Demand outlook of Indian tyre industry remains favourable: ICRA

After two years of contraction, the Indian tyre industry's demand is poised to grow by 13-15 per cent in the original equipment manufacturer (OEM) segment and 7-9 per cent in the replacement market segment this fiscal, according to ratings agency ICRA.

Stating that capex executions have resumed in the last few months after a hiatus with improving domestic and exports demand, ICRA said based on projected demand growth, capital expenditure of over ₹20,000 crore is expected in the tyre industry between FY2022 and FY2025, which would be partly debt funded.

The demand outlook of the tyre industry remains favourable and growth in the ongoing fiscal will be aided by a sharp recovery in OEM tyre demand, lower base effect of FY2021, improving pace of vaccination, continued preference for personal mobility and healthy rural cash flows amid a normal monsoon forecast, the ratings agency said in a statement.

"Tyre demand has been relatively more resilient compared to other auto components as the replacement demand in the tyre industry insulates it from cyclicality to a large extent," ICRA Vice President and Co-Group Head Srikumar Krishnamurthy said.

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Vehicle production had fallen by around 13-15 per cent in the last two years, ending FY2021 on account of weak consumer sentiments and subdued economic activities while domestic tyre demand contracted by around 8 per cent, he added.

"In line with the overall auto industry, tyre demand contracted sharply in Q1 FY2021 due to the nationwide lockdown, but recovery in tyre demand was stronger and faster as tyre volumes reached the pre-COVID levels in Q2 FY2021 and witnessed a healthy growth in the subsequent two quarters," Krishnamurthy.

Between FY2022 and FY2025, he said ICRA expects domestic tyre demand to increase at a Compound Annual Growth Rate (CAGR) of 7-9 per cent in units, aided by stable replacement demand, a pick-up in OEM demand and exports.

As for 2021-22, the ratings agency said the Indian tyre industry's demand is poised to grow at 13-15 per cent and 7-9 per cent in OEM and replacement segments respectively after two years of contraction aided by stable growth in both the segments.

On the exports front, which constitutes nearly one-fifth of the tyre industry's revenues, ICRA said going forward it is expected to be supported by increased acceptance for Indian tyres.

Exports grew by 10 per cent in value and 8 per cent in volume terms in FY2021 after a marginal contraction in FY2020, it added.

"Healthy demand from top export destinations such as the US and the European nations supported exports in FY2021, primarily led by the agri-construction segment," the ratings agency said.

With the Director General of Foreign Trade (DGFT) placing all categories of tyre imports under the restricted category against free category earlier, imports of tyres had declined by 77 per cent in volume terms and 51 per cent in value terms in FY2021, it added.

With improving domestic and exports demand, capex executions have resumed in the last few months after a hiatus, ICRA said.

"Based on projected demand growth, ICRA estimates capital expenditure of over ₹20,000 crore between FY2022 and FY2025, which would be partly debt funded," it said, adding the credit profiles of tyre manufacturers would be supported by healthy earnings and cash reserves.

The ratings agency continues to maintain a stable outlook on the Indian tyre industry, ICRA said.