ICRA maintains volume demand growth estimate for FY22 at 13-15 pc

Ratings agency ICRA on Monday said it is maintaining the domestic demand growth in volumes estimate for the Indian tyre industry at 13-15 per cent for the ongoing fiscal year and 7-9 per cent for the FY22-25 period.

While the stable demand from replacement and export segments support industry revenues, earnings have been affected by elevated input prices, ICRA said in a statement.

”ICRA maintains its (volume) demand growth estimates of 13-15 per cent year-on-year (Y-o-Y) for FY2022 and 7-9 per cent (CAGR between FY2022-25) for the Indian tyre industry,” it added.

Following two years of contraction — down 9 per cent each in FY20 and FY21 — amid sharp contraction in vehicle sales and COVID-19, the ratings agency said tyre demand has recovered sharply in FY22.

”However, the impact of the pandemic on tyre demand has been relatively less compared to other auto components. This is given its higher skew (around 60 per cent) on the after-market segment,” it added.

The tyre industry is relatively better protected from any potential impact of Omicron due to its large dependence on the stable replacement market and learnings from earlier waves, ICRA said.

ICRA Assistant Vice President and Sector Head Nithya Debbadi said,”We expect industry revenue growth of 16-20 per cent in FY2022, driven by growth in volumes and realisations. While the demand is favourable, higher input prices (namely natural rubber and crude derivatives) keep industry margins and earnings under pressure.” Replacement volumes are at record-high levels with improving economic activities while OE (original equipment) sales are partly affected by the sluggish demand for two-wheelers and supply constraints impacting passenger vehicle production, she added.

”ICRA’s sample of tyre manufacturers witnessed strong year-on-year (Y-o-Y) growth of 25 per cent, recording all-time high revenues in Q2 FY2022 on the back of favourable replacement and export sales volumes,” Debbadi said adding, increase in realisations on the back of price hikes taken by the industry to offset the commodity inflation has also supported revenue growth.

Although the industry has seen some price hikes, she said,”We expect a 400-600 bps contraction in the operating margins for FY2022, while it would still compare well with pre-Covid levels.” With increasing acceptance of Indian tyres in the overseas markets, tyre exports have seen a sharp growth in the current year amidst healthy demand from destinations like the US and the European nations.

Tyre imports continue to remain low on the back of government regulations, thus favouring the domestic players, ICRA said.