Favourable de­mand prospects for tyre in­dus­try: ICRA

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The In­dian tyre in­dus­try is ex­pected to post vol­umes growth of 7-8% to 1,805 lakh tyres dur­ing FY2018, de­spite the weak vol­umes dur­ing Q1 and part of Q2 dur­ing GST roll-out. In ton­nage terms, tyre de­mand is es­ti­mated to grow by 7% dur­ing FY2018 sup­ported by pick-up in T&B re­place­ment de­mand af­ter over 2 years of weak growth and; for FY2019, the unit and ton­nage growth is pegged at 8-8.5% and 6.5-7% re­spec­tively, says an ICRA note.

Subrata Ray, Se­nior Group Vice Pres­i­dent, Cor­po­rate Sec­tor rat­ings, ICRA said, “Tyre vol­umes across all the com­mer­cial seg­ments de-grew dur­ing H1FY18 due to Goods and Ser­vice Tax (GST) im­ple­men­ta­tion which im­pacted Q1FY2018 de­mand due to de-stock­ing by deal­ers. How­ever, bar­ring this short-term aber­ra­tion, the do­mes­tic tyre de­mand has re­mained favourable dur­ing the year and is likely to re­cover in H2FY2018. Fur­ther a re­bound in au­to­mo­tive pro­duc­tion across prod­uct seg­ments is ex­pected to have a cas­cad­ing im­pact on orig­i­nal equip­ment (OE) tyre de­mand dur­ing the year.”

Tyre ex­ports re­mained strong for the se­cond straight year, led by re­vival in de­mand across prod­uct seg­ments. Fol­low­ing a 27.5% growth in FY2017, ex­ports vol­ume in­creased by 14.1% dur­ing H1FY2018. In value terms, the growth in ex­ports came a bit lower at 13.3% as re­al­i­sa­tions re­mained tepid; the pric­ing was con­strained by soft­ened raw ma­te­rial prices. While over­all tyre ex­ports grew by 13% dur­ing FY2017, growth in ex­ports to the top 10 coun­tries was higher to 18% aided by steady de­mand in most of the re­gions, bar­ring UAE and Philip­pines. Tyre ex­ports are es­ti­mated to grow by 10% in FY2018 and by 8-10% over the next 3 years led by sta­ble de­mand and in­creased ac­cep­tance of In­dian tyres in over­seas mar­kets, both in terms of qual­ity and pric­ing. How­ever, with ris­ing pen­e­tra­tion of low cost Chi­nese tyres in over­seas mar­kets, es­pe­cially post the re­moval of anti-dump­ing duty (ADD) by the US on Chi­nese tyres in Fe­bru­ary 2017, com­pe­ti­tion from China (both in terms of vol­umes and pric­ing) will re­main a key chal­lenge.

Fol­low­ing the ADD im­po­si­tion on Chi­nese tyres by the US in FY2015 and re­moval of ADD on Chi­nese tyre im­ports to In­dia in FY2015, TBR tyre im­ports to In­dia had wit­nessed a sharp growth in FY2016 and FY2017. How­ever, due to the de­mon­eti­sa­tion ef­fect and with the US rul­ing out ADD on Chi­nese tyres in Fe­bru­ary 2017, tyre im­ports have de-grown by 10.5% (in value terms) and 2.0% (in vol­ume terms) dur­ing H1 FY2018. This apart, the re-im­po­si­tion of ADD by In­dia on Septem­ber 19,

2017 on im­port of new Chi­nese TBR (in­clud­ing tube­less) for 5 years, is likely to keep the im­ports lower go­ing for­ward. China cor­nered a lion’s share with 90% of TBR tyres orig­i­nat­ing from China in FY2017. With the com­pet­i­tive­ness of Chi­nese play­ers di­min­ish­ing post ADD, it pro­vides level play­ing field for In­dian T&B tyre mak­ers.

“ICRA ex­pects the ca­pac­ity ad­di­tion in the in­dus­try to con­tinue over the next 5 years given the large cash bal­ances, strong ac­crual po­si­tion and favourable de­mand sce­nario. Capex in­vest­ments are likely to con­tinue with planned Rs. 25,000 crore of in­vest­ments spread across the next 5 years,” Ray said.

