The production volume of Indian tyre makers is set to rise 6-8 percent YoY to a new high of 2.7 million tonne in FY2024, driven mainly by higher replacement demand, and steady demand from commercial vehicles and passenger vehicles says Crisil. This is despite the probability of a decline exports.
The ratings agency says the production volume growth this fiscal, while moderating from the 14 percent and 11 percent seen in FY2022 and FY2023, respectively, will still be higher than the decadal average of around 4 percent. The rising preference for personal mobility and recovery in CV volume drove a strong rebound in volume growth after the Covid-19 pandemic.
On the other hand, operating margin should see a sharp expansion of 300-400 basis points to 13-14 percent this fiscal due to softening prices of key raw materials, which are largely crude-linked. The higher profitability and moderate capital expenditure should improve their debt metrics this fiscal.
Tyre industry sees revenue of over Rs 85,000 crore
A Crisil Ratings analysis of India’s top 6 tyre manufacturers, accounting for around 80 percent of the sector’s Rs 85,000 crore revenue, indicates as much. The sector derives around 60 percent of its volume from the replacement market, around 30 percent from original equipment manufacturers (OEMs), and approximately 10 percent from exports.
Poonam Upadhyay, Director, CRISIL Ratings said, “We foresee 7-9 percent growth in replacement demand in the current fiscal, primarily from the CV segment. This follows continuing investments in infrastructure and enhanced bus fleet utilisation with workplaces seeing more people returning to office after the pandemic. Replacement demand will also find traction from high on-road stock of PVs and two-wheelers.”
Crisil expects the demand from OEMs to rise 6-8 percent on improvement in sales of two-wheelers, CVs, and PVs. On the other hand, demand from the tractor segment — which was buoyant last fiscal and sales volume reached an all-time high — is expected to be flattish because of high-base effect and monsoon vagaries.
Besides, exports — especially off-road for agriculture and construction activity, which account for bulk of exports — could decline by 4-6 percent due to weak demand from Europe and the United States.
However, manufacturers will benefit from lower prices of key raw materials this fiscal. Natural rubber and crude-linked inputs such as carbon black and nylon tyre cord account for 70 percent of their total cost. Last fiscal, prices of these raw materials were high until the third quarter, which curbed operating margin to around 10 percent.
Nitin Bansal, Associate Director, Crisil Ratings, “We expect operating margin in the 13-14 percent range this fiscal due to price hikes in some categories and moderation in the prices of key inputs and freight cost. But the decline in exports, which are typically more profitable, will limit further improvement. Yet, operating margin will be in line with the decadal average, and higher than the sub-10 percent seen in the past two fiscals.”
