The credit profile of Indian tyre industry is likely to weaken in FY2020
due to the ongoing slowdown in domestic automotive industry, observes ICRA.
Rising raw material (RM) prices and higher spends over debt-funded capacity
expansion are affecting growth of the industry. Though, the long-term outlook of
the industry credit profile is stable, believed ICRA.
K Srikumar, Vice President & Co-Head-Corporate
Ratings, ICRA Ltd, said, “Following two years of strong growth (12
and 14 per cent in FY2018 and FY2019 respectively), tyre industry revenue is
estimated to grow at a lower rate of 3-4 per cent in FY2020, affected by modest
growth in OE tyre demand on the back of sluggish auto demand and expected
moderation in tyre exports.”
According to ICRA, subdued vehicle production due to weak consumer
sentiments amid slowing economic activities, rising cost of vehicle ownership
and softened rural demand, will impact the tyre demand in FY2020. Following a
6.7 per cent growth in FY2019, the domestic tyre demand is estimated to grow at
a lower rate of 3-4 per cent (volume) during FY2020.
The replacement segment, which represent over 55 per cent of industry
volumes, is likely to grow by 5-6 per cent in FY2020. Meanwhile, the demand
growth in the original equipment (OE) segment is pegged at lower levels of 2-3
per cent affected by subdued vehicle production in FY2020. Beyond this, the
domestic tyre demand is expected to grow by 6-8 per cent during FY2020-24.
Apart from lower revenue growth, the industry earnings will also be
affected by higher raw material (RM) prices. The RM price basket, which had
softened in Q4 (down 5 per cent Q-o-Q with fall in oil prices) rose by over 10
per cent in Q1 FY2020 mainly due to 13 per cent spike in natural rubber (NR)
prices during this period.
ICRA expects industry wide operating and net margins to contract by 200
bps and 300 bps respectively to 11-12 per cent and 3.5-4.5 per cent
respectively. The net margins will also be influenced by the rise in interest
costs (on debt taken towards expansion in tyre capacities).
Based on the announcement of tyre makers, the industry is investing over
Rs. 17,000 crore over next three years (ending FY2022), part of which is funded
through debt. Lower accruals amid rising debt shall impact the industry RoCE
levels and debt protection metrics during FY2020/21. However, any scale down in
capex by tyre makers shall restrict the moderation in debt metrics.
“Going forward, the industry revenue growth
is projected at 6-8 per cent with operating and net margins at 12-13
per cent and 4-5 per cent respectively, in the period FY2020-24. The
industry capitalisation and coverage indicators are likely to remain
comfortable over the long-term, although some moderation is expected in