Production volume growth at tyre companies is set to halve to 6-8% this fiscal to ~2.5 million tonne, compared with 12-14% last fiscal. Demand will be driven by segments such as replacement, commercial and passenger vehicles (CVs and PVs), and exports.

The moderation will be because growth last fiscal had benefited disproportionately from the low-base effect created by the preceding two fiscals, when volume had contracted due to economic slowdown and the Covid-19 pandemic.

Operating margin should rise to ~12% this fiscal, up 200 basis points from last fiscal’s decadal low of ~10%, as price hikes ease the pressure of high raw material costs.

The credit profiles of tyre makers are expected to remain stable. Better cash accruals should help fund higher capital expenditure and keep debt metrics healthy, a Crisil Ratings analysis of India’s top six tyre makers, which account for ~80% of the Rs 75,000 crore revenue of the sector, shows.

The sector derives 60% of its volume¹ from the replacement market, 27% from original equipment manufacturers (OEMs), and the balance from exports.

Says Anuj Sethi, Senior Director, Crisil Ratings, “Demand from the replacement market is expected to normalise to ~4% growth this fiscal from ~12% last fiscal. OEM demand should grow ~12%, driven by CVs owing to higher government spending on infrastructure and improving fleet utilisation. OEM demand from PVs should be healthy given the rise in personal incomes and strong consumer preference for personal mobility. However, demand from the two-wheeler and tractor OEM segments will continue to be modest.”

Exports are seen growing 13-15% on a high base of over 45% growth last fiscal, because of cost-competitiveness, benefits of the China + 1 strategy of global OEMs, and buoyant demand for off-road tyres in the US and Europe.

Higher volume will be accompanied by expansion of operating margin by ~200 basis points (bps) to 12%, backed by price hikes in the first half to offset higher raw material costs, especially of natural rubber and crude-linked inputs.

In fiscal 2022, operating margins crimped to an estimated 10% — a level last seen in fiscal 2012 — as the price of natural rubber surged over 20%, and that of crude-based inputs such as carbon black and nylon tyre cord jumped 40-50%. These account for ~70% of the raw material cost of tyre makers. The increases were not completely passed on since demand was reviving after two weak years.

Capex is expected to rise to ~Rs 5,000 crore this fiscal given improving demand, compared with ~Rs 3,700 crore annually in the preceding two fiscals. With capacity utilisation still below 70-75%, capex this fiscal will be lower than the annual average of ~Rs 6,200 crore between 2018 and 2020.

Says Rajeswari Karthigeyan, Associate Director, Crisil Ratings, “Better accrual, along with higher revenue and operating margin, should support capex funding and keep balance sheets healthy, ensuring stable credit profiles for Crisil-rated tyre makers. This fiscal, we expect gearing and interest coverage ratios at ~0.5 time and 5-6 times, respectively, a tad better versus the 0.6 time and 4-5 times seen last fiscal.”

Further waves of the pandemic, continuing shortage of semiconductors — which can impact demand for PVs — and the trend in key raw material prices would bear watching.

¹ In tonnage terms