Replacement demand for trucks and buses (T&B) is likely to pick up to 5 % in FY18 following the 0-3 % decline witnessed in FY17. Though demand in Q1FY2018 suffered due to destocking by dealers before the GST rollout, this is a short term aberration and volumes should recover in H2FY2018.
According to Subrata Ray, Sr. Group Vice President, Corporate Sector ratings, ICRA, “The FY2017 (provisional) estimates indicate tyre industry volume demand were robust at 9%-9.5%, led by stronger than expected replacement demand (accounts for over 65% of the industry ) of 10%-13%; offsetting muted OEM growth of 5%. Tyre volumes stood at 16.7 lakh units against an expected 16.2 lakh units. This was primarily due to higher than expected demand for two wheeler tyres.”
Expected growth in demand in the commercial vehicle (CV) and two-wheeler industry will result in automotive production growing by 9-10% in FY2018, compared to the 5.2% growth in FY2017.
During FY2017, demonetization and impending GST rollout led to considerable demand volatility. The impact of the transition to GST is visible in the CV segment and given the inventory destocking across the board in June-17, the automotive demand is likely to be relatively muted during Q1FY2018.
“The Aug’17 recommendation of imposition of definitive anti-dumping duties (ADD) on the import of Truck and Bus radial (TBR) tyres from China, by Directorate General of Anti-dumping and Allied Duties (DGAD) is a positive development for the industry. If the ADD is imposed, there would be sharp reduction in tyre imports from China, thus enhancing the demand potential for domestic players. The duty recommended ranges between $277.53 per tonne and $452.33 per tonne,” adds Ray.
Regarding tyre exports, they rebounded in FY2017 following two years of negative growth. Led by demand revival across product segments, export volumes grew at a robust 29%, while in value terms the growth was lower at 10%, affected by falling realizations.
As per ICRA, realisations were down due to downward price revisions taken by exporters, especially in agriculture / construction and T&B segments, with the gradual fall in raw material prices.
Despite intense global competition, tyre exports grew at10% while exports to the top ten countries grew by 20%, overall. USA and Germany remain the preferred destinations for export of Agri / construction tyres.
On the other hand, tyre imports have surged in the last five years (13% CAGR till FY2017) which has considerably impacted the domestic TBR segment, where domestic players have made sizeable investments.
Imports too were affected by demonetisation and were almost flat in FY2017. Imported tyres largely cater to the unorganized, replacement market which is a cash-based market.
Despite the demonetisation impact, T&B imports still grew by 9% for FY2017 while two-wheeler tyre imports, which saw a sharp growth in recent years, fell by 11% on a full year basis as the domestic capacities came online closing the supply gap in the Indian markets. Even before demonetisation, the segment witnessed a 3% de-growth.
Given the sizable accrual build-up in the industry over the past few years, ICRA research expects new capacity announcements to pick up in the coming quarters.
Commissioning of some of these plants is phased across 4-6 quarters, like the CEAT’s Halol and Butibori plants which have started phased production over the past four quarters.
Domestic natural rubber (NR) prices for FY2017 averaged Rs. 135/kg, the highest over the last four years. Sharp volatility was witnessed with the peak domestic and global NR prices hitting Rs. 160/kg and Rs. 190/kg respectively.
While the domestic prices were ruling at a discount (vis-à-vis global prices) till Nov’17, the trend reversed briefly till Dec’16 due to factors like curtailed NR supplies from Thailand due to floods, rising consumption from China, movement in crude oil prices and strengthening of dollar lifted the NR prices during Q3FY17. The prices since the end of Feb’17 have corrected.
This was because of the lag effect of rising crude prices and tight supply for feedstock (butadiene) due to closure of large crackers for maintenance in key markets. The prices have moderated since Apr’17 with the fall in oil prices.
Among other inputs, carbon black has largely mirrored the oil prices while caprolactum prices witnessed sharp volatility in last two quarters with fluctuation in crude and benzene prices.
ICRA expected a contraction in profit margins for FY2018; but long term return indicators remain strong. Weighed down by weak realizations with rising RM prices, the growth in industry revenues has been subdued in recent quarters. Industry wide operating and net margins crashed during Q4FY17 (down 600 bps Y-o-Y and 240 bps respectively).
“For FY2018, the profit margins is expected to contract due to the effect of high cost inventory held by tyre makers and consequent margin collapse in Q1FY2018. While the margins are likely to improve in ensuing quarters, the profit margins for FY2018 is expected to be much weaker than FY2017,” concludes Ray.