The Indian tyre industry is gearing up for a second consecutive year of single-digit revenue growth, with projections indicating a modest increase of 7-8% for the financial year 2024-2025 (FY25). This marks a notable slowdown compared to the robust 21% compound annual growth rate (CAGR) seen between FY21 and FY23, according to a report by CRISIL Ratings.
Key Drivers of Growth in FY25
1. Modest Realizations and Volumes
The industry’s revenue growth is primarily attributed to a 3-4% rise in both realizations and volumes. Gradual price hikes and sustained replacement demand are expected to play pivotal roles in this uptick.
2. Impact of Natural Rubber Costs
Natural rubber, a critical component that constitutes nearly 50% of the raw material mix for tyre production, has seen prices soar due to global shortages. Adverse weather conditions in major producing nations like Thailand and Vietnam have exacerbated the supply crunch, significantly impacting production costs.
Despite attempts to pass on these costs to customers, operating profitability is projected to decline by 300 basis points, settling at 13% in FY25 compared to 16% in the previous financial year.
Domestic and Export Dynamics
3. Domestic Market Trends
Domestic demand, which accounts for 75% of the industry’s tonnage sales, continues to be driven by the replacement segment. This segment, primarily catering to commercial and passenger vehicles, is expected to fuel volume growth, while original equipment manufacturer (OEM) demand is forecasted to grow at a subdued rate of 1-2%, reflecting weak commercial vehicle sales.
4. Challenges in Exports
Exports, constituting around 25% of the industry’s revenue, face significant headwinds. Key export markets such as North America and Europe are grappling with weak demand, supply chain disruptions, and increased freight costs. As a result, export growth is expected to remain limited to 2-3% in FY25.
Stability Amid Challenges
Despite the industry’s challenges, the credit profiles of leading tyre manufacturers are anticipated to remain stable. This resilience is attributed to strong balance sheets and prudent capital expenditure strategies.
5. Strategic Investments
The top six tyre manufacturers, representing 87% of the industry’s revenue, plan to invest Rs 5,500 crore in FY25. This allocation focuses on essential capacity enhancements and debottlenecking initiatives, slightly lower than the previous year’s investments.
6. Government Relief Measures
The government’s extension of countervailing duties on Chinese radial tyres has alleviated competitive pressures for domestic manufacturers. This move provides much-needed relief, helping local players maintain their market position amidst challenging conditions.
7. Capacity Utilisation and Efficiency
With capacity utilisation levels hovering around 80%, tyre makers are adopting a cautious approach to price increases and capital expenditure. This strategy aims to preserve capital efficiency while navigating volatile market conditions.
Looking Ahead
The Indian tyre industry is poised to weather the storm of rising input costs and export challenges by leveraging strong domestic demand and strategic investments. While growth rates may be subdued, the sector’s resilience and adaptability continue to ensure its long-term stability.
Source: Business Standard