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Credit profile of Indian tyre industry is likely to weaken in FY2020: ICRA

According to ICRA, subdued vehicle production due to weak consumer sentiments amidst slowing economic activities, rising cost of vehicle ownership and softened rural demand will impact the tyre demand in FY2020.

Aug 06, 2019, 07.43 PM IST
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Apart from lower revenue growth, the industry earnings will also be affected by higher raw material (RM) prices.
MUMBAI: The credit profile of Indian tyre industry is likely to weaken in FY2020 affected by the ongoing slowdown in domestic automotive industry, rising raw material (RM) prices and higher spend towards debt-funded capacity expansion. Nevertheless, the long-term outlook on industry credit profile is stable.

Says K Srikumar, Vice President and Co-Head, Corporate Ratings, ICRA , “Following two strong years of growth (~12% and ~14% in FY2018 and FY2019 respectively, tyre industry revenue is estimated to grow at a lower rate of 3-4% in FY2020 affected by modest growth in OE tyre demand on the back of sluggish auto demand and expected moderation in tyre exports.”

According to ICRA, subdued vehicle production due to weak consumer sentiments amidst slowing economic activities, rising cost of vehicle ownership and softened rural demand will impact the tyre demand in FY2020. Following a 6.7% growth in FY2019, the domestic tyre demand is estimated to grow at a lower rate of 3-4% (volume) during FY2020. The replacement segment, which represent over 55% of industry volumes, is likely to grow by 5-6% in FY2020 (PY: 5.7%) while demand growth in Original equipment (OE) segment is pegged at lower levels of 2-3% (PY: 7.8%) affected by subdued vehicle production in FY2020. Beyond this, the domestic tyre demand is expected to grow by 6-8% during FY2020-24.

Apart from lower revenue growth, the industry earnings will also be affected by higher raw material (RM) prices. The RM price basket, which had softened in Q4 (down 5% Q-o-Q with fall in oil prices) rose by over 10% in Q1 FY2020 mainly due to 13% spike in Natural rubber (NR) prices during this period. ICRA expects industry wide operating and net margins to contract by ~200 bps and 300 bps respectively to 11-12% and 3.5-4.5% respectively. The net margins will also be influenced by the rise in interest costs (on debt taken towards expansion in tyre capacities). Based on the announcement of tyre makers, the industry is investing over Rs. 17,000 crore over next three years (ending FY2022), part of which is funded through debt. Lower accruals amidst rising debt shall impact the industry RoCE levels and debt protection metrics during FY2020/21. However, any scale down in capex by tyre makers shall restrict the moderation in debt metrics.

“Going forward, the industry revenue growth is projected at 6-8% with operating and net margins at 12-13% and 4-5% respectively, in the period FY2020-24. The industry capitalization and coverage indicators are likely to remain comfortable over the long-term, although some moderation is expected in FY2020/21,” concludes Mr. Srikumar.
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