Industry Risk Score : Tyres

Executive Summary

Tyre industry in India is primarily a domestic industry with 80-85% sales in the domestic market and is majorly dependent on automobile industry for growth.

The volume growth is projected to be 1,805 lakh tyres in FY 2017-18 at 7-8% growth despite weak volumes in the first half due to the Goods and Services (GST) rollout. High demand growth of 6-8% is expected over the medium term driven by improvement in industrial gross domestic product (GDP), push towards infrastructure development, better freight availability and revival of rural demand.

The growth in the tyre industry is in line with expanding automobile sector in terms of production and sales. It is poised for tremendous growth on account of rising urbanisation, huge investment in capacity expansion and fast development of road infrastructure in India. Exports have remained strong for straight second year following a 14-15% growth during the first half of FY 2017-18 led by revival in demand across all segments . To combat Chinese imports in this sector (which grew up to 40%), the Union Budget 2018-19 has increased the import duty on truck & bus radials (TBRs) from 10% to 15%, thus providing opportunity to the domestic market. Radialisation in Truck and Bus (T&B) tyres, which increases life span of tyres and leads to better mileage, is happening at a faster-than-expected pace and is expected to be one of the most important revenue drivers. Imposition of the anti-dumping duty (ADD) and hike in customs duty from 10% to 15% on imported radial tyres are expected to combat cheap Chinese imports and reduce price differential between the two.

The industry in India is highly competitive. There are about 40 companies in the domestic segment with the top 10 companies accounting for 85-90% of the market share. Of this, the top 3 - MRF Ltd, Apollo and JK Tyre &Industries - constitute ~60% of the total tyre market in India. Industry profitability is moderate at an average of 7-9%.

Natural rubber, the principle raw material for tyre production, suffers from huge demand-supply gaps and sharp volatility in prices in the domestic market. The industry thus has to resort to imports, about 45% from Southeast Asian plantations. Also, the exorbitant customs duty of 25% to curb import and the inverted duty structure on natural rubber have made it difficult to source the key raw material.


Key Risks& Attributes

  • Demand-supply gap in raw material
  • Volatility in prices of natural rubber
  • Changes in duty structure
  • Low-cost Chinese TBR imports
  • Dumping by China
  • Forex fluctuation risk
  • Increasing competition
  • Recycling and import of waste tyres

Demand & Supply Scenario

5/6

The Indian tyre industry is ancillary to the automobile industry. The automobile industry registered a growth of 14.78% during FY2017-18 over the previous year on the back of rising urbanisation, increasing disposable income, interest rate cuts and improved road infrastructure, translating into tremendous growth prospects for the tyre sector.

Tyre demand originates from two end-user categories – original equipment manufacturers (OEM), dependent on new vehicle sales, and replacement, linked to usage patterns, road conditions and replacement cycles. Replacement demand is less cyclical than OEM and is generally a higher margin business for tyre manufacturers. As of FY2015-16, the OEM segment accounts for almost half of the industry revenues, while the replacement market accounts for the balance. Tyre volumes recorded at 1,805 lakh units in FY 2017-18, growing by 7% due to higher OEM and T&B replacement market demand. Exports registered 14% growth during the first half of FY 2017-18 led by revival in demand across all segments . Demand in the automobile sector (9-10%) triggered by high disposable income, series of interest rate cuts, push on manufacturing and infrastructure segment by the government resulted in the tyre industry growing by approximately 7-8% during FY2017-18.

The OEM segment accounts for 44% of the revenues, while the replacement market has the major share at 56%. The market is driven largely by two-and three-wheelers (53%), followed by passenger cars (28%) and commercial vehicles (16%). Tractor segment accounts for only 3% of the industry sales. Replacement demand for tyres depends on on-road vehicle population, road conditions, vehicle scrappage rules, overloading norms, re-treading intensity and miles driven. Replacement demand for T&B is likely to have picked up to 5% in FY2017-18 though demand in 1QFY18 suffered due to destocking by dealers before the GST rollout.

The exorbitant duty of 25% on key input natural rubber leads to an inverted duty structure as tyres can be imported at 7% and even nil duty under various trade agreements. This skews the field and encourages large-scale tyre imports in the country.

