Domestic Tyre Industry Cruising with

Tailwinds in Operating Profitability

March 21, 2023 l Ratings

Synopsis
• The domestic tyre industry’s sales revenue is expected to grow between 15-17% Y-o-Y (year-on-year) and is
likely to cross the Rs. 90,000 crore mark by the end of the fiscal year 2023. Over the next two to three years,
the industry is expected to grow by 4-5% Y-o-Y.
• Revenue growth was supported by price hikes in the current fiscal year. Exports are expected to be impacted
in the coming quarters due to geopolitical issues and adverse macroeconomic conditions. Nonetheless, exports
are expected to remain a growth driver for the domestic tyre industry beyond the current macroeconomic
condition.
• Replacement demand was tepid in FY23, particularly for commercial vehicles (CV), mainly due to stretched
replacement cycles amid rising prices, however expected to recover, particularly in the Truck & Bus segment.
Replacement demand for passenger vehicles (PV) expected to remain fairly stable.
• Tyre industry volumes are likely to clock approximately 5% growth in FY24, after closing the current fiscal
with 8-10% growth.
• Industry reported improvement in profitability with players reporting on an average 10.7% operating
profitability (for a sample set of listed players) i.e., incremental 70 basis points Q-o-Q (quarter on quarter)
after seven consecutive quarters of contraction due to super-cycle observed in input prices particularly in
natural rubber (NR) and synthetic rubber prices. Incremental improvement expected over the coming quarters
supported by high realizations and further moderation in raw material costs.

Record Growth in Revenue Likely on Growing PV Sales, CV Cycle

The Indian tyre industry proved to be resilient against the Covid-19 pandemic, supported by robust growth in
exports, driven by the globally adopted China+1 policy, and improved tyre performance by Indian tyre
manufacturers. Furthermore, the government's restrictions on tyre imports, particularly from China, resulted in
import substitution during FY21 and FY22. While replacement tyre demand, the backbone of the industry, continued
to perform steadily during FY21 and FY22, it has slowed down in the current fiscal year.

The easing of supply-related headwinds, particularly those related to semiconductors, the reopening of
schools/colleges, the government’s push towards infrastructure, and the increasing pace of private capital
expenditure, are expected to positively impact the demand for tyres from the automobile original equipment
manufacturer (OEM) segment. The industry has started witnessing growth from the second half of FY21, which
continued into FY22 driven by replacement demand, major revenue generator for the industry, and sharp boost in
exports. This growth is also driven by a steep decline in imports, particularly from China, following the application
of customs duty and restrictions on imports by the Government of India to promote domestic manufacturing. As a
result, imports fell from 8.7 million tyres in FY20 to 2.1 million tyres and 2.6 million tyres in FY21 and FY22,
respectively. The tyre industry recorded a 14% volume growth in FY22 Y-o-Y, and it is expected to end the year
with a 4-5% growth Y-o-Y in volumes for FY23. The tyre industry has been recording growth across the past 10
ten quarters, primarily led by a combination of growth in volume and realisations. Revenue growth in FY23 so far
is more driven by realisations on account of steep cost pressures.

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 Domestic Tyre Industry Cruising with Tailwinds in Operating Profitability

The Indian tyre industry generated approximately Rs 77,430 crore in consolidated revenues in FY22, growing by a
remarkable 24% YoY albeit at a lower base. It was mainly driven by rising volumes from the commercial vehicle
(CV) and passenger vehicle (PV) segments, along with significant contributions from the export segment. For FY23,
the industry is expected to end with a 15-17% Y-o-Y growth in revenue primarily supported by an increase in
realisations on the back of price hikes taken by players against soaring cost pressures. Going forward, the tyre
industry is expected to grow at 4-5% and is expected to cross the Rs 1 lakh crore revenue mark by FY26.

Chart 1: Trends in Domestic Tyre Industry’s Revenue

120000 1,05,000 30%
24%

% Change (Y-o-Y)
100000
15 - 17% 20%
80000 77,430
Rs Crore

60000 12% 10%

4% 6% 6% 5%
40000 3%
-2% 0%
20000
-6%
0 -10%
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26
(est.) (P) (P) (P)

Revenue (Rs Crore) Growth Y-o-Y (%)

Source: CareEdge Ratings, CMIE

Despite Current Headwinds, Exports Remain a Growth Pillar

Export tyre volumes had remained steady at 13-16 million tyres per annum over the four fiscal years through FY21,
but almost doubled in FY22 to 30.5 million, driven by increasing adoption of China + 1 policy, stringent anti-
dumping duties against Chinese products, and efforts by players to enhance exports. The faster recovery of demand
in the European and North American markets from the pandemic-led slump also contributed to the surge in exports.
As a result, the value of exports also rose by around 50% to Rs. 20,463 crores. It was secular export growth across
all segments in FY22, including CV, PC & UV, 2W, Agri, and Off-Road. The Indian tyre industry exports to over 170
countries, with major destinations being the USA, Germany, Brazil, France, and Bangladesh. While geopolitical
issues and macroeconomic headwinds remain a challenge, cost arbitrage and rising penetration in new export
markets, along with increasing market share in existing export geographies, will enable Indian tyre manufacturers
to capture a higher share of global exports going forward.

Price Hikes & Easing Cost Pressures to Drive Improvement in Profitability

Raw material prices, including natural rubber (NR), synthetic rubber (SR), and carbon black, have been relentlessly
rising over the past few quarters. A deficit in the supply of NR, due to erratic seasonal rains in key rubber-producing
geographies, Covid-19 lockdowns, and strong demand from China (which consumes over 40% of global rubber
produced), had led to higher NR prices globally and in domestic markets. Import duties and restrictions, along with
an acute container shortage and higher freight rates, have also kept imported NR expensive, allowing higher
domestic NR prices. Further, the Russia-Ukraine war has led to higher crude oil prices, which in turn have pushed
up prices of SR and other crude derivatives-based raw materials.

