Credit rating agency ICRA has maintained its domestic tyre demand growth forecast for FY2024 at 6-8 percent YoY on the back of favourable demand from the original equipment manufacturer (OEM) segment and expected revival in replacements.
It finds that an improved product mix and range-bound input costs are expected to enhance the margins by 200-300 bps in FY2024.
The OEM segment is expected to grow by 7-9 percent YoY in FY2024 on the back of favourable prospects for most of the product categories. Easing of supply-related headwinds, preference for personal mobility, and rising disposable income of consumers are likely to support passenger vehicle demand. Commercial Vehicles demand continues to be supported by infrastructure and construction activities, although some sluggishness was seen in Q1 with pre-buying ahead of BS6 2.0 emission norms transition.
The demand recovery in the two-wheelers segment has been gradual, and the momentum in the next few quarters will depend on the monsoon performance.
ICRA says it expects mid-single-digit growth in the replacement segment in or FY2024. Following two years of pent-up demand and an increase in prices, volume growth is likely to witness some stabilisation in FY2024.
The demand has been subdued to some extent in the last 2-3 months, although the same is likely to recover with improving urban and rural sentiments. However, the impact of an unfavourable monsoon distribution and El Nino occurrence on rural demand will remain under focus.
Growth outlook
ICRA finds that tyre export volumes contracted by 7 percent YoY in FY2023 owing to reduced demand from key markets on the back of economic slowdown and inflationary pressure. It expects the export demand to remain subdued for the next couple of quarters.
Nithya Debbadi, Assistant VP and Sector Head – Corporate Ratings, ICRA, said: “Following a sharp 26 percent expansion in FY2022, revenues of the domestic tyre industry (consolidated for ICRA’s sample of seven leading tyre manufacturers) witnessed a healthy 19.5 percent growth in FY2023. This was supported by strong demand from the OEMs, moderate replacement demand, and favourable realisations on the back of a better product mix and pass-through of the increase in raw material prices. We expect the revenue growth to moderate to 5-7 percent YoY in FY2024, led by a 6-8 percent YoY growth in domestic tyre demand, likely decline in exports, and flat average realisations.”
She further states that the operating and net margins of the industry came at around 11 percent and 4 percent, respectively, in FY2023. The margins, which were affected by elevated input prices and rising freight costs in FY2022 and H1 FY2023, have witnessed a sharp recovery in H2 with softening of prices of natural rubber and crude oil derivatives since July 2022.
“ICRA expects the margins to expand by 200-300 bps in FY2024 amid better product mix and range-bound input costs, thus supporting the overall earnings profile of industry players,” added Debbadi.
Capacity utilisation
Going forward, on the supply side, capacities added in the last year are gradually being utilised. This coupled with the expectation of lower growth in domestic tyre demand (compared to the last two years) and weak export demand, will result in some moderation in the pace of supply addition in the near term.
Furthermore, over the medium term, it expects the industry to continue to invest in capacity addition and research and development activities related to tyre quality improvement, along with opportunities around vehicle electrification. While a portion of the capex would be funded by debt, the credit profiles of tyre manufacturers will be supported by healthy earnings and cash reserves.