Supply chain management in tyre industry is getting complex with new automobile models being rolled out. There is a constant demand for different types, sizes and weights of tyres translating into high storage and handling costs. Effective supply chain management with right technology support can facilitate prompt product supply.

As compared to 100% radialisation in cars, the commercial vehicles segment has achieved only 45-50% level. Growing awareness of its favourable cost-benefit ratio and improved fuel efficiency has led to expansion in radial tyre capacities by tyre companies, but increased capex shall reduce profitability of companies in the short term. Also, with the coming up of expressways and launch of multi-axle trucks, radialisation in the T&B segment shall witness a jump. However, cheaper radial imports available in the huge unorganised market have hurt prospects of domestic players. Union Budget 2018-19 has increased customs duty on radial tyres from 10% to 15% to curb low priced radial imports from China.

Integrated waste tyre management system, currently under government consideration, shall regulate recycling or re-use of waste/used tyre business in India. Re-treading of tyres being done at 25% cost of new tyres, shall impact replacement demand of tyres

Indian players are undertaking large capacity additions to tap low penetration of radial tyres in the country and compete with low-priced imported tyres. Acuité believes the demand side risk is low given the buoyant demand growth driven by infrastructure development in the Indian economy.

Nature & Extent of Competition

4/6

The domestic tyre industry is dominated by ten players, which account for over 85-90% of the market share. MRF Ltd is the leading player, with an overall market share of around 28%, followed by Apollo and JK Tyre & Industries Ltd with share of 19% and 13%, respectively. The T&B segment is highly competitive with JK Tyre, MRF and Apollo as the leading players. In the passenger car segment, Apollo and MRF enjoy an equal market share, followed by Bridgestone. While the industry is moderately consolidated, pricing flexibility has been impacted due to close market shares amongst domestic players.

In the past few years, the Chinese companies majorly accounted for replacement market in TBR, while the Indian capacities were underutilised. Consequently, the ADD was imposed on TBR imports from China in September 2017 in the range of $245-452/tonne, to protect domestic market from below cost shipment for the next five years. As a result, their imports have dropped by around 50% to 75000 tonnes a month .Exports are likely to grow by 10% in the coming years due to stable demand and increased acceptance of Indian tyres in the overseas market. However, in the United States, competition is crucial due to the removal of ADD on Chinese tyre imports.

Acuité believes the competitive landscape is susceptible to high risk due to stiff competition from low-cost radial tyres for the T&B segment imported from China and other Southeast Asian countries. Well-established brand names and their distribution networks, high capital intensity and low margins pose entry barriers to new entrants.

Input Related Risk

3/6

India being one of the largest producers of natural rubber in the world, it is primarily used in production of tyres (around 70%) as against 35-40% in developed markets. It accounts for about 70% of total cost of production of tyres and hence rubber price fluctuations and relatively inferior quality of domestic rubber, directly impacts the tyres industry. As per the Rubber Board, the deficit at 39.2% in six months to September in production (321,000 tonnes) vs. consumption (527,880 tonnes) of rubber caused prices to surge by 30% in FY 2016-17. The growers held back stock in the hope of a continued rally in the prices .

 

The demand–supply gap in domestic market and competitive prices of natural rubber in the international market (Rs. 118/kg globally compared with Rs. 131/kg domestic) results in high imports from the international market. Global prices have shown a tendency to rise after the consortium of Thailand, Indonesia and Malaysia considered cutting their exports. The import of natural rubber is currently only allowed at Chennai and JNPT ports, resulting in high logistics cost. Easing down of port restrictions is expected to streamline the freight cost. However, the exorbitant customs duty of 25% to curb import and the inverted duty structure on natural rubber have made it difficult to source the key raw material. The industry is seeking permission to allow rubber import on tariff rate quota basis at "nil" rate to the extent of deficit. The external dependency also calls for currency risk.

Other raw materials like synthetic rubber and carbon black are crude derivatives and their prices depend on crude oil prices. Ratio of natural rubber to synthetic rubber in tyre production in India is 73:27 as against 44:56 globally. Change in consumption pattern of synthetic rubber over natural rubber is growing at a higher rate due to cost benefits.

