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Automotive Product Finder Magazine | Tyre industry rolling on the back of technology
Tyre industry rolling on the back of technology
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There have been mammoth capacity additions in the Indian tyre industry in the last one decade with a cumulative spend of Rs 278 billion, of which 70 per cent was spent in the last six years. With tyre demand remaining beneficial, an upward movement is anticipated in terms of supply addition in the industry, says Neellohit Banerjee.
The tyre industry in India plays a relevant role in the automotive sector. Its contribution to the manufacturing GDP is 3 per cent and 0.5 per cent to the total GDP. Following a 5.5 per cent growth in FY2018, tyre demand is estimated to grow by 9-11 per cent in FY2019 supported by stable OE demand and sharp recovery in replacement demand. In FY2019, the domestic tyre industry benefited from strong growth in both original equipment (OE) and replacement segments. While there have been some headwinds like Kerala floods, tightened financing, insurance related regulatory changes impacting two-wheeler (2W) demand, rising fuel and interest costs etc., the YTD sales growth across most segments have been robust leading to healthy OE tyre demand growth. Replacement tyre demand too has recovered sharply in the last one year supported by post-effects of Goods and Service tax (GST), pick-up in infrastructure activities, and healthy consumption driven demand.
For 9M FY2019, industry revenues grew by over 15 per cent YoY with healthy tyre demand (both domestic and exports) and increase in realisations. “However, increase in scale has not translated to a large expansion in operating margins (flat at ~13 per cent) because of higher costs of raw materials, especially crude linked derivatives like synthetic rubber, carbon black etc. We expect the margins to improve in Q4 FY2019 as the prices of these raw materials have declined in last 2-3 months, in line with crude. For FY2019, the tyre industry revenue growth is pegged at ~15 per cent with operating and net margins of ~14 per cent and 7 per cent respectively, almost in line with last year,” says K Srikumar, Vice President and Co-Head, Corporate Ratings, ICRA Ltd.
Tyre exports from India have been steadily increasing in the last one year with recovery in tyre demand from overseas markets and rising competitiveness of Indian tyre makers, both in terms of quality and pricing. Tyre imports have dwindled in the last one year following the re-imposition of Anti-dumping duty (ADD) on import of new Chinese Truck and Bus radial (TBR) tyres, for a period of five years effective from September 18, 2017 and increase in customs duty by 500 bps to 15 per cent, effective April 1, 2018. This has supported the domestic TBR players as the large capacities added in recent years are now being effectively utilised.
There has been mammoth capacity additions in the Indian tyre industry in the last one decade with a cumulative spend of Rs 278 billion, of which 70 per cent was spent in the last six years. With tyre demand remaining beneficial, there will be an upward movement in terms of supply addition in the industry. Based on the announcements, tyre industry is likely to see a capacity addition of Rs 200 billion over the next five years.
While tyre demand has been favourable, the industry margins have come under pressure in recent times. Between April to September 2018, domestic natural rubber (NR) prices were trading at Rs 120-134 per kg, however, the prices of crude derivatives like synthetic rubber, carbon black, rubber chemicals, etc. increased sharply due to increase in oil prices. Accordingly, there was a fall in industry profit margins by 120 bps in Q2 FY2019 YoY. But with current NR prices being largely stable at around Rs120/kg levels and crude oil prices crashing by over 30 per cent in the last two months, the industry margins are expected to improve in H2 FY2019.
Indian tyre market is clearly skewed towards the replacement segment which contributes 70 per cent of total revenues. Whereas in volume terms, the replacement segment contributes 60 per cent, indicating realisations in the after-market are clearly higher than OEMs’ market. “Share of replacement segment is estimated at 67 per cent of the total tyre market (in tonnage terms) in FY2019. Segment-wise, share of replacements in commercial vehicles is high at 77 per cent, followed by passenger vehicles at 57 per cent, tractors at 52 per cent and 2/3 wheelers is 50 per cent,” shares Srikumar.
In the last one decade, the domestic tyre industry has witnessed significant investments in R&D with specific focus on safety, lower emissions and higher fuel efficiency. One of the key innovations in tyre technology is radial tyres, which provides benefits like enhanced lifespan, better mileage and durability. “While radialisation levels in passenger vehicle segment is high at 98 per cent, it is low in commercial vehicles at 47 per cent. That said, this was less than 10 per cent a decade back reflecting increasing awareness of the same supported by large investments by tyre makers in radial segment. We expect the investments in radial tyres to continue resulting in increasing pace of radialisation,” reveals Srikumar.
Another pathbreaking introduction is the low rolling resistance tyre, which brings down fuel consumption. “If every car in India starts fitting this tyre, it can save upto 5-10 per cent of the fuel. Even if 5 per cent is saved, and if there is a $100-billion worth import of crude, it reduces expenditure by $5 billion,” says Sanjay Mathur, General Manager, Pirelli Tires.
As it is there is a lot of noise in the cities in India, and no matter at what speed a vehicle is moving, there is a certain level of noise that is produced. That can come down when low noise producing tyres are fitted on vehicles. Another impressive technology is the run-flat tyres. In the eventuality of a flat tyre or a puncture, the vehicle can reach its destination without the tyre being replaced, since it has got some amount of air and a self-supporting system.
“We are one of the top players in that particular segment. You will find it in most of the BMW cars, and some of the Mercedes cars in India. These cars have an air pressure monitoring system that informs about the lack of air in the tyre. After that, one can run the car at a speed of 80 km/hr and upto a maximum distance of 80 kms. Even though run flat was developed around 15 years back, we have lately developed something new. We have developed a self-seal inside the tyre, which does not let the air pressure reduce even if there is puncture in a tyre,” elaborates Mathur.
This is a 3-4 year old technology which is yet to come to India. The reason why it is not coming to India is because of the higher cost. “If people spend a little more money, it will provide convenience to the user,” says Mathur. This is something that is going to be there in the future, and in Europe, 25-30 per cent of the vehicles are shifting over to this technology.
Amidst continued investments towards capacity additions (partly being debt funded), the liquidity position, capitalisation and coverage indicators of the industry players are expected to remain comfortable, largely supported by the stable earnings and healthy cash reserves available with most of the players. “Tyre demand is estimated to grow by 7-9 per cent over the next five years (FY2019-23) supported by favourable outlook for the domestic automotive industry,” believes Srikumar.
We expect the investments in radial tyres to continue resulting in increasing pace of radialisation.”
- K Srikumar, Vice President and Co-Head, Corporate Ratings, ICRA Ltd
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