However, the reversal of crude prices due to recessionary expectations in key global economies, along with lower
freight rates allowing higher NR imports by domestic companies, has resulted in twin benefits for Indian tyre
manufacturers: falling NR and SR prices. Additionally, rising Covid-19 infections in China had resulted in softer
demand from China and, consequently, lower crude oil and NR prices. The tyre industry has started reporting a
decline in the cost of the raw material basket in Q3FY23on the back of moderation in raw materials costs. This

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 Domestic Tyre Industry Cruising with Tailwinds in Operating Profitability

trend is expected to continue over the next few quarters with further moderation in raw material costs in Q4FY23,
after having utilised most of its high-cost inventory in the third quarter.

Chart 2: Fall in Natural Rubber and Crude Prices, to cushion profitability.

190.0 120

Crude (USD/Barrel)
180.0 110
RSS-4 (Rs/Kg)

170.0 100
160.0
90
150.0
140.0 80
130.0 70
120.0 60
Dec-21

Dec-22
Jan-22

Jan-23
Mar-21
Apr-21

Mar-22
Apr-22
Jul-21

Jul-22
Sep-21
Oct-21

Sep-22
Oct-22

Feb-23
May-21

Nov-21

Feb-22
Aug-21

May-22

Nov-22
Aug-22
Jun-21

Jun-22
RSS-4 Kottayam (Rs/Kg) Crude (USD/barrel)

Source: CareEdge Ratings, CMIE

The Indian tyre industry has been faced inflationary pressures leading to limited price hikes in order to cope with
the steep hike in input prices. Consequently, the industry witnessed a fall in margins over seven straight quarters
through Q2FY23. Crude oil prices seem to have finally settled down in between US$80-90 per barrel along with
softening of NR prices. There is further downward pressure with crude oil prices falling below $75 in March 2023
on account of continued inflationary pressure globally along with adverse banking collapse news globally leading
to negative sentiment. This is despite of re-opening of China, auguring well for demand, being the second largest
consumer of crude oil. However, CareEdge Ratings expects the operating margins to improve from Q4FY23 and in
FY24 due to the moderation in raw material costs, leading to improvement in the tyre companies’ bottom line.

Chart 3: Operating profitability to Improve after declining for 7 quarters.

25.0 19.6 19.9
20.0 15.0 16.1
14.1 12.5
15.0 10.0 11.5 11.8 10.0 10.1 10.7
9.1 9.6 9.1 9.3
7.7
10.0 5.6 4.2 4.5 2.9 2.9 3.7 2.9
5.0 1.1
-0.8
0.0
Q3FY20

Q4FY20

Q1FY21

Q2FY21

Q3FY21

Q4FY21

Q1FY22

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Q2FY23

Q3FY23

-5.0

EBITDA (%) PAT (%)

Source: CareEdge Ratings, CMIE

CareEdge View
In FY23, the tyre industry is expected to witness revenue growth driven by price hikes implemented by tyre players
to offset the sharp increase in input costs. Despite challenges such as weaker European and US economies due to
inflation and geo-political issues arising from the Russia-Ukraine war, and moderation in replacement demand on
a higher base, the industry is expected to achieve revenue growth of 15-17% Y-o-Y, with revenue levels expected
to surpass Rs.90,000 crore.

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 Domestic Tyre Industry Cruising with Tailwinds in Operating Profitability

However, the exports segment, which had been a major revenue growth driver since Covid-19, is likely to face
headwinds in the near term due to macroeconomic headwinds and geopolitical pressures. The subdued replacement
market can be attributed to inflationary pressures. The domestic demand, on the other hand, is heavily reliant on
the Indian government's push for infrastructural development, which is expected to support the uptrend in CV
demand from original equipment manufacturers (OEMs) and revive CV replacement demand, resulting in expected
revenue growth of 4-5% over the next two to three fiscal years.

“In recent quarters, the tyre industry has been facing margin challenges despite recording revenue growth.
However, with the receding natural rubber and crude oil prices, the industry is expected to see a moderation in the
cost of the raw material basket starting from Q3FY23. This, along with the lag in the effect of earlier price hikes, is
expected to benefit the bottom line of Indian tyre companies. The margins of all players are projected to record
200-300 bps expansion in FY24 over FY23 exit margins, which will be around 10-11% on average. The credit profile
was impacted by margin pressure in FY22 and H1FY23, but as margins gradually improve in the second half of the
current fiscal year due to price hikes taken by the industry and the moderation of raw material costs and on
expected sustainability of the same, the credit profile is also expected to improve sequentially in FY24,” said Ravleen
Sethi, Associate Director at CareEdge Ratings.

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Domestic Tyre Industry Cruising with Tailwinds in Operating Profitability

Contact
PS Bhagavath Senior Director ps.bhagavath@careedge.in +91 - 22 - 6754 3407
Pulkit Agarwal Director pulkit.agarwal@careedge.in +91 - 22 - 6754 3407
Ravleen Sethi Associate Director ravleen.sethi@careedge.in +91 - 11 - 4533 3251
Yash Gupta Lead Analyst yash.gupta@careedge.in +91 - 20 - 4000 9000
Mradul Mishra Media Relations mradul.mishra@careedge.in +91 - 22 - 6754 3596

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