Carbon black makes up to 12% of tyre cost and industry consumes around 60% of domestic production. Demand-supply gap in the domestic market increased to 20% in FY 2017-18 from 14% in FY 2016-17 causing severe shortage in its domestic availability . The industry is demanding waiving off of ADD, duty-free import and regulation in its exports.

Acuité believes the overall profitability of the industry is impacted by high volatility in raw material prices and high duties on the import of rubber and carbon black.    

Regulatory Risk

4/6

The government has totally banned import of waste tyres in India for direct reuse. The government is working on a new legislation for waste tyre management for domestic manufacturers. This would require authorised collection and storage centres to ensure recycling and safe disposal of tyres. To address the regulatory requirement and cover the additional expenses towards waste management infrastructure and processes, companies are moving towards ownership based sales across the entire lifecycle of tyres. Reuse of tyres for beneficial purposes needs is being promoted by the government; which may affect the sales of tyres in the short-medium term.

Radialisation in Truck and Bus (T&B) tyres, which increases life span of tyres and leads to better mileage, is happening at a faster-than-expected pace and is expected to be one of the most important revenue drivers. Imposition of the anti-dumping duty (ADD) and hike in customs duty from 10% to 15% on imported radial tyres are expected to combat cheap Chinese imports and reduce price differential between the two.

Acuité believes the regulatory risk is moderate in the medium term though emergence of strict norms around disposability of used tyres shall make the industry accountable for environmental issues and might put profitability of the industry under strain.

Technology Risk

5/6

Manufacturing of tyres is technology and capital intensive in nature. Most tyre companies in India are expanding radial tyre capacities. Capital expenditure incurred on such expansion is expected to reduce profitability in the short term as manufacturing of radial tyres is more capital intensive than cross-ply tyres. New tyre technologies are being developed in close collaboration with automobile companies due to introduction of electric cars and self-driven cars. Thus the demand for high product segmentation can also pose a risk to the industry, in the medium to long term.

Tyre manufacturing companies also face the risk of under-utilization of existing capacity and bearing its related fixed costs. Capacity utilisation levels for manufacturing Truck and Bus Radials (TBR)is around 60-65% due to increasing dumping of TBR tyres from China. Also, the tyres and tubes industry was expected to witness completion of about 5 projects worth Rs 45.9 billion in 2016-17 adding an incremental capacity of about 13.7 million units to the industry. In the next two years (FY18 and FY19) about Rs 70 billion worth projects are to be completed adding another 12 million unit's capacity to the industry. Going forward, significant capex will put pressure on the utilization levels and hamper the operational margins of the players, thus requiring a higher capacity utilisation to improve margins and financial performance of the industry.

Acuité believes the technology risk is low in the near term as most of the current players are managing risk well through better inventory management systems and analytics.

 

 IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating 'High Risk' and 6 indicating 'Highest Safety'. The intermediate scores are defined in the table below:

Industry Risk Score Risk classification of the Industry
ACUITE IRS 1 Highly Unfavourable
ACUITE IRS 2 Unfavourable
ACUITE IRS 3 Neutral
ACUITE IRS 4 Marginally Favourable
ACUITE IRS 5 Favourable
ACUITE IRS 6 Highly Favourable

Data Sources & Credits

  • Rubber Asia website
  • Automotive Tyre Manufacture Association (ATMA) website
  • Society of Indian Automobile Manufacturers (SIAM) website
  • News Reports, Economic Times

 

 

Disclaimer:

Acuité IRS should not be treated as a recommendation or opinion that is intended to substitute for a financial adviser's or investor's independent assessment of whether to buy, sell or hold any security of any entity forming part of the industry. Acuité IRS is based on the publicly available data and information and obtained from sources we consider reliable. Although reasonable care has been taken to ensure that the data and information is true, Acuité, in particular, makes no representation or warranty, expressed or implied with respect to the adequacy, accuracy or completeness of the information relied upon. Acuité is not responsible for any errors or omissions and especially states that it has no financial liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of Acuité IRS.



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