Based on the OEM demand growth and trends observed in the industry till date, ICRA scales down its earlier estimates for total tyre volume growth for 2013-14 to 2-4 percent due to the higher than anticipated weakness in the passenger car and Truck & Bus (T&B) segments, says ICRA in its latest study on Indian Tyre Industry. The tonnage growth is likely to be a shade weaker as the larger T&B OEM tyre segment posts declines. This muted volume growth in the tyre industry comes after two consecutive years of weak demand of 5 percent and -2 percent during 2011-12 and 2012-13 respectively. In H1, 2013-14 industry volumes are estimated to have been witnessed a marginal uptick.
Automotive industry growth revised downwards marginally from ~1-1.2 percent growth to flat growth for 2013-14 with CVs, MCEs and PVs dragging down volumes even as tractors continued their positive trend. ICRA expects the Indian automotive industry to post flat volume growths during 2013-14. ICRA's market check indicates limited scope for any uptick in OEM demand over the next 6-8 months.
Overall ICRA estimates the domestic tyre demand from the OEM segment to be largely flat (0 percent to -3 percent de-growth) for the second consecutive year during 2013-14, with contraction across all segments barring scooters and tractors while we estimate replacement tyre volume demand during 2013-14 to grow by 5-6 percent, following a 2 percent decline in 2012-13. The continued decline in the M&HCV industry and delayed replacement of vehicles by fleet owners is expected to translate into higher replacement demand for consumables like tyres in this segment. Further, we believe that coming on the heels of the replacement tyre demand decline of the previous year, there is pent up replacement demand in the two-wheeler and tractor segment, says ICRA in the report.
According to the report, ICRA's forecasts estimate a ~1-3 percent growth in industry revenues during 2013-14 to Rs. 454.0 billion and further by ~6-7 percent during 2014-15. While the demand outlook for 2013-14 continues to be modest, operating margins are expected to post a ~190-200 bps expansion during 2013-14 supported by a softer raw material scenario and higher export realizations. Companies which can tweak their product mix, by increasing focusing on the relatively high margin non T&B and export segments are likely to post relatively healthier margins. The operating margin however would remain vulnerable to raw material price trends and competitive pressures (in view of large capacity additions).
During the first half of the current fiscal, global tyre demand was positive; with the outlook remaining strong, tyre exports from India is expected to be healthy during 2013-14. Further, the sharp depreciation in the INR is expected to have supported revenues and exports considerably, despite the re-pricing of contracts seen post the sharp slide in INR. ICRA expects tyre export from India to grow by ~10 percent (in volume terms) during 2013-14.
Based on current announcement, industry wide capex is set to moderate to Rs. 77.0 billion during 2013-16 as against ~Rs. 120 billion spent during 2010-13. However given the large cash build up in the industry, ICRA expects more announcements on capital expenditure to flow in the coming quarters. Some of the major projects which are likely to witness completion in the near term are Falcon's Rs. 5.7 billion plant at Haridwar, Yokohoma's Rs. 9.7 billion plant at Bahadurgarh and ATC Tires' Rs. 6 billion plant at Jhagadia Gujarat. With incremental TBR capacities being commissioned over the medium term (2-3 years), during the transitioning phase from bias to radial, ICRA anticipates supply glut in the industry, which could result in pricing pressures.
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