Operating profits of tyre makers to surpass pre-Covid levels, says Crisil

The operating profits of tyre manufacturers are expected to register growth this year, surpassing pre-Covid levels, despite the lower volumes. Higher realisations and benign input prices will help offset the impact of 4-6% volumes decline, and enable a 6-8% growth in operating profits for tyre manufacturers in fiscal 2021, said a research note by Crisil Ratings, based on analysis of India’s top six tyre manufacturers, accounting for 80% of the Rs 60,000 crore automobile tyre sector revenue.

That, along with phased implementation of capital expenditure plans, will ensure stable credit outlook for tyre manufacturers. The sector derives 28% of its volume (in tonnage terms) from original equipment manufacturers (OEMs), 58% from the replacement market, 10% from exports, and the rest from imports.
Tyre offtake by OEMs is seen skidding 5-7% this fiscal primarily on account of a sharp decline in demand from the commercial vehicle (CV) segment. This would get partially offset by robust demand from the tractor segment, it said.

Replacement demand is seen slipping just 2% because of support from pent-up demand from existing CVs, uptick in freight movement and improving economic activity. Exports volume is expected to sustain because of increasing replacement demand in the overseas markets for tractor and CV tyres, which account for 90% of tyre exports. Hence, the tyre sector is likely to log only a moderate volume decline of 4-6%, Crisil said.

Anuj Sethi, senior director, Crisil Ratings said, “Improved realisations on account of increased share of replacement demand (to 60% from 58% in fiscal 2020) and exports, which command better prices, will drive the increase in operating profits of tyre manufacturers this fiscal. Tyre makers have also increased prices in the domestic market after imports were placed on restricted list in June 2020. The average realisation per tonne of tyres is expected to increase 4-5% this fiscal.”

Input costs also fell 18% in the first half of the fiscal given the subdued global demand for automobiles and softer crude prices (crude derivatives account for about 40% of raw material requirement).

Though prices are expected to firm up moderately in the second half on account of lower global production of natural rubber and increase in crude prices, overall input cost will still be lower this fiscal.

According to Crisil, higher realisations and lower input cost will improve the average operating margin of tyre manufacturers by 100-120 basis points to about 14% this fiscal, leading to an average 6-8% increase in operating profit.

Pick-up in OEM demand across vehicle segments and higher replacement demand for CV tyres following recovery in economic activity will drive domestic volume up next fiscal. Operating margins of tyre manufacturers will sustain at 13-14%, driven by higher volume and continued pricing flexibility, supported by favourable import policies.

The capital expenditure (capex) is expected to remain modest this fiscal. As against the planned capex of about Rs 18,000 crore over fiscals 2021-23 (compared with Rs 18,500 crore over fiscals 2018-20), capex of less than Rs 1,000 crore was incurred during the first half of this fiscal, and Crisil expects players will exercise caution in stepping up capacity, given sufficient available capacity and uncertainty around the pandemic.