Tyre makers likely to see growth in operating profit this year: Crisil

Tyre companies are expected to record good growth in operating profit this fiscal. In fact, the sector could be one among the very few whose operating profits are expected to register a growth this year. Higher realisation and benign input prices will help offset the 4-6 per cent volume decline, and enable a 6-8 per cent growth in operating profits for tyre manufacturers in fiscal 2021, says a report of Crisil.

The tyre industry derives 28 per cent of its volume (in tonnage terms) from original equipment manufacturers (OEMs), 58 per cent from the replacement market, 10 per cent from exports, and the rest from imports.

“Improved realisations on account of increased share of replacement demand (to 60 per cent from 58 per cent in fiscal 2020) and exports, which command better prices, will drive the increase in operating profits of tyre manufacturers this fiscal. Tyre makers have also increased prices in the domestic market after imports were placed on restricted list in June 2020. The average realisation per tonne of tyres is expected to increase 4-5 per cent this fiscal,” said Anuj Sethi, Senior Director, Crisil Ratings Ltd.

Input costs also fell 18 per cent in the first half of the fiscal given the subdued global demand for automobiles and softer crude prices (crude derivatives account for about 40 per cent of raw material requirement). Though prices are expected to firm up moderately in the second half on account of lower global production of natural rubber and increase in crude prices, overall input cost will still be lower this fiscal.

Higher realisations and lower input cost will improve the average operating margin of tyre manufacturers by 100-120 basis points to about 14 per cent this fiscal, leading to an average 6-8 per cent increase in operating profit.

Declining offtake

Tyre offtake by OEMs is seen declining 5-7 per cent this fiscal primarily on account of a sharp decline in demand from the commercial vehicle segment. This would get partially offset by robust demand from the tractor segment.

Replacement demand is seen slipping just two per cent because of support from pent-up demand from existing CVs, uptick in freight movement and improving economic activity.

Export volume is expected to sustain because of increasing replacement demand in the overseas markets for tractor and CV tyres, which account for 90 per cent of tyre exports. Hence, the tyre sector is likely to log only a moderate volume decline of 4-6 per cent.

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