Indian tyre sector: A smooth ride ahead says Sushil Finance

Sushil Finance has come out with its report on tyre sector.

The Indian tyre industry has seen strong demand growth post FY 2009 but huge spike in Natural rubber prices from CY 2011 have had a severe impact on profitability of the Tyre Companies. There were price revisions seen by tyre manufacturers across the industry but they were not enough to pass on the steep rise in rubber prices. However with the recent decline in rubber prices the medium to long term outlook on the sector remains promising. Few of the factors that would have an impact on demand for tyres in India have been summarized below.

Healthy Auto Demand to drive demand for Tyres:According to SIAM, Passenger Vehicle (PV) Sales are expected to grow from 2.2 mn units in 2009 to 5.1 mn units in 2015 implying a CAGR of 15.0%. On the other hand Commercial Vehicle (CV) Sales including Small Medium and Heavy CV’s are expected to grow from 0.47 mn units in 2009 to 1.42 mn units in 2015 implying CAGR of 20.2%. Auto demand touched new peaks during 2010 after slowdown witnessed in 2009 period. The effect of this huge growth will be witnessed in replacement market in coming period. Replacement markets enjoy higher margins than OEM segment and the increase in demand from Replacement would mean higher margins.

Increasing shift towards Radialization: Indian tyre industry lags far behind other developed countries when it comes to Radialization in Trucks and Bus Segment (T&B). The Indian markets are slowly converging towards radial tyres in CV segment. Tyre Companies are now continuously investing in radial capacity which is likely to improve turnover and margin performance due to change in the sales mix.

Branding and Advertising play key role: The leaders in the industry are MRF Tyres , Apollo Tyres, JK Tyres and Ceat together commanding over 70.0% of the market. As there are only these few players who command major shares of overall market in India, branding and advertising remains a key.

Huge Entry Barriers and Low Margin business: The entry barriers in this business remain very high owing to high initial investment required. Also high Raw material costs coupled with higher working capital requirements and high competition tends to keep the industry profitability under check despite strong tyre demand.

Retreading Business: As Companies across tyre industry have raised prices owing to higher input costs, there could be increase in demand for retreading by customers which could affect demand in Replacement market going forward. Retreading can be done 2-3 times depending on tyre conditions and gives a new life to tyre at almost 25.0% of the new tyre costs. Sharp increase in retreading has an impact on tyre demand from replacement markets.

Dumping from Foreign Companies: Increasing penetration from foreign players particularly Chinese Companies in Indian tyre markets is likely to impact the profitability of local players. Although Chinese companies enjoy low market share currently (5-6%), it can increase going forward on price competition.

Source: http://www.moneycontrol.com/news/brokerage-recos-sector-report/indian-tyre-sector-a-smooth-ride-ahead-says-sushil-finance_682400.html

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