ICRA webinar on Indian Tyre Industry

Speakers:
Ms. Pavethra Ponniah, Vice President
Mr. K Srikumar, Vice President

We welcome you all to the ICRA’s teleconference on the Trends and Outlook for the Indian Tyre Industry. In this
presentation, we will cover the demand and supply trends in the tyre industry, price movements of key raw materials,
financial updates and our outlook on the industry.

COVID-19 pandemic had impacted most of the industries and automotive sector was one among them. The disruption
in auto demand was significant during most part of Q1 FY2021 amidst the lockdown across the country. With
subsequent relaxations in lockdown, the demand revived gradually in Q2 and a sharp recovery was witnessed across
vehicle segments since Q3 partly aided by the seasonal festivities. GDP estimates, which were initially pegged to
degrow in double digits were subsequently revised favourably with normalization of economic activities, and strong
rural sentiments.

With improved consumer sentiments and better financial availability, vehicle production levels have increased in
recent months. The bounce back in consumer-oriented segments like passenger vehicles have been significant. The
cumulative production levels of automobiles, tractors and mining and construction equipment recorded a de-growth
of 15% in FY2020 and the contraction for FY2021 is expected in double digits for second straight year, while tractors
bucked the trend.

We will now look at demand trends in tyre industry and ICRA’s estimates going forward. With vehicle production
slowing down in FY2020 and hitting multi-year lows in FY2021, the domestic tyre demand and production has been
consequently affected. Nevertheless, its impact has been relatively less in comparison to other auto components as the
demand skew towards the replacement segment is higher in tyres (~55-60% in units and over 65% in tonnage) against
sub-30% in most other auto components. In commercial segments like T&B and LCV tyres, the share of replacements
is high at ~74% and 66% respectively (units). The industry also generates over 20% of revenues from exports.

While tyres have historically outperformed other components given the large share of replacements, nevertheless tyre
demand contracted by 8.8% in FY2020. The contraction is the sharpest fall seen in the last 25-years and FY2021 will
see incremental fall due to the lockdown and weak consumer demand effect. For 9m FY2021, tyre demand fell by
~16.4% and segment wise, OE fell at higher rate of over 25% while replacements fell by ~10%.
Quarter-wise, Q1 FY2021 saw the sharpest fall of 67% hit massively by the pandemic-induced lockdown but with
pent-up replacement demand (especially T&Bs) and better rural output supporting tractor and motorcycle demand,
tyre demand recovered to a 1% YoY growth in Q2 FY2021. Nevertheless, factors like negative GDP growth, bearish
consumer sentiments, weak infra-related spend, etc continued to act as headwinds. The demand however picked up
sharply in Q3 as demand grew by ~16% YoY partly aided by festive season and the momentum has been stronger in
Q4 as well with estimated YoY growth of over 25% partly aided by a weak base. For full year, we expect the
contraction to be at 5-7% range.

Product-wise – In the PV segment, the OE to replacement share is 35:65 in the recent years. OE demand in last two
years were affected by rising ownership costs on the back of additional safety feature requirements, increase in
operating costs (like fuel, insurance, etc.), bearish consumer sentiments, rising preference for shared mobility, tepid
rural output etc. Lockdown due to Covid-19 caused further stress on the income level of the consumers and resulted
in deferral of non-discretionary items. There has been sharp recovery in PV sales in recent months, driven by festive
season and rising preference for personal vehicles. Nevertheless, for 9m FY2021, PV tyre demand witnessed a sharp
contraction of 26% with OE and replacement segments falling by 29% and 23% respectively. With Q4 likely to be
strong, the full year contraction is estimated at 12-14%. For FY2022, demand growth is likely to be robust at 18-20%.

