Tyre Industry in Sweet Spot with favourable demand prospects : ICRA
The domestic 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 two years of weak growth and, for FY2019, the unit and tonnage growth is pegged at 8-8.5% and 6.5-7% respectively, as per an ICRA note.
Says Mr. Subrata Ray, Sr. Group Vice President, Corporate Sector ratings, ICRA, “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 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.”
Regarding tyre exports, the same have 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 realizations remained tepid; the pricing was constrained by softened RM prices. While overall tyre exports grew by 13% during FY2017, growth in exports to the top ten countries was higher at ~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 three 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 USA 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 USA 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 USA 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 Anti-dumping duty (ADD) by the Government of India on September 19, 2017 on import of new Chinese TBR (including tubeless) for five years, is likely to keep the imports lower going forward. China cornered a lion 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 next five 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 five years,” says Mr. Ray.
As for raw material prices impact on the industry, while there was an interim spike of 30% during Feb-Mar’17, the natural rubber (NR) prices have subsequently declined sharply and been trading at an average of Rs. 130 per kg during 9mFY2018, in line with FY2017 levels. Due to subdued demand, NR consumption increased by only 1.9% during 5mFY2018 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 9mFY2018. 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 three months.
WTI crude oil prices have increased to US$ 59.5/bbl in Dec’2017 (up ~20% since October 2017), primarily be attributed to geo-political tensions from countries like Iraq-Kurdistan, Libya and Nigeria, fears of sanctions on Iran by USA, expectations of extension of timeline for production cut back by OPEC and 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 ten quarters of subdued performance, the 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 realizations 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. Industry wide operating and net margins expanded by 670bps and 400bps Q-o-Q respectively.
ICRA expects the tyre industry (represented by ICRA’s sample of seven 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 five years FY18-22, the industry is expected to fund the same from the significant pile of accruals during the past three years, leading to a stable credit profile for the industry.