Tyre manufacturers are expected to achieve revenue growth of 7-8% this fiscal year, supported by a 3-4% increase in both realisations and volumes. This marks the second consecutive year of single-digit growth, though nearly double the growth seen last fiscal, following a robust compound annual growth rate (CAGR) of 21% between fiscals 2021 and 2023.
Realisation growth will unfold gradually, as tyre companies implement incremental price hikes to counter the rising cost of natural rubber, which accounts for nearly half of their raw material expenses. Meanwhile, volume growth will primarily be fueled by strong replacement demand.
The high natural rubber prices and limited ability to pass on these costs due to modest volume growth will pull operating profitability down ~300 basis points (bps) this fiscal. Cash flow, though moderately affected, will still be sizeable.
Strong balance sheets and gradual capacity expansion will keep the credit profiles of tyre makers stable. A CRISIL Ratings analysis of the top six tyre makers, which account for ~87% of the industry’s revenue, indicates as much.
Says Anuj Sethi, Senior Director, CRISIL Ratings, “Domestic demand accounts for ~75% of the industry’s sales (in tonnage terms), while the rest is exported. About two-thirds of the domestic demand is from the replacement segment and the rest is from original equipment manufacturers (OEMs). This fiscal, replacement demand, mainly from commercial and passenger vehicles, will drive volume growth, while OEM demand is expected to rise only 1-2% due to slow growth in commercial vehicle sales.”
On the exports front, growth is expected to be muted at 2-3% this fiscal due to weak demand in key markets such as North America and Europe, which make up about 60% of India’s total exports. Moreover, supply-chain disruptions due to geopolitical concerns have led to higher freight costs and longer transit times, weighing on export demand.
With increased freight costs and the rise in natural rubber prices being passed on only partially due to modest demand, operating profitability of tyre makers will drop to ~13% this fiscal from ~16% last fiscal.
The sharp rise in natural rubber prices (see chart in annexure) is due to a global shortage caused by inclement weather in major producing countries such as Thailand and Vietnam, which account for about half of the global production.
The other key raw materials in tyre production, such as nylon tyre cord, carbon black, styrene butadiene rubber and poly-butadiene rubber, are derivatives of crude oil and, hence, subject to price fluctuations.
Says Naren Kartic.K, Associate Director, CRISIL Ratings, “To support domestic tyre manufacturers, the Indian government has extended the countervailing duty on Chinese radial tyres for five years to ease competition. Plus, given the sluggish demand and pressure on operating margins, tyre makers are implementing appropriate price increases and prudent capital expenditure to ensure that capital efficiencies remain satisfactory. With capacity utilisation at ~80%, tyre manufacturers rated by us are investing ~Rs 5,500 crore this fiscal, slightly lower than last fiscal, with a focus on necessary capacity enhancements and debottlenecking.”
Prudent capex and healthy cash generation will obviate significant debt addition, resulting in stable credit profiles. Gearing and interest coverage are seen at ~0.3 times and 7-8 times, respectively, similar to last fiscal.
Raw material prices, OEM demand, duty changes and Extended Producer Responsibilityregulations will bear watching.
 this fiscal. Despite this, cash flow will remain substantial, though moderately impacted.){kind=link}