With intense competition in the market place, tyre majors are of the opinion that the days of higher industry profit margins are most likely over. An expected hardening of raw material prices, plus excess capacity in the industry, would see a boost in competition. Moreover, the price hike, which the companies
announced, has not been absorbed by the market.
It is, therefore, critical for companies
to protect their turf in the commercial tyres and the two wheeler segments, which will be under severe pressure in the years to come. ATMA has also reported about investments of $5.5 billion (about Rs 36,000 crore) in additional capacity creations. This increase in capacity, coupled with growing Chinese imports, will put pressure on the tyre manufacturers.
In MRF's annual report, chairman and managing director K M Mammen said, "the Indian tyre industry
has endured a very turbulent year with economic volatility, further compounded by initiatives like demonetization and change over from BS III to BS IV norms."
MRF said that the outlook for the domestic tyre industry
looked stable in the short to medium term on the back of favourable demand in both the domestic and export markets.
The company believes that issue of raw material cost escalation, especially of natural rubber, is here to stay for some time, which will affect operational margins for a while in the foreseeable future. As far as demand is concerned, the company said, a near-normal monsoon in 2016-17 and investments in the core and infrastructure segments, coupled with a 7.2% annual growth in GDP are likely to have a positive impact on the tyre industry
in the short to medium term.
The positive sentiment shown by the infrastructure and rural sectors in recent months will have an impact on demand in the tyre industry, both for the original equipment and the replacement markets.
"However, the days of higher industry profit margins are most likely behind us and the expected hardening of raw material prices coupled with excess capacity in the industry will see competition intensifying in the market place," said MRF.
said that in the last four years, the industry has invested around Rs 42,000 crore in capacity and technology.
Satish Sharma, chairman of the Automotive Tyre Manufacturers' Association (ATMA) and president (Asia-Pacific, Middle East and Africa) at Apollo Tyres, said that raw material accounts nearly 60 per cent of the revenue. Since December, raw material prices rose and companies
tried passing it on to the customers but they were not absorbed fully.
He noted, between December and April alone, raw material prices rose by 25 per cent.
Adding to this burden, cheap Chinese import
continues to affect the domestic tyre industry
in the Truck Bus Radial (TBR) segment. "We don't have level playing field in India and we are not able to understand Chinese tyre pricing also," said Sharma.