1 min read.Updated: 06 Jul 2021, 01:46 PM ISTLivemint
Factors like lower base effect of FY21, improving pace of vaccination, continued preference for personal mobility and healthy rural cash flows amid a normal monsoon forecast will aid vehicle demand across categories which will lead to more vehicle production by automakers
NEW DELHI: The domestic tyre industry will report a 13-15% increase in demand in FY22 as stable growth is expected from both automobile manufacturers and the replacement market, according to the credit rating agency ICRA.
However, a sustained increase in commodity prices such as rubber and crude is likely to put pressure on operating margins in the first two quarters of the fiscal.
Factors like lower base effect of FY21, improving pace of vaccination, continued preference for personal mobility and healthy rural cash flows amid a normal monsoon forecast will aid vehicle demand across categories, which will lead to more vehicle production by automakers.
“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. ICRA expects domestic tyre demand to increase at a CAGR of 7-9% (in units) between FY2022 and FY2025, aided by stable replacement demand, a pick-up in OEM demand and exports," said Srikumar Krishnamurthy, vice-president and co-group head, ICRA.
Exports that constitute nearly one-fifth of the tyre industry’s revenues, grew by 10% in value and 8% in volume in FY2021 after a marginal contraction in FY2020. Healthy demand from top export destinations such as the US and the European nations supported exports in FY2021, primarily led by agri-construction segment, the rating firm added.
Based on projected demand growth, ICRA estimates capital expenditure of over ₹20,000 crore between FY2022 and FY2025, which would be partly debt funded.
“The operating margins of tyre manufacturers touched record high levels of 20% in Q2 and Q3 FY2021, against the levels of 13-14% in FY2020 on the back of favourable input prices, especially crude-linked derivatives. However, raw material prices rose sharply in H2 FY2021, largely led by an increase in oil prices. The margins would remain under pressure in H1 FY2022 as well given the elevated levels of raw material price," said Nithya Debbadi, assistant vice president and sector head, ICRA.