The sharp recovery of OEM tyre demand, low base effect, need for personal mobility, and healthy rural cash flow will keep the growth story of the tyre industry intact. According to ICRA, the tyre industry is poised to grow at 13-15% in FY22.
The research agency also expects domestic tyre demand to increase at a CAGR of 7-9% (in units) between FY22 and FY25, aided by stable replacement demand, a pick-up in OEM demand and exports.
Srikumar Krishnamurthy, Vice President and Co-Group Head, ICRA, said, “Tyre demand has been relatively more resilient compared to other auto components as the replacement demand in the tyre industry insulates it from cyclicality to a large extent. Vehicle production fell by ~13-15% in the last two years (ending FY21) on account of weak consumer sentiments and subdued economic activities, while domestic tyre demand contracted by ~8%.
In line with the overall auto industry, tyre demand contracted sharply in Q1 FY21 due to the nationwide lockdown, but recovery in tyre demand was stronger and faster as tyre volumes reached the pre-COVID levels in Q2 FY21 and witnessed a healthy growth in the subsequent two quarters.
Exports, which constitute nearly one-fifth of the tyre industry’s revenues, grew by ~10% in value and ~8% in volume terms in FY21 after a marginal contraction in FY20.
Healthy demand from top export destinations such as the US and the European nations supported exports in FY21, primarily led by the agri-construction segment.
Going forward, tyre exports are expected to be supported by increased acceptance of Indian tyres.
Imports, on the other hand, declined by ~77% in volume terms and ~51% in value terms in FY21 as the Director-General of Foreign Trade (DGFT) placed all categories of tyre imports under the restricted category (against free category earlier), thus necessitating DGFT’s permission for all tyre imports.
According to Nithya Debbadi, Assistant Vice President and Sector Head, ICRA, Tyre manufacturers recorded all-time high revenues in Q4 FY21 as the pent-up demand in the urban markets and favourable rural demand supported volume growth. Realisations increased on the back of price hikes by the industry players to offset increased raw material costs. The operating margins of tyre manufacturers touched record high levels of ~20% in Q2 and Q3 FY21, against the levels of 13-14% in FY20 on the back of favourable input prices, especially crude-linked derivatives.
ICRA highlighted that raw material prices rose sharply in H2 FY21, led mainly by increased oil prices. As a result, the margins would remain under pressure in H1 FY22. The extent of contraction would depend on the industry’s ability to pass on the increased input costs to customers.
With improving domestic and exports demand, CAPEX executions have resumed in the last few months after a hiatus. Based on projected demand growth, ICRA estimates a capital expenditure of over ~INR 20,000 crore between FY22 and FY25, which would be partly debt-funded. Nevertheless, the credit profiles of tyre manufacturers would be supported by healthy earnings and cash reserves. The rating agency continues to maintain a 'Stable' outlook on the Indian tyre industry.