The tyre industry is poised to grow by around 15% in terms of production and sales during this fiscal backed by healthy domestic demand and a modest recovery in exports. This is despite conflicting expectations in terms of demand recovery, stated Icra Management Consultancy Services (IMaCS), a wholly-owned subsidiary of Icra.
Though radialisation and imports are impacting revenues and margins of the prominent players, expected high growth in the replacement market is likely to result in stable margins.
IMaCS has predicted an increase in domestic demand for tyres on account of a steady growth in almost all segments of the automobile industry even as volatility in prices of rubber and other derivatives of crude oil remains a concern.
During the nine months period of FY’10, operating income of listed tyre companies increased 12.8% (y-o-y) to Rs 14,174 crore. Though operating income y-o-y growth was healthy at 21% in Q1 FY ’09, it decelerated sharply thereafter till Q1 FY’10. However, operating income increased at a higher rate of 13% (y-o-y) in Q1 FY ?10 and 18% in Q3 FY?10. Operating margins declined sharply in Q2 FY ?09 and Q3 FY?09 because of increase in input and employee costs. However, margins improved from Q4 FY ?09 onwards because of moderation in input costs.
A close scrutiny of the financials of eight major tyre manufacturing companies shows that while their collective operating income was Rs 18,800 crore in FY09, in the five year period FY04-FY09 increases in raw material costs and selling costs have impacted operating margins.
Lower interest costs till FY2007-09 resulted in an improvement in net margins. Subsequently, net profit margins have declined because of lower operating margins and increased interest and depreciation costs.
According to IMaCS study, the growth in tyre production for OEMs would dependent on automotive production, which is expected to grow at a healthy rate in FY2010. CV production has increased substantially in FY2010, largely because of the base effect.
By comparison, given the low levels of penetration of two-wheelers and passenger cars in the country and the recent excise duty cuts, domestic supply to these segments is likely to increase at modest rates of 17% and 18%, respectively in FY2011.
While radialisation has become the norm in the passenger car segment, acceptance in the bus and truck tyre segment is still limited. Bus and truck radialisation could emerge in the country in the long term as the quality of roads improves and the restrictions on overloading are better enforced. The prospects of tyre exports from India appear modest, following efforts by Indian companies to increasingly enter into outsourcing agreements with tyre producers in South-east Asia, Eastern Europe and Latin America.