> Tyre demand in FY21-24 may be insufficient to absorb current capacities
Tyre demand in FY21-24 may be insufficient to absorb current capacities
3 min read.Updated: 17 Dec 2020, 07:30 PM IST
The incremental tyre demand generated in the fiscals 2021-24 could be insufficient to absorb the new capacities created in the current capex cycle.
The tyre companies have undertaken an aggressive capital expenditure (capex) cycle over the financial years 2016-20.
The incremental tyre demand generated in the fiscals 2021-24 could be insufficient to absorb the new capacities created in the current capex cycle, while the overall capacities could be unutilised to the extent of 20 per cent, ratings agency India Ratings (Ind-Ra) has said.
Also, Ind-Ra expects a mid-single-digit decline in the tyre industry volumes despite a sharper decline of 20-25 per cent in original equipment makers' (OEMs) volumes, as the replacement market would continue to support the industry.
The agency expects that segment-wise, two- or three-wheeler tyre capacities will be utilised 70-75 per cent and passenger car radials by 80-85 per cent by 2023-24, after factoring in the additional capacities under set-up or ramp-up.
The truck and bus (T&B) segment capacities are expected to be utilised 65-70 per cent by the financial year 2023-24. While the segment has seen a weak demand from OEMs, the replacement market is likely to provide support, Ind-Ra said in a release.
The ratings agency said its analysis is based on the capacities of the top-5 listed tyre companies -- Apollo, CEAT, JK Tyres, MRF and TVS Srichakra.
The tyre companies have undertaken an aggressive capital expenditure (capex) cycle over the financial years 2016-20. As a large part of the capex is debt funded, their leverage metrics moderated in 2019-20, the ratings agency said.
The leverage ratio is expected to remain elevated around 2.5x in 2021-22, as the ramp-up of these facilities would still take time and due to lower profitability amid subdued demand, conditions over FY20-FY21 and lower operating leverage.
However, as a large part of the capex cycle has been completed, the metrics should start improving from the financial year 2022-23. While some players have deferred part of the capex by one-two years due to a demand slowdown, the overall capex intensity is likely to remain low in forecast years, the ratings agency said.
According to Ind-Ra, the successful implementation of the scrappage policy would benefit the tyre sector, particularly the T&B segment. Given the shorter replacement cycle for T&B tyres, fleet owners could be encouraged to scrap older vehicles and lead to the subsequent purchases of new vehicles.
However, structural changes such as work from home, even after the COVID-19 outbreak is settled, and significant push towards public transport spending for managing pollution levels could dent the replacement demand, particularly in passenger car radials and two-wheeler tyres, it said.
As over 50 per cent demand comes from the replacement market in these segments, the utilisation of the additional capacities could take longer than expected, the release stated.
The industry is operating with an all-time low asset turnover and return on capital employed ratios, which could sustain for some time in this scenario. Lower profitability on account of constrained operating leverage could extend the deleveraging process and thus impact the credit ratings, it said.
The tyre industry is insulated to an extent from the cyclicality observed in auto sales due to its reliance on the more stable replacement market.
While sales to OEMs declined 16.3 per cent in year-on-year in the previous fiscal, the replacement market sales declined by a modest 2.6 per cent in the same period, according to the ratings agency.
The replacement market share also increased to 58 per cent of the overall domestic tyre sales volumes in 2019-20 on the back of the decline in OEM sales, it said.
The overall industry could also benefit from any further restriction and duties on imported tyres. Ind-Ra expects the tyre sector revenue to recover in 2021-22, supported by a better demand from both OEM and replacement markets, said the release.
In the second quarter of the current fiscal, the top-five tyre companies recorded exceptional Ebitda margins, aggregating about 16 per cent on the back of stable rubber prices as well as crude oil prices, as per the ratings agency. Ebitda stands for earnings before interest, tax, depreciation and amortisation.
In the medium-to-long term, Ind-Ra expects the margins to benefit from the economies of scale, product diversification and increasing share of radial tyres. However, the extent of the benefit would be subject to the volatility in raw material prices, it said in the release.