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INDIAN TYRE INDUSTRY

On a roll with improved tyre demand, rising margins and renewed capex plans

FEBRUARY 2015

Tyre Feature February 2015

INDIAN TYRE INDUSTRY

On a roll with improved tyre demand, rising margins and renewed capex plans

Industry Update | February 2015

Indian tyre industry benefits from improving auto demand sentiments and lower raw material costs
Sentiments improve with growth in M&HCV and two wheeler segments while demand for Passenger cars, LCV and tractors remain sluggish
The domestic automotive industry is witnessing a gradual recovery in 2014-15 following two years of demand slowdown because of weak economic activity,
rising inflation, poor consumption and tight liquidity constraints. The recovery has been primarily supported by the Two wheeler (2W) and Medium and
Heavy Commercial vehicle (M&HCV) segments while demand for Tractors, Light commercial vehicles (LCV) and Mining and construction equipment (MCE)
segments continue to remain weak. Buoyed by strong replacement demand, Two-wheeler volumes grew by a strong 11% YTD December 2014; performance
of scooters was especially robust at 28% while the high volume Motorcycle segment reported a modest 5.5% growth. Improvement in freight rates, good
replacement demand and a lower base have supported M&HCV sales growth (up 10.3% YTD December 2014) while LCV segment continues to experience
demand contraction (down 12.8% YTD December 2014) affected by significant capacity additions over past few years and constrained financing environment
amidst rising delinquencies. The Passenger vehicle (PV) segment saw a modest growth (up 3.7% YTD December 2014) aided largely by replacement demand
as demand arising from first-time buyers remained weak. Tractor demand saw a higher than expected de-growth (-6% YTD December 2014) and with the
peak quarter of Q4 unlikely to bring fresh demand, we expect the segment to de-grow by a sharp 9-10% for 2014-15.
A revival in investments in infrastructure and manufacturing space and overall economic upturn is likely to lead to a stronger demand for M&HCVs and
moderate recovery in MCE segment over the next 1-2 years even as LCV demand is likely to witness meaningful recovery only after 1-2 quarters. For the next
one year, Two-wheeler demand remains on track for healthy growth on the back of favourable demographics and moderate penetration while growth in
passenger cars segment is expected to revert to its long term growth trends as the underlying cyclical variables turn favourable. Tractor demand for next 1-2
quarters remains sluggish and growth from there on will hinge on the monsoons. Overall, ICRA expects the automotive industry to complete 2014-15 at
modest levels of 4-6%, but improving demand sentiments is likely to translate to a more broad-based growth in 2015-16.
Domestic tyre demand momentum (volumes) picks up in 2014-15; tonnage growth still modest with weak tractor, LCV and MCE demand
Following a 2% de-growth in 2012-13 and a muted 0-1% growth in 2013-14, ICRA expects the domestic tyre demand to grow by 6-8% during 2014-15 driven
by a 5-6% growth in the OEM segment and 6-7% growth in the replacement segment. M&HCV, Scooters, Motorcycles and Passenger vehicles are likely to
support the growth while negative growth is expected from tractor and LCVs segments. In tonnage terms, we expect a 3-4% growth for 2014-15 due to the
higher skew of product mix towards the smaller 2w, but higher tonnage growth is expected for 2015-16 contributed by M&HCV and MCE segments.
Capex cycle in full swing across segments as tyre makers gear up to ride the next growth wave in the automotive industry
Following the postponements in 2013-14, tyre industry is witnessing strong capacity additions across segments as tyre makers prepare themselves to cash in
the expected growth in auto industry. We expect more capital investments in the industry supported by healthy cash accruals generated over last 1-2 years.
Tyre imports rise in H1 2014-15; US anti dumping duty (ADD) on Chinese tyres a key development
In a major development, in January 2015, the US Commerce Departments International Trade Administration levied preliminary ADD on Chinese tyres in the
US market - duty rates varying between 19.17% and 87.99%. Incidentally, Chinese tyre makers have been dumping stocks in India which has led to a 15%
surge in tyre imports in H1, 2014-15. Representation from Automotive Tyre Manufacturers' Association (ATMA) to the Government of India (GoI) continues
towards increasing the customs duty on tyres from 10% at present to 20% as the industry remain affected by the inverted duty structure.

