ICRA expects the credit metrics of the Indian tyre industry to remain strong with industry-wide revenue growth estimated at 4%-6% for FY 2017 as against 2%-4% de-growth estimated for FY 2016, says ICRA in its latest research update on Indian Tyre Industry.
Following a 15% volume growth in FY 2015, domestic tyre demand is estimated to grow by a muted 0%-2% during FY 2016 supported by 2%-2.5% growth in the Original Equipment Manufacturer (OEM) segment and 1%-1.25% growth in the replacement segment. Continued weakness in OE demand in certain key segments, weak agricultural activity and consequent subdued rural demand; and relatively muted infrastructural activity for most of the year affected tyre demand during FY 2016.
Domestic tyre production was also affected by the deluge in tyre imports (up 12%-14% FY16e) and falling exports (down 13%-15% FY16e). Imports of two-wheeler and Truck and Bus radials (TBR) surged; two-wheelers on capacity constraints in the local market and TBR post the February-15 sunset of an Anti dumping Duty (ADD) against China. With an expected broad based revival in OE demand and economic activity in the country, and likely improvement in rural demand given the weak base, ICRA expects the domestic tyre demand to grow by 4%-6% over the next three years (FY2016-18).
Continued softness in input material prices: natural rubber (NR) and crude oil, has kept the industry profit margins at elevated levels throughout FY16. With the build-up of accruals and expectation of demand improvement, tyre manufacturers are expected to continue to invest towards capacity expansions, particularly in the two wheelers (2W) segment which suffers from capacity shortage. Around 60% of the proposed capacity additions (in volume terms) are focused on the 2W industry, while in value terms over 45% of the investments are being made in the TBR segment.
With expected improvement in demand, industry wide revenues are expected to grow over the next 12-18 months despite the fall in prices with the expected on-streaming of ongoing capacity addition in the industry. Profit margins are likely to remain at elevated levels with bearish outlook on rubber and crude oil prices, but current levels are unlikely to be sustained over the next 12-18 months.
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