Other key segment is T&B segment where the replacement share is high at above 70%. After witnessing one of the
worst years in history in FY2020, the segment started the current fiscal under an extended period of lockdown, amidst
the Covid-19 pandemic, subdued macroeconomic environment, and poor health of fleet operators. For 9m FY2021,
though OE segment fell by 56%, however demand in replacement segment bounced back sharply and grew by 2%,
resulting in overall contraction of 7%. As OE demand shoots up in Q4, full year demand contraction is estimated at
less than 1%. For FY2022, OE demand growth is likely to recover sharply although sustenance of replacement demand
remains to be seen. We expect a flattish growth for T&B segment for FY2022.

On to LCVs - uptick in rural demand, e-commerce and last mile transport requirements, insulated the segment from a
larger impact of pandemic. For 9m FY2021, LCV tyre demand fell by 21% YoY with contraction in OE and
replacement segments at 28% and 19% respectively. LCV tyre demand de-growth is expected at 10%-12% and for
FY2022, we expect a strong growth of 14-16% for LCV tyre segment.

Moving to two and three wheelers, there is an almost equal mix of OE and replacements for 2W but OE share is high
for 3W at 70%. Domestic demand witnessed recovery from Q2 onwards, driven by rural markets buoyed by healthy
rabi yields, timely kharif sowing, Government support schemes and a shift towards personal mobility in urban areas.
For 9m FY2021, 2/3W tyre demand fell by 15% YoY with contraction in OE segment at 27%, while replacement fell
by 4%. Given the strong rural dependence, motorcycles have performed better than scooters. For FY2022, we expect
over 15% growth for 2/3W tyre segment.
Finally, on to tractors, this is the only segment to report growth in current year. Healthy rabi cash flows, better
monsoons and good water reservoir levels have resulted in a sequential and sustained improvement in tractor sales
since May 2020. For 9m FY2021, there was 15% and 7% growth in OE and replacements segments, and we expect a
5-7% growth for FY2022 coming on a high base.

This slide is a summary and comparison of product wise tyre demand over last 15 years ending FY2020. Unlike
vehicle production statistics where the current numbers are comparable to decadal low figures, tyre industry is better
off and its current demand numbers are better than the long period mean. Even over the next 3 years, the projected
demand growth is seen better than the past 15-year CAGR trends across product segments and consumer segments
shall continue to outperform commercial segments.

Going forward - With expected recovery in economic activities and sustenance of rural output support, tyre demand
is estimated to grow by 13-15% (units) in FY 2022 with OE segment likely to fare better with a 16-18% growth while
growth in replacements are seen at 12-14%. In tonnage terms, a 7-9% growth is estimated for FY2022 given the
relatively lower growth seen in replacement part of commercial segments like T&B and tractors. Between FY022 and
FY2025, demand growth is pegged at 8-10% (units) and 6-8% (tonnage) during FY2022-25 (CAGR) aided by stable
replacements. Product wise -consumer segments are likely to outperform commercial segments.

We will now discuss the trends in tyre exports from India. At ~Rs. 12,550 crore in FY2020, exports accounts for
around one-fifth of tyre industry revenues and product wise, agri and construction tyres constitute the largest share of
65% in value terms followed by truck and bus at 25%. We export to over 175 countries and exports to top ten countries
is less than 50% of total exports. The USA, Germany, the UAE, Nepal and Bangladesh are the key destinations
accounting for one-third of total tyre exports (in value) from India.

