OPEN APP
Home >Markets >Mark To Market >Tyre firms stare at weak FY21 as replacement market sales remain wobbly

Tyre firms’ prospects for fiscal year 2021 (FY21) were already deflated as auto production hit a multi-year low due to the coronavirus pandemic. Hopes that the replacement market demand could lift sales is also slowly waning.

Analysts believe that tyre firms face a double-digit decline in sales in FY21.

For one, replacement tyre sales continue to be tepid even after lockdown restrictions have been eased and dealers have reopened. A pan-India dealer-check conducted by Reliance Securities Ltd stated that while April sales volume was barely 10% (of normal) for dealers, sales inched up to about 25% of normal level in the last fortnight of May.

Indeed, the lockdown has punctured hopes of replacement market sales revival.

According to dealers, tyre firms clock around two-fifths of the annual sales between March to June in the domestic market. Usually, demand from commercial vehicles (CV) spurts in this period as fleet operators refurbish trucks in the beginning of a fiscal year.

Further, hot climatic conditions in the domestic market that leads to higher wear and tear usually inflates replacement market demand. These months typically record strong tractor-tyre sales, which enjoy higher profit margins.

This time around, the weak macroeconomic scenario had impacted movement of goods even before the pandemic. A note by Icra Ltd stated, “over the last one year, the Indian tyre industry has been affected by the downturn in automotive demand amidst slowing economic growth, subdued rural output, weak consumer sentiments, rise in total cost of vehicle ownership, adverse lending environment, etc."

Given reports of falling truck utilisation levels and deferral of interest repayment on loans by operators, tyre replacement is bound to be deferred. Also, dealers are worried about the magnitude of impact of work-from-home on replacement sales even in passenger vehicle segment.

All these factors point to a very slow revival in replacement tyre demand, which comprises for about 57% of sales mix, the highest being in the truck and bus radial segment.

On top of this, the current demand-supply mismatch in tyres may continue in the near term. “Overall inventory among factory, dealers and in-transit, is about 30-45 days," says the Reliance Securities’ note. This will stymie production ramp-up at least for a few quarters. Even export prospects are bleak given the auto sales and production disruption across countries.

The only relief for tyre companies is subdued rubber and crude prices, which together comprise about three-fourths of the total raw material mix in making a tyre. The moot question is whether this can help bolster profitability amid falling sales and negative operating leverage. Certainly a double-digit fall in sales in FY21 will weigh on profit margins too. It is not surprising, therefore, that leading tyre firm stocks such as Apollo Tyres Ltd, Ceat Ltd and MRF Ltd are down 15-44% down since January.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our App Now!!

Close
×
Edit Profile
My ReadsRedeem a Gift CardLogout