The tyre demand growth forecast for the domestic market for FY24 will be at 6-8% YoY, on the back of favourable demand from the original equipment manufacturer (OEM) segment and expected revival in replacements, ICRA said.
According to the independent and professional investment Information and Credit Rating Agency, an improved product mix and range-bound input costs are expected to increase margins by 200-300 bps in FY24.
The OEM segment is expected to grow by 7-9% YoY in the current fiscal based on favourable prospects for most product categories.
Supply Chain
Easing of supply-related headwinds, preference for personal mobility, and rising disposable income of consumers are likely to support passenger vehicle (PV) demand. Commercial Vehicles (CV) 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 research agency noted that 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 expects mid-single-digit growth in the replacement segment in FY24. Following two years of pent-up demand and increased prices, volume growth will likely stabilise in the year. The demand was 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.
Exports
Tyre export volumes contracted by 7% YoY in FY23 owing to reduced demand from key markets due to economic slowdown and inflationary pressure. The agency expects the export demand to remain subdued for the next couple of quarters.
Nithya Debbadi, Assistant Vice President and Sector Head – Corporate Ratings, ICRA, said, “Following a sharp 26% expansion in FY22, revenues of the domestic tyre industry (consolidated for ICRA’s sample of seven leading tyre manufacturers) witnessed a healthy 19.5% growth in FY23. 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% YoY in FY24, led by a 6-8% YoY growth in domestic tyre demand, likely decline in exports, and flat average realisations.'
The operating and net margins of the industry stood at ~11% and ~4%, respectively, in FY23. The margins, which were affected by elevated input prices and rising freight costs in FY22 and H1FY23, 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,” Debbadi added.
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 moderate the pace of supply addition in the near term. Nevertheless, over the medium term, the industry will continue investing in capacity addition, research and development activities related to tyre quality improvement, and 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, the report added.
NB: Featured photo courtesy: JK Tyre
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