term profitability of the tyre companies, but on long-term the operating margins will improve with the increase in prices by around 8% to 10% during the same period.
The margins will improve also due to the increased focus on radial tyre manufacturing by the companies. The selling prices of radial tyres are about 20% higher than cross-ply ones.