Indian tyre manufacturers expected to see growth

The Indian tyre industry is expected to grow by recover and grow in double digits from five years of weakness, according to a report by Motilal Oswal.

“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 Rs 116b over FY22-24E vs Rs 135.5b over FY19-21) augurs well for profitability,” the report said.

"We estimate 2W/ PCR/ T&B tyre volumes to clock 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,” the report added.

However, there has been a sharp increase in the raw material cost. “The RM basket witnessed a sharp price decrease in 1HFY21 (~620bp over FY20 average), before the trend reversal from 3QFY21 (RM basket per kg increased by ~10pp in 2H over 1HFY21; the same in 1QFY22 is ~18 per cent higher than its FY21 average).

“Since Dec 2020, tyre companies have taken a price hike of nearly 8 per cent till Jun 2021. We estimate gross margin for tyre companies to decline by 80-110bp over FY21-23E,” the report added.

"This, coupled with operating leverage, will enable a recovery in profitability (after impact of higher RM cost in FY22E) and capital efficiency (approximately 190bp over FY21E)," it further said.

Motilal Oswal also said that capex intensity has peaked out in their view, with cumulative capex for Apollo, Ceat and MRF to reduce to nearly Rs 116b over FY22-24E (vs Rs 135.5b over FY19-21).