Tyre exports (excluding bicycles) from India witnessed a marginal contraction in FY2020. Muted demand in the
overseas markets, coupled with the impact of Covid-19 pandemic on global automotive demand in Q4 FY2020 had
impacted tyre exports from India. Due to the Covid-19 impact on demand, tyre exports declined by ~19% (volume)
and ~7% (value) in H1 FY2021. However, rising preference for Indian tyres over China (post pandemic) and recovery
in global demand for agri/construction tyres has resulted in stable growth in tyre exports in the recent months. We
expect tyre exports to grow at low single digit during FY2021. Over long term, prospects for exporters remain
favourable with expected recovery in global auto demand and increasing acceptance of Indian tyres in global markets.
Moving to tyre imports, total value of tyres imported to India was ~Rs. 2,600 crore in FY2020, representing ~4% of
the domestic tyre industry revenues. The share was marginally higher at ~6% in FY2017 when the imports peaked at
~Rs. 3,280 crore aided by a sharp increase in import of Truck and Bus Radial (TBR) tyres from China. However, tyre
imports declined steadily post the re-imposition of the five-year, anti-dumping duty (ADD) on import of new Chinese
TBR tyres in Sep 2017, 500 bps increase in customs duty in Apr 2018, 500 bps rise in customs duty on import of
passenger car radial (PCR) tyres in Sep 2018 and imposition of countervailing duty (CVD) on Chinese TBR tyres in
June 2019. In June 2020, to support the domestic tyre industry from the effects of Covid-19 pandemic, the DGFT
placed categories of tyres imported under restricted category (vs. free category earlier), thus necessitating DGFT
permission (or) licence for all tyre imports. Following this move and amidst the weak domestic demand, tyre imports
fell by ~77% and 54% respectively in volume and value terms during 9M FY2021.

TBR tyres accounted for over 40% (values) of the total tyre imports in FY2017. Following the ADD re-imposition on
Chinese TBR tyre imports in Sep’17, there has been a gradual decline in imports in the last three years. While there
was some re-routing of TBR tyres from China through Thailand in FY2019/20, the Jun’20 restriction by DGFT on
import of all tyre categories led to a significant drop in TBR tyre imports. In 9m FY2021, the share of TBR tyres
reduced to 13% (values) with sustained fall in TBR tyre imports. ICRA expects the TBR tyre imports to remain low
over the next 15-18 months given the surplus capacity available in the domestic market and the ADD on Chinese tyres
being in effect till Aug’22. With sharp fall in import of other segments (especially T&B), the share of agri/ construction
tyres increased to 46% in 9m FY2021

In recent years, tyre imports have largely originated from China, Thailand and Vietnam, which cumulatively accounted
for ~60% of the total tyre imports in FY2020. Following the duty actions, tyre imports from these countries declined
by ~13% in the last three years (CAGR ending FY2020) and it contracted further post the DGFT restrictions. India
imports T&B, PV and 2W tyres from these three countries. A major part of tyre imports currently originate from
Japan. Imports from Japan have increased by 19% (3-year CAGR ending FY2020) and ~77% of tyre imported from
Japan are agri/construction tyres.

We will now move onto the trends in supply additions. With stable buildup of accruals, the industry players continued
to invest heavily with a highest ever annual capex spend of ~Rs. 7,800 crore in FY2020. However post pandemic and
continuing uncertainties, all tyre majors had deferred the earlier announced capex to FY2022. But with improving
domestic and export demand, capex executions have resumed in the last two months. The large capex spend towards
capacity addition in the last few years has resulted in sharp contraction in industry profitability (RoCE) levels (down
from over 20% till FY2017 to ~10% in FY2021e). Based on projected demand growth, we estimates an investment of
over ~Rs. 20,000 crore during FY2022-25.
Profit margins in the tyre industry are largely influenced by the price movement of raw materials (RM), namely natural
rubber (NR) and other crude linked inputs like synthetic rubber (SR), caprolactam, nylon tyre chord fabric (NTCF)
and rubber chemicals. Prices of crude derivatives which largely move in line with the oil prices with some time lag.
NR accounts for ~30% of the RM mix (in volume terms), followed by carbon black (25%), SR (20%), fabric (10%)
and others. In the global context, SR’s share is the highest due to product mix, road infrastructure, weather etc. ICRA’s
RM price index, which reflects the price basket for the tyre industry, has been steadily declining in last six quarters.
This was primarily led by the sharp and sustained fall in crude oil prices, although a sharp spike is seen in recent
months and the same shall impact near-term margins.

