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Tyre manufactures to see double-digit revenue growth

The Indian tyre industry is expected to recover from five years of weakness and be on a linear growth path over FY21-25E. (Photo: Mint)Premium
The Indian tyre industry is expected to recover from five years of weakness and be on a linear growth path over FY21-25E. (Photo: Mint)

  • With the swift rebound in economic activity and vehicle production in August-March period of FY21, tyre manufacturers reported recovery in their financials in the third and fourth quarter. The second wave of covid infections though has derailed the recovery

NEW DELHI: India’s top tyre manufacturers are expected to report double-digit revenue growth on the back of improved sales to automakers and in the aftermarket segment. Capacity expansion and a rise in export demand will help sustain growth after five years of muted performance, according to a report by brokerage firm Motilal Oswal Institutional Equities.

“The Indian tyre industry is expected to recover from five years of weakness and be on a linear growth path (12% CAGR over FY21-25E), supported by timely capacity expansion across companies. Improving demand, stable competitive intensity, and peak capex (capex of INR116b over FY22-24E v/s INR135.5b over FY19-21) augurs well for profitability," said analysts of Motilal Oswal in a note.

Two-wheelers, passenger cars and commercial vehicles volumes are estimated to grow at 8%/11%/13% CAGR over FY21-25E. This coupled with a reasonable pricing environment and operating leverage, will enable a recovery in profitability and capital efficiency, they said.

Factors like a favourable base effect, improving pace of vaccination, continued preference for personal mobility, and healthy cash flows in rural centres amid forecast of a normal monsoon will boost vehicle demand across categories, and in turn production.

With the swift rebound in economic activity and vehicle production in the August to March period in FY21, tyre manufacturers reported recovery in their financials in the third and fourth quarter. The second wave of covid infections though has derailed the recovery as economic activity has been disrupted by lockdown in most states.

“Since December FY 20, Tyre companies have taken a price hike of 8% till June 21. We estimate gross margin for Tyre companies to decline by 80-110 bp over FY21-23E. This coupled with operating leverage, will enable a recovery in profitability (after impact of higher RM cost in FY22E) and capital efficiency (190bp over FY21E), said the analysts.

“Capex intensity has peaked out in our view, with cumulative capex for Apollo Tyres, Ceat Ltd and MRF to reduce to 116b over FY22-24E (v/s 135.5b over FY19- 21). FY21 utilization across segments has been 63%-72% as large part of capacities is in ramp-up mode after start of operations over last 12-18 months," they added.

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