Path laid for tyre makers to have a smooth ride; try & tap this growth

By DK Aggarwal

The performance of the tyre industry is directly linked to the performance of the automobile industry and demand swings in any of the auto segments (commercial vehicles, cars, two-wheelers) have direct impact on it. With the expected growth in the automobile sector, there is an assumption that tyre companies would continue to see higher order flows.

In recent quarters, strong volume growth helped tyres companies report healthy top line growth but rising raw material (RM) prices mounted pressure on their profitability. Meanwhile, the recent fall in crude oil and rubber prices, which comprise nearly three-fourths of the cost of making a tyres, bodes well for the industry, and with the pick-up in demand, tyre companies will have the advantage of both lower raw material prices and higher sales volume growth.

At home, natural rubber prices are expected to remain soft as Indian prices are still at a premium compared with international rates. Also, the imposition of anti-dumping duty on truck and bus radial (TBR) tyres from China in 2017 has supported the growth of replacement demand and OEM business expansion. The replacement market contributes ~ 70 per cent of total revenues of the industry.

Now with growing demand to lower emission levels and improve fuel efficiency in vehicles, besides plummeting weight, the Indian tyre industry is adopting new trends in the manufacturing process to meet the changing market dynamics and supply to the latest demands of the OEMs.

Besides the emphasis on research & development has helped Indian tyre industry increase its export competitiveness. Cost efficiency and customization have also helped tyre companies turn exports competitive.

Indian manufactured tyres are exported to more than 100 countries, including the US and Europe. To note, from Rs 8,824 crore in year 2015-16, tyre exports from India went up to Rs 9,658 crore in 2016-17 and crossed the Rs 10,000 crore mark for the first time at Rs 11,180 crore in 2017-18.

The US is the largest export destination for Indian manufactured tyres accounting for 13 per cent of total export turnover. Germany is the second largest with more than 7 per cent share. According to latest Global Tyre Report, Indian tyre companies rank very high when it comes to percentage increases in R&D spend over previous years. Currently about 2 per cent of the revenue is being invested on R&D, which matches the global average.

Going forward, the road ahead appears to promise a smoother ride for tyre companies, as India has some of the finest radial tyre manufacturing facilities. Demand from both the original equipment and replacement market segments will continue to sustain. India has emerged as favoured destination for greenfield and brownfield investments and out of top 10 global tyre majors, 6 have a manufacturing as well as marketing presence in India.

The Indian tyre industry is expected to see significant capacity expansion in the coming two to three years. Given the large cash balances, strong accrual position and the favourable demand scenario, the capacity addition is likely to continue in the industry.

All the major players such as MRF, Apollo Tyres, JK Tyres, CEAT, Balkrishna Industries and Bridgestone have announced capex plans. So, it is expected that investing in these stocks may help investors get good returns going forward.

(The author is CMD, SMC Investments and Advisors. Views and recommendations expressed in this section are his own and do not represent those of EconomicTimes.com.)