Domestic NR prices have been rising since July 2020 influenced by a significant spike in global prices amidst supply
shortage issues due to the pandemic-led impact on labour availability / rubber tapping in Thailand, fungal disease in
SE Asia and improving NR consumption by China. Domestic NR prices have mirrored the movement in global prices
historically. In Q2 and Q3 FY2021, global NR prices have increased sharply due to supply constraints and subdued
demand conditions. Also, rising oil prices have influenced the global NR prices with increasing usage of synthetic
rubber in global markets. Going forward, global price movement shall continue to influence domestic prices given
India’s import dependence.
Prices of crude derivatives like SR, Carbon black, Caprolactam (feedstock for Nylon tyre chord fabric) and other
rubber chemicals draw cues from the movement in oil prices, apart from individual demand-supply factors. Following
a 13% correction in FY2020, the oil prices fall is estimated at ~23% for full year FY2021 with consequent impact on
the prices of SR, carbon black and caprolactam. Most of these prices have spiked in recent months due to oil price rise
and this shall impact in Q4 FY2021 and Q1 FY2022 margins although part of the spike is expected to be passed on.

A peek into the quarterly performance of industry players - For our analysis, we have considered a sample set of 7
major players in the industry; these players account for over 80% of industry revenues. Covid-19 pandemic-led
lockdown impact on the tyre industry revenues was significant in the last fortnight of March 2020 and it continued till
May 2020. Accordingly, the revenues contracted by 15.2% and 44.2% in Q4 FY2020 and Q1 FY2021 respectively.
With a sharp rebound in replacement demand since mid-June 2020 supported by favourable rural output, reverse
migration and pent-up demand in urban market, revenues grew at a 7-quarter high of 10.7% in Q2 FY2021. Sustained
demand from replacement segment and major recovery in OE and export demand, resulted in all-time high levels of
revenues in the industry during Q3 FY2021.

On the margin front, higher scale coupled with favourable movement in input prices, especially the crude linked
derivatives lifted the profit margins. Operating profit margins witnessed sharp expansion to ~20% in the last two
quarters (ending December 2020), against the levels of 13-14% in FY2019 and FY2020. With elevated levels of
operating profits, net margins also expanded to over 10% in Q3 FY2021. Consequently, the earnings for the quarter
are the all-time high levels witnessed by the tyre industry.
Despite 18% contraction in H1 FY2021, with improving demand in H2 (both domestic and exports), the contraction
in revenues is estimated to be lower at low single digit for FY2021. Revenue growth is likely to be sharp next year
and given the lesser threat of imports (given the prevailing ADD on Chinese TBR tyre imports till Sep 2022), long-
term revenue growth is projected at 9-11% (4-year CAGR ending FY2025). While FY2021 will have higher margins,
going forward profit margins will remain vulnerable to the movement in input prices and capacity utilization levels.
Over the long-term, profit margins are expected at ~13-15%% at operating level and 6-7% at a net level.

Industry credit profile continues to be stable with healthy financial profile of industry players characterized by strong
capitalization and coverage indicators. Over long term, the industry credit profile is expected to remain stable given
the high dependence on replacement segment and stable accruals. The sizeable cash reserves in the industry are likely
to be deployed for capex purposes.

To summarize, for FY2021 the industry revenues shall de-grow in lower single digit. Improving macro economic
environment, stable rural demand and rising exports are key positives. Shortage of few auto components in global
markets, rising commodity prices and elevated fuel prices could however play spoilsport for the industry in the coming
months, and remain key monitorables. Long term growth expectations remain similar to earlier estimates at higher
single digits.

On the margin front, favourable oil prices supports the profit margins in current year and shall stabilize at 13-15% and
will remain exposed to the volatility in RM prices. On the credit metrics, considering the debt funded capex, the
coverage indicators are likely to moderate in FY2021. However, over long term, given the strong cash accruals and
high replacement mix, the credit profile of tyre industry is expected to remain stable. With this we will end our
presentation and the forum is now open for Q&A.