Subrata Ray, Senior Group Vice President, ICRA, in an exclusive interview with HUNED CONTRACTOR, elaborates on the organisation's status report on tyre industry.
What are the growth projections for the tyre industry in India?
Sluggish OEM demand in segments like motorcycles, tractors, and light commercial vehicles on the back of weak agricultural activity and consequent subdued rural demand; and tepid infrastructural activity resulted in a muted 0-2 per cent growth in domestic tyre production during FY16. However, with an expected broad-based revival in OE demand and economic activity, and a likely improvement in rural demand, ICRA expects the domestic tyre demand to grow by 4-6 per cent over the next two years, i.e., FY16-18. In the truck and bus (T&B) segment, tyre demand from the OE segment remained strong (about 24 per cent) during FY16 while replacement demand was impacted (de-growth of about 1 per cent) by deluge of imports (about 75 per cent growth) in the country. In the passenger vehicle (PV) segment, both the OEM (7.2 per cent) and replacement (8.8 per cent) demand was strong in FY16, compared to FY15.
What are the new technologies being introduced to match safety standards?
Labelling of tyres is a relatively recent phenomenon which requires tyre makers to imprint stickers on a tyre or a leaflet to be accompanied with the tyre package indicating wet braking performance (for safety) and environmental impact (rolling resistance, external noise, etc). These measures have been introduced not only to improve safety but also to promote energy efficiency. While India is currently playing 'catch up' to these standards, several domestic manufacturers have already introduced tyres with labelling, in anticipation of introduction of such measures in India as well.
What is the status of tyre imports? How will this pan out in the coming years?
Tyre imports have been on a rise for the last two years; up by 17 per cent in FY15 and 12-14 per cent for FY16e. Product wise, T&B contributes 15 per cent of imports, PVs about 53 per cent, two-wheelers (2W) about 26 per cent and the rest are made up of other segments. Specific to FY16, imports was higher in the 2W and truck and bus radials (TBR) segment; two-wheelers on capacity constraints in the local market and TBR post the February 2015 sunset of an anti-dumping duty (ADD) against China. We expect imports to stabilise over the next two years on the back of commercialisation of large-scale domestic 2W capacities, which would substitute the 2W imports. Any re-imposition of ADD would be beneficial for the domestic TBR industry.
Does the Indian tyre industry have significant exports?
Exports, which contribute to around 20 per cent of the Indian tyre industry, has been increasing in the last five years; up from Rs 34.4 billion in FY10 to Rs 97.9 billion in FY15. However, with the slowdown in global automotive demand and dumping of tyres by China in various countries, exports from India is estimated to have declined by 13-15 per cent for FY16. Key export destinations are USA, Germany, Philippines, UAE and the Netherlands and the top 10 nations account for approximately 44 per cent of total exports, reflecting moderate diversity.
Which are the top five tyre manufacturers in India?
Based on the revenues (standalone), the top five tyre manufacturers are MRF Ltd, Apollo Ltd, JK Tyres Ltd, CEAT Ltd and Balkrishna Industries Ltd.
What is the status of smaller players?
The top five players mentioned above account for over 75 per cent of industry revenues. Other key players like TVS Srichakra, Goodyear, Bridgestone, etc, command healthy market share in the segments they operate, although they are not present in all segments. Small players in the industry account for a meagre 8 per cent and given the strong incumbents, they continue to be periphery players.
How are the raw material prices affecting the production?
The key raw materials for tyre manufacture are natural rubber, synthetic rubber, carbon black, and rubber chemicals. Barring natural rubber, all other raw materials are crude derivatives and hence their prices are correlated to the movement in crude oil prices, albeit with a time lag. With the steep fall in crude oil prices over the last 15 months, the prices of crude derivatives also fell considerably. The domestic price of natural rubber too has been falling sharply with subdued automotive demand and declining international prices. The fall in domestic natural rubber prices to seven-year low has led to a steady fall in tapping as realisations are unfavourable amidst rising production costs. For FY16, natural rubber production in India is estimated to reach 5.5 lakh MT, the levels last seen two decades back. With better natural rubber availability globally, the supply gap is increasingly met through imports.
How are duties and taxes impacting the industry?
The tyre industry currently suffers from an inverted duty structure, whereby a duty of 25 per cent or Rs 30 per kg, whichever is lower, is levied on import of natural rubber (raw material) as compared to the rate of 10 per cent or lesser (in the case of South Asian Free Trade Area agreement) on import of tyres (finished product).
Are tyre companies planning on capacity addition in 2016?
Keeping pace with the expectation of rising demand, tyre manufacturers have continued to invest heavily in capacity expansion. According to our estimates, the next 12-18 months are likely to witness completion of projects worth over Rs 90 billion (investments spread across previous years) followed by another Rs 80 billion in the subsequent 12 months - across a broad range of product segments. Most of these projects, particularly in the two-wheeler segment, have been in the works for over 3-4 years; recent announcements include the setting up of a 2W plant by global major Maxxis in Sanand (Gujarat) for Rs 26 billion, Kesoram's Rs 8 billion capex in Balasore (Odisha) on PV tyres and MRF's capex of Rs 12 billion in Perambalur (Tamil Nadu).
Are there any game-changers in the pipeline?
At present, the domestic tyre industry is witnessing a surge in radialisation of T&B tyres, led by marketing efforts of tyre makers as well as increasing adoption by truck makers/fleet operators given cost benefit advantages (namely better mileage and longer life). As against 5 per cent in FY08, the T&B radialisation currently stands at 39 per cent, with bulk of the growth coming in the last 3-4 years. We expect this trend to intensify over the next 3-5 years, with radialisation levels crossing 65-70 per cent, aligning with global trends.
This has large implications for the industry as the transformation leads to redundant bias capacities (currently making up 75 per cent of the total installed T&B domestic capacities).
How tyre makers tackle this change - either through conversion of bias capacities to other product categories or greater focus on exports would be a key trend to look out for. Introduction of radial
tyres in two-wheelers has also been a recent phenomenon, which could potentially
open up a new growth segment for