ICRA LIMITED

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Tyre Feature February 2015

Tyre exports to grow by 4-6% for 2014-15; anti-dumping duty by USA on Chinese tyres to create fresh opportunities for Indian tyre makers
The growth in tyre exports has decelerated in the last two and half years due to the relatively subdued demand conditions in the overseas markets. For the
period, April to November 2014, tyre exports (value) from India saw a modest 3.6% YoY growth; this follows a 7.3% YoY growth achieved in 2013-14 although
this growth was primarily supported by the depreciating rupee. Going forward, we expect the tyre exports to grow by 4-6% for 2014-15, partly supported by
imposition of anti-dumping duty by USA on Chinese tyres.
Raw material costs remain favourable
Domestic natural rubber (NR) prices remain low: Domestic NR prices have been declining in the last 18 months due to subdued tyre demand; however
it continues to be at a 15-20% premium to global prices leading to a 26% YoY jump in NR imports during 9m 2014-15. This coupled with the
unfavourable realisations in domestic market has forced domestic rubber farmers to curtail production during the critical rubber tapping season.
Although domestic NR production declined by 18% YoY during 9M, 2014-15, weak global prices led to a crash in domestic NR prices reaching lows of Rs.
114 per kg in December 2014. However, the NR prices has since then moved up swiftly to Rs. 130 per kg by end of December 2014 following measures
initiated by the Government (to protect the interest of rubber farmers), these include persuading tyre companies to procure NR locally and reducing
the time frame from 18 to 6 months for tyre manufacturers export obligations. These measures are expected to support NR prices going forward,
although it would remain vulnerable to trends in global rubber prices.
Plunge in crude oil prices brings down the prices of synthetic rubber and other rubber chemicals: Rising oil supplies partly arising from shale oil boom
in USA, and the demand slowdown in Europe, Japan and China has led to a plunge in oil prices in the last few months. Accordingly, the prices of crude
derivatives like synthetic rubber, carbon Black and caprolactum (a feedstock for Nylon Tyre Cord Fabric) have been falling in recent months.
Declining input costs continue to support healthy expansion of margins for the industry. In a volatile price environment, inventory costs have significant
bearing on profitability.
Credit profile to improve with favourable tyre demand and stable profit margins during 2014-15
Revenues for ICRAs sample set comprising of nine major players grew by 5% YoY for Q2 and H1, 2014-15, the growth being supported by auto OEM demand
and modest price cuts taken by some tyre OEMs. However, the industry posted a five-year high profit margins during Q2, 2014-15 with operating and net
margins reaching 15.2% and 7.2% respectively aided by lower NR and drop in crude oil prices. For 2014-15, we expect a 6-8% revenue growth with stable
margins of 14.0-14.5%. Impact of lower NR prices on margins would to an extent be compensated by price cuts, discounting, indexation clauses with OEM
customers and increased brand building expenditure. Movement in NR and crude oil prices will continue to determine the margin performance of the
industry. For the next three years (2015-17), ICRA forecasts a growth of 9%-12% (CAGR) led by volumes (with strong demand both in the domestic and export
markets) even as realisations are unlikely to increase considerably with benign input costs and pressure from the dealer community on tyre OEMs to reduce
prices in-line with the falling raw material prices.
Global tyre industry grows by a muted 1-3% in the OEM segment and a relatively faster 3-4% in replacement during CY2014; growth to weaken in CY2015
as global vehicle sales slows down marginally
A mild winter in Europe and weak economic conditions across several countries including China, Europe and South America hit global demand for tyres.
North American demand was the only major sweat spot for the industry. Performance of major tyre OEMs like Michelin, Bridgestone and Goodyear (with
cumulative global market share of 40% plus) reflected this weakness, even as tailwinds of benign raw material supported margins.

ICRA LIMITED

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Tyre Feature February 2015

Subscribe to the full report for the following and more

I. Brief overview of the Indian Automotive Industry
- Trends in the key segments - M&HCV, Passenger Cars, Two wheelers and Tractors
- Demand drivers and ICRA's demand estimates for these segments
II. Update on the recent trends in the tyre indstry
- Replacement and OEM demand scenario
- Growth trends and ICRA's expectations for domestic tyre demand in Truck & Bus, Passenger car, LCV and Two Wheelers
III. Trends in Raw material prices
- Price movement of natural rubber and ICRA's analysis of the rubber production, supply gap and imports
- Price movement of Synthetic rubber and rubber chemicals; and a comparison with crude oil prices
IV. Trends in tyre import and exports
- Recent trends in import of various product categories, coverage of anti-dumping duties, etc.
- Trends in tyre exports across geographies
V. Update on capacity additions in the industry
- Addition of capacities during 2014-15
- Key projects scheduled for completion over the medium term
VI. Update on industry revenues and profitability indicators
- Impact of falling rubber prices on the profit margins
- Quarterly trends in operating and net margins of the tyre industry
- ICRA's outlook on industry revenue growth and margins

