Tyre Sector Volumes to Grow Around 7% in FY17

India Ratings and Research (Ind-Ra) expects the overall tyre volumes (in numbers) to grow around 7% in the FY17 (FY16 Ind-Ra estimates: around 4%) due to a steady demand from original equipment manufacturers (OEMs) and an improvement in replacement demand. However, revenue growth for sector companies might be lower than the overall growth in volume demand due to an increase in imports as well as pricing pressure.

Among the key segments, volumes in the truck & bus segment (T&B) are expected to grow around 4% yoy (FY16: around 1%) in FY17, driven by an improvement in replacement demand and strong growth in the T&B radial segment, while volumes in the passenger car radial segment are expected to grow around 10% yoy (FY16: around 8%) with growth in OEM auto volumes. Two-wheeler volumes are expected to grow around 6% yoy (FY16: around 4%) in FY17, driven by higher volume growth in the scooter segment (around 15%) along with an improvement in volumes in the motorcycle segment (around 3%). Ind-Ra expects volumes in the truck & bus radial segment to grow around 16% higher than the overall T&B segment. The growth in tonnage volume would be lower due to a higher contribution of low tonnage two-wheeler tyres (around 50%) to the overall volumes for the industry.

Rising imports trend could continue increasing the pressure on the volumes of domestic manufacturers in FY17. Import volumes in both passenger car radial and truck & bus radial segments grew 22% and 40% yoy, respectively, in 1QFY17. The T&B segment accounts for around 55% of the industry revenue and a continued increase in imports in this segment could lead to a revenue decline for domestic tyre companies. Domestic T&B production declined 2% yoy in FY16 to 16.8 million tyres, driven primarily by the decline in production in the truck & bus bias (TBB) segment. Ind-Ra's analysis indicates that 20%30% of the revenue of the top players in the industry is contributed by the TBB segment. Increased radialisation due to low-cost imports could lead to these companies seeing a rapid volume and revenue decline in this segment. Lower capacity utilisation of the existing domestic TBB capacity could exacerbate the pricing pressures in the segment.

The revenue growth of major tyre manufacturers is likely to be in the range of 3%-6% (FY16: below negative 2.5% to positive 2.5%) in FY17, with higher volume growth negating the year-on-year decline in pricing. Companies could see a moderation in EBITDA margins, due to the recent increase in input costs as well as pricing pressures. EBITDA margins reached historical peak levels in FY16. The recent increase in rubber prices is likely to impact the profitability of tyre companies on a quarterly basis. But, the trend of increase in prices is unlikely to be sustained and prices will stabilise at the current levels due to the prevailing rubber demand-supply dynamics. Crude oil prices have also increased from the low levels seen in February 2016, but are unlikely to increase further. Thus, tyre companies will not face increased input pressure over the next 12 months. Marginal deterioration in the credit profile is likely for some companies undertaking capex.

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