Domestic Tyre Demand will Grow by 6-8% in FY24: ICRA

Commercial Vehicle (CV) demand remains supported by infrastructure and building activity, while there was some sluggishness in Q1 with pre-buying ahead of the transition to BS6 2.0 emission standards.

According to ICRA, tyre demand will increase in the domestic market for FY24 by 6-8% YoY, owing to favourable demand from the original equipment manufacturer (OEM) segment and an expected rebound in replacements.

A better product mix and range-bound input prices are likely to raise margins by 200-300 basis points in FY24, according to the independent and professional investment Information and Credit Rating Agency.

Based on favourable prospects for most product categories, the OEM segment is predicted to increase by 7-9% YoY in the current fiscal year.

Consumers' preference for personal mobility and increased disposable income are projected to support passenger vehicle (PV) demand. Commercial Vehicle (CV) demand remains supported by infrastructure and building activity, while there was some sluggishness in Q1 with pre-buying ahead of the transition to BS6 2.0 emission standards.

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According to the research firm, demand recovery in the two-wheeler market has been modest, and the momentum in the coming quarters would be determined by monsoon performance.

In FY24, ICRA anticipates mid-single-digit growth in the replacement segment. Volume growth is expected to level out this year after two years of pent-up demand and rising prices.

Demand has been restrained to some level in the last 2-3 months, but it is expected to recover as urban and rural morale improves. However, the impact of an unfavourable monsoon distribution and the incidence of El Nino on rural demand will be closely monitored.

Tyre export volumes fell 7% year on year in FY23 due to lower demand from major countries due to economic downturn and inflationary pressure. The agency anticipates that export demand will remain weak in the next quarters.

"Following a sharp 26% expansion in FY22, revenues of the domestic tyre industry (consolidated for ICRA's sample of seven leading tyre manufacturers) witnessed a healthy 19.5% growth in FY23. This was underpinned by robust OEM demand, moderate replacement demand, and favourable realisations as a result of an improved product mix and the pass-through of raw material price increases. We anticipate revenue growth of 5-7% year on year in FY24, driven by 6-8% year on year growth in domestic tyre demand, a projected reduction in exports, and flat average realisations," stated Nithya Debbadi, Assistant Vice President and Sector Head - Corporate Ratings, ICRA.

In FY23, the industry's operating and net margins were 11% and 4%, respectively. Margins, which were impacted by high input prices and growing freight costs in FY22 and H1FY23, saw a rapid rebound in H2, with natural rubber and crude oil derivatives prices decreasing since July 2022.

"ICRA expects margins to expand by 200-300 basis points in FY2024 due to improved product mix and range-bound input costs, supporting industry players' overall earnings profile," Debbadi noted.

On the supply side, capacity built in the previous year is progressively being tapped. This, combined with a reduced increase in domestic tyre demand (relative to the previous two years) and weak export demand, may slow the pace of supply addition in the short term.

Nonetheless, the sector will continue to engage in capacity expansion, research and development efforts linked to tyre quality enhancement, and potential related to vehicle electrification in the longer term. While some of the capex would be paid by debt, tyre makers' credit profiles will be backed by robust profitability and cash reserves, according to the report.