It is expected that industry wide operating and net margins to contract by 200 bps and 300 bps, respectively, to 11-12% and 3.5-4.5%, respectively.
The ongoing demand slowdown in the automotive industry is expected to curtail the tyre industry’s revenue growth to 4% in FY20, rating agency Icra said on Tuesday.
The industry’s margins too are expected to weaken in the current fiscal due to slowdown, rising raw material costs and higher spend towards debt-funded capacity expansion.
Following two strong years of growth (12% and 14% in FY18 and FY19, respectively), tyre industry revenue is estimated to grow at a lower rate of 4% in FY20, affected by modest growth in original equipment (OE) tyre demand on the back of sluggish auto demand and expected moderation in tyre exports, Icra added.
Subdued vehicle production due to weak consumer sentiments amidst slowing economic activities, rising cost of vehicle ownership and softened rural demand will impact the tyre demand
Following a 6.7% growth in FY19, the domestic tyre demand is estimated to grow at a lower rate of 3% (volume) during FY20.
The replacement segment, which represent over 55% of industry volume, is likely to grow by 5% in FY20 (previous year 5.7%) while demand growth in OE segment is pegged at lower levels of 3% (PY: 7.8%) affected by subdued vehicle production in FY20. Beyond this, the domestic tyre demand is expected to grow by 6%-8% during FY20-24, the analysis pointed out.
It is expected that industry wide operating and net margins to contract by 200 bps and 300 bps, respectively, to 11-12% and 3.5-4.5%, respectively. The net margins will also be influenced by the rise in interest costs (on debt taken towards expansion in tyre capacities).
Based on the announcement of tyre makers, the industry is investing over `17,000 crore over next three years (ending FY22), part of which is funded through debt. Lower accruals amidst rising debt shall impact the industry RoCE levels and debt protection metrics during FY20-21. However, any scale down in capex by tyre makers shall restrict the moderation in debt metrics, Icra said further.
K Srikumar, vice-president and co-head, corporate ratings, Icra, said: “Going forward, the industry revenue growth is projected at 6-8% with operating and net margins at 12-13% and 4-5%, respectively, in the FY20-24 period. The industry capitalisation and coverage indicators are likely to remain comfortable over the long-term, although some moderation is expected in FY20-21.”
Apart from lower revenue growth, the industry earnings will also be affected by higher raw material (RM) prices. The RM price basket, which had softened in Q4 (down 5% q-o-q with fall in oil prices) rose by over 10% in Q1FY20 mainly due to 13% spike in natural rubber prices.