As for raw ma­te­rial prices im­pact on the in­dus­try, while there was an in­terim spike of 30% dur­ing Fe­bru­ary-March’17, the nat­u­ral rub­ber (NR) prices have sub­se­quently de­clined sharply and been trad­ing at an av­er­age of Rs. 130 per kg dur­ing FY2018, in line with FY2017 lev­els. Due to sub­dued de­mand, NR con­sump­tion in­creased by only 1.9% dur­ing FY2018 vis-à-vis a 5.7% rise in pro­duc­tion lev­els. Global NR prices con­tinue to trade at a dis­count of 10% av­er­ag­ing at Rs. 118 per kg dur­ing FY2018. Slow­ing de­mand from China, USA and Ja­pan cou­pled with higher out­put have kept the global prices lower. Against a 4.7% Y-o-Y in­crease in pro­duc­tion, the global NR con­sump­tion in­creased by just 1.2% dur­ing the pe­riod Jan­uary to Novem­ber 2017. Global NR prices are ex­pected to in­crease by over 15% and do­mes­tic NR prices to trend in the range of Rs. 135 -145 per kg over the next 3 months.

Crude oil price in­crease to US$ 59.5/bbl in De­cem­ber 2017 (up 20% since Oc­to­ber 2017), can pri­mar­ily be at­trib­uted to geopo­lit­i­cal ten­sions in coun­tries like Iraq-Kur­dis­tan, Libya and Nige­ria, fears of sanc­tions on Iran by the US, ex­pec­ta­tions of ex­ten­sion of time­line for pro­duc­tion cut back by OPEC and a few non-OPEC coun­tries and the re­cent higher-than-an­tic­i­pated global de­mand growth of petroleum prod­ucts. ICRA ex­pects the prices of crude de­riv­a­tives to in­crease by 15-20% in­Q4FY2018 due to the time lag ef­fect of the 20% spike in oil prices dur­ing Oct-Dec’17.

Fol­low­ing 10 quar­ters of sub­dued per­for­mance, the tyre in­dus­try rev­enues grew by a sharp 12.6% dur­ing Q2FY2018. The growth was fu­elled by strong vol­umes across prod­uct cat­e­gories, es­pe­cially in the OE seg­ments, even as re­al­i­sa­tions re­mained weak. With fall­ing im­ports, T&B tyre de­mand re­cov­ered sharply while LCV and mo­tor­cy­cle tyre sales vol­umes were sup­ported by good farm out­put. Sta­ble PV and scooter tyre de­mand, rise in OTR tyre ex­ports and pent-up re­place­ment de­mand across prod­uct cat­e­gories (post GST re­lated is­sues) fur­ther sup­ported the growth in vol­umes dur­ing the quar­ter.

On the mar­gin front, with the soft­en­ing of RM prices since April 2017, the in­dus­try re­cov­ered back to its nor­mal lev­els of mar­gins in Q2FY2018 fol­low­ing an ex­cep­tion­ally weak per­for­mance in the pre­ced­ing quar­ter. Nev­er­the­less, Q2 mar­gins are still lower than FY2017 level (con­sid­ered one of the best years for tyre in­dus­try), due to steep cor­rec­tion in RM prices. In­dus­try­wide op­er­at­ing and net mar­gins ex­panded by 670bps and 400bps Q-o-Q re­spec­tively.

ICRA ex­pects the tyre in­dus­try (rep­re­sented by ICRA’s sam­ple of 7 ma­jor tyre com­pa­nies) to post 8-10% growth dur­ing FY18-22. While price cuts dur­ing 9MFY17, capped rev­enues dur­ing FY2017, price hikes be­tween Jan-May’17 cou­pled with mod­est vol­ume growth is ex­pected to sup­port a 7-8% rev­enue growth dur­ing FY2018; dur­ing H1FY18, the in­dus­try posted 6.7% growth in rev­enues. De­spite heavy capex in the com­ing 5 years FY18-22, the in­dus­try is ex­pected to fund the same from the sig­nif­i­cant pile of ac­cru­als dur­ing the past 3 years, lead­ing to a sta­ble credit pro­file for the in­dus­try.

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