Tyre output to rise 47%, with Rs 17,500-crore capex

Loan servicing, increasing input costs to keep margins under pressure.

Encouraged by immense growth in demand from the automobile sector, tyre makers have prepared Rs 17,500 crore worth of plans to raise production capacity in the next two years. This would raise the domestic manufacturing capacity 47 per cent, from 122 million tyres in 2009-10 to around 180 million tyres by 2012-13.

Michelin, the leading French manufacturer, has a Rs 4,000-crore investment plan for India, to raise capacity in its Chennai facility. This is scheduled to be completed by 2012. MRF, Ceat and Apollo also have a mega investment plan (see table).

In line with demand trends, the truck and bus radial (TBR) segment is expected to attract the highest share of investments (over half) over the next three years, followed by the passenger car tyre (PCR) segment. Given the strong demand expectations from the domestic auto industry and the possibility of some delays in project implementation, utilisation levels are expected to remain high over the medium term, especially in the TBR segment.

Coupled with the expected margin pressure from raw material inflation, these expansion projects are likely to result in depressed cash flows, higher leverage and subdued return on capital over the next few years, an Icra report added.

Vehicle sales have seen significant increase in the first quarter of the current calendar year. For example, Audi, the German luxury car manufacturer, reported 210 per cent growth in car sales in March over the corresponding monthlast year. It had 107 per cent growth for the March quarter.

The outlook for the domestic automobile industry remains robust, supported by strong growth in the economy, favourable demographic profile and rising disposable income. India’s growing importance as an automotive export hub for small cars is another key demand driver for tyres. In2009-10, India manufactured 3.5 million vehicles (29 per cent growth); 10.5 million two-wheelers (25 per cent growth); 440,000 tractors (29 per cent growth) and 45,000 mining and construction equipment.

Unlike other emerging markets, the Indian tyre industry is dominated by domestic participants (barring the presence of Bridgestone and Goodyear in the passenger car segment), which cater to 85 per cent of the domestic requirement. The premium charged by international participants for their relatively superior products has found limited acceptance in the highly price-sensitive markets, especially owing to the poor road conditions which curb the benefits of these tyres in terms of higher durability, lower emissions and safety.

With the industry pumping enormous funds to increase capacities, capital structures are likely to witness some deterioration. Rising raw material costs, as well as higher interest and depreciation charges, are likely to keep the industry profitability under pressure over the medium term, in spite of the strong growth potential.