VII. Brief coverage on the following tyre majors a) Apollo Tyres Limited
b) Balkrishna Industries Limited
c) Ceat Limited
d) Elgi Rubber Company Limited
e) Goodyear India Limited
f) JK Tyre and Industries Limited
g) MRF Limited
h) TVS Srichakra Limited

ICRA LIMITED

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Tyre Feature February 2015

Please contact ICRA to get a copy of the full report

CORPORATE OFFICE
Building No. 8, 2nd Floor,
Tower A, DLF Cyber City, Phase II,
Gurgaon 122002
Ph: +91-124-4545300, 4545800
Fax; +91-124-4545350
REGISTERED OFFICE
th
1105, Kailash Building, 11 Floor,
26, Kasturba Gandhi Marg,
New Delhi 110 001
Tel: +91-11-23357940-50
Fax: +91-11-23357014
MUMBAI
Mr. L. Shivakumar
Mobile: 9821086490
3rd Floor, Electric Mansion,
Appasaheb Marathe Marg, Prabhadevi,
Mumbai - 400 025
Ph : +91-22-30470000,
24331046/53/62/74/86/87
Fax : +91-22-2433 1390
E-mail: shivakumar@icraindia.com

GURGAON
Mr. Vivek Mathur
Mobile: 9871221122
Building No. 8, 2nd Floor,
Tower A, DLF Cyber City, Phase II,
Gurgaon 122002
Ph: +91-124-4545300, 4545800
Fax; +91-124-4545350
E-mail: vivek@icraindia.com

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CHENNAI
Mr. Jayanta Chatterjee
Mobile: 9845022459
Mr. Leander Rayen
Mobile: 9940648006
5th Floor, Karumuttu Centre,
498 Anna Salai, Nandanam,
Chennai-600035.
Tel: +91-44-45964300,
24340043/9659/8080
Fax:91-44-24343663
E-mail: jayantac@icraindia.com
leander.rayen@icramail.in
KOLKATA
Ms. Vinita Baid
Mobile: 9007884229
A-10 & 11, 3rd Floor, FMC Fortuna,
234/ 3A, A.J.C. Bose Road,
Kolkata-700020.
Tel: +91-33-22876617/ 8839,
22800008, 22831411
Fax: +91-33-2287 0728
E-mail: vinita.baid@icraindia.com

HYDERABAD
Mr. M.S.K. Aditya
Mobile: 9963253777
301, CONCOURSE, 3rd Floor,
No. 7-1-58, Ameerpet,
Hyderabad 500 016.
Tel: +91-40-23735061, 23737251
Fax: +91-40- 2373 5152
E-mail: adityamsk@icraindia.com

AHMEDABAD
Mr. Animesh Bhabhalia
Mobile: 9824029432
907 & 908 Sakar -II, Ellisbridge,
Ahmedabad- 380006
Tel: +91-79-26585049/2008/5494,
Fax:+91-79- 2648 4924
E-mail: animesh@icraindia.com

BANGALORE
Mr. Jayanta Chatterjee
Mobile: 9845022459
'The Millenia', Tower B,
Unit No. 1004, 10th Floor,
Level 2, 12-14, 1 & 2, Murphy Road,
Bangalore - 560 008
Tel: +91-80-43326400,
Fax: +91-80-43326409
E-mail: jayantac@icraindia.com

PUNE
Mr. L. Shivakumar
Mobile: 9821086490
5A, 5th Floor, Symphony,
S. No. 210, CTS 3202,
Range Hills Road, Shivajinagar,
Pune-411 020
Tel : +91- 20- 25561194,
25560195/196,
Fax : +91- 20- 2553 9231
E-mail: shivakumar@icraindia.com

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Tyre Feature February 2015

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Copyr igh t , 2015 ICRA Lim ited. All Righ t s Reser ved.

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