As the demand outlook remains favourable amid the threat of third wave of the pandemic, the tyre industry is seeing a revival in capex spend towards capacity additions. The proposed capex by the companies is estimated at more than ₹20,000 crore over the next three years, according to rating agency Icra.

Following two years of contraction (down 9 per cent each in FY20 and FY21) amidst sharp contraction in vehicle sales and Covid-19, tyre demand has recovered sharply in FY22. The impact of the pandemic on tyre demand has been relatively less compared to other auto components. This is given its higher skew (about 60 per cent) on the after-market segment.

The tyre industry is relatively better protected from any potential impact of Omicron due to its large dependence on the stable replacement market and learnings from earlier waves. Industry players gear up for next round of investments towards capacity enhancements, it said.

For H1 FY22, tyre demand grew by optically higher levels (about 50 per cent y-o-y) amid low base and for Q2 FY22, the growth was 8.6 per cent y-o-y on the back of a 9.3 per cent growth in replacement segment and muted 1.5 per cent growth in the OE segment.

Growth in overseas markets

With increasing acceptance of Indian tyres in the overseas markets, tyre exports from India have seen a sharp growth in the current year with healthy demand from destinations like the US and the European nations. Tyre imports continue to remain low on the back of government regulations, thus favouring the domestic players. Icra pegs demand growth at 13-15 per cent for FY22 and 7-9 per cent CAGR between FY22-25 for the Indian tyre industry.

“Replacement volumes are at record-high levels with improving economic activities while OE sales are partly affected by the sluggish demand for two-wheelers and supply constraints impacting passenger vehicle production,” said Nithya Debbadi, Assistant Vice President and Sector Head, Icra.

Icra’s sample of tyre manufacturers witnessed strong y-o-y growth of 25 per cent, recording all-time high revenues in Q2 FY22 on the back of favourable replacement and export sales volumes. Moreover, increase in realisations on the back of price hikes taken by the industry to offset the commodity inflation has also supported revenue growth.

“We expect industry revenue growth of 16-20 per cent in FY22, driven by growth in volumes and realisations. While the demand is favourable, higher input prices (namely natural rubber and crude derivatives) keep industry margins and earnings under pressure. Though the industry has seen some price hikes, we expect a 400-600 bps contraction in the operating margins for FY22, while it would still compare well with pre-Covid levels,” said Debbadi.

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