With no significant growth in rubber supply expected over the next 12-15 months, rubber prices will remain high over the next four-six quarters and affect tyre makers profitability, said an ICRA report.

The tyre industry is also likely to face margin pressure over the medium-term as apart from rising raw material costs, increased debt, higher interest and depreciation charges will pose a challenge.

“The profitability of tyre manufacturers over the next 12-15 months could be affected by the expected supply gap for rubber, despite the robust demand for tyres. Anticipating the immense potential for radials, many industry majors have announced large capital expenditure plans for the next two years … increased debt, higher interest and depreciation charges are likely to keep the industry profitability under pressure over the medium term in spite of the strong growth potential,” it said.

It added that there is also a threat from Chinese imports of truck and bus radial tyres, contributed in part by domestic capacity constraints. Pressure from original equipment manufacturers (OEMs) and cheaper Chinese imports could curb pricing power in the domestic industry.

“The benefits of the ongoing OEM demand growth is also expected to trickle down to robust replacement demand with a lag. As with all auto ancillaries, raw material cost volatility and price pressure from OEMs remain inherent risks for this industry,” said the report.

Mr Subrata Ray, Senior Vice-President and Head, Corporate Ratings, ICRA, said, “While demand in the industry is expected to be robust going forward, cost pressures, particularly from natural rubber remains a challenge. Ability to successfully pass on the input cost increases to the end customer will be critical.”

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