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Indian tyre industry to grow 13%-15% in FY22: ICRA

Indian tyre industry to grow 13%-15% in FY22: ICRA

    Indian tyre industry to grow 13%-15% in FY22: ICRA

07 Jul, 2021

New Delhi: After two years of contraction the Indian tyre industry’s demand is estimated to grow at 13%-15% and 7%-9% (in tonnes) in FY22, aided by stable growth in both the original equipment manufacturer (OEM) and replacement segments.

A study by ICRA says that the growth will be aided by a sharp recovery in OEM tyre demand, lower base effect of FY21, improving pace of vaccination, continued preference for personal mobility and healthy rural cash flows amid a normal monsoon forecast.

Srikumar Krishnamurthy, vice president and co-group head, ICRA, said the tyre demand has been relatively more resilient than other auto components as the replacement demand in the tyre industry insulates it from cyclicality to a large extent.

"Vehicle production fell by 13%-15% in the past two years (ending FY21) on account of weak consumer sentiments and subdued economic activities while domestic tyre demand contracted by 8%. In line with the overall auto industry, tyre demand contracted sharply in Q1 FY21 due to the nationwide lockdown, but recovery in tyre demand was stronger and faster as tyre volumes reached the pre-Covid levels in Q2 FY21 and witnessed a healthy growth in the subsequent two quarters,” he added.

"Tyre manufacturers recorded all-time high revenues in Q4 FY21 as the pent-up demand in the urban markets and favourable rural demand supported volume growth. Nithya Debbadi, assistant vice president and sector head, ICRA"

Exports, the rating agency further said, which constitute nearly one-fifth of the tyre industry’s revenues, grew by 10% in value and 8% in volume terms in FY21 after a marginal contraction in FY20.

It also noted that healthy demand from top export destinations such as the US and the European nations supported exports in FY21, primarily led by Agri and construction segments.

Going forward, the ICRA study said, tyre exports are expected to be supported by increased acceptance of Indian tyres.

Imports, on the other hand, declined by 77% in volume terms and 51% in value terms in FY21 as the Director-General of Foreign Trade (DGFT) placed tyre imports under the restricted category (against free category earlier), thus necessitating DGFT’s permission for all tyre imports, the ICRA study said.

Nithya Debbadi, assistant vice president and sector head, ICRA, said tyre manufacturers recorded all-time high revenues in Q4 FY21 as the pent-up demand in the urban markets and favourable rural demand supported volume growth.

"Realisations increased on the back of price hikes by the industry players to offset the impact of increased raw material costs. The operating margins of tyre manufacturers touched record high levels of 20% in Q2 and Q3 FY21, against the levels of 13%-14% in FY20 on the back of favourable input prices, especially crude-linked derivatives," Debbadi explained.

However, she noted, raw material prices rose sharply in H2 FY2021, largely led by an increase in oil prices. "The margins would remain under pressure in H1 FY2022 as well given the elevated levels of raw material prices. The extent of contraction would depend on the industry’s ability to pass on the increased input costs to customers," Debbadi added.

While maintaining a stable outlook on the tyre industry, ICRA said, with improving domestic and export demand, Capex executions have resumed in the past few months after a hiatus.

Based on projected demand growth, ICRA estimates a capital expenditure of over INR 20,000 crore between FY2022 and FY2025, which would be partly debt-funded. Nevertheless, the credit profiles of tyre manufacturers would be supported by healthy earnings and cash reserves, the study said.


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