Industry Risk Score : Tyres

The Indian tyre industry is primarily based on the domestic market, which contributes to around 80-85% sales. The industry is majorly dependent on the growth of the overall automobile industry coupled with replacement demand.

In FY19, the growth in tyre volumes is estimated to be 7-9% y-o-y, bringing the volumes to ~190 million tyres. In fact, the first half was impacted due to supply shortages of rubber due to floods in Kerala.

The tyre industry in India is highly competitive with about 40 companies in the domestic segment. However, the top 10 companies account for 85-90% of the overall market share with MRF Ltd, Apollo and JK Tyre & Industries constituting ~60% of the total tyre market in India.

Rubber and Carbon Black are the key raw materials for the tyre companies. While volatility in crude oil prices affects carbon black, rubber which is the principle raw material required for tyre manufacturing, faces variation from huge demand-supply gaps. Rubber also sees sharp volatility in prices in the domestic market, inversely impacting the sector. Owing to the domestic supply constraints, the industry has to resort to imports. Consequently, the sector depends upon rubber imports to the tune of 45% (of total demand), from the Southeast Asian countries such as Thailand. However a customs duty of 25% on imports and the inverted duty structure on natural rubber has further deteriorated the availability of the raw material.

The Indian tyre industry also faces increased competition from China. Over the years, owing to rise in cheap imports of tyres from the country, capacity utilization for domestic companies has been negatively impacted - thereby affecting their profitability. To combat these rising imports and to act as a deterrent in future, the import duty on truck & bus radials (TBRs) was increased from 10% to 15%. Radialisation in Truck and Bus (T&B) tyres, which increases tyre life span and offers better safety and mileage, is expected to be one of the most important drivers for players going ahead.

Key Risks & Attributes

• Volatility in prices of raw materials
• Changes in government policy and underlying growth risk

The tyre industry is an ancillary to the automobile industry. Consequently, rise in the automobile industry tends to support growth in the tyre sector in addition to replacement demand.

As per data available in the public domain, the tyre market is majorly driven by two and three wheelers (~50%), followed by passenger cars (~30%) and CVs (~15%). Tyres can also be classified as cross-ply and radial, based on the technology used.

Typically, tyre demand originates from three end-user categories which are the original equipment manufacturers (OEM) (dependent on new vehicle sales), replacement demand (linked to usage patterns, road conditions and replacement cycles) and exports.

Of the three, in value terms, replacement accounts for more than half of the market followed by OEM’s (accounting for 15-25%) and exports make up the rest. The replacement demand is less cyclical than OEM’s and is generally a higher margin business for tyre manufacturers. Tyre volume is estimated to record a growth of 7-9% y-o-y in FY19 (~19 crore units) led by higher replacement market demand. Exports on the other hand is estimated a 14% y-o-y growth led by revival in demand across segments.

Replacement demand for tyres typically depends on road conditions, overloading norms and kms driven. Despite undergoing destocking by several dealers in FY18 owing to the GST rollout, demand picked up in FY19. Going ahead as well, notwithstanding tepid growth in the auto sales, the demand from the replacement market is likely to augur well for the sector and would be the key growth driver. Current high density of vehicles on the roads coupled with likely pick up in OEM sales in Q4 FY20 is expected to drive demand as well.

Moreover, In India, the commercial tyre segment is dominated by cross ply tyres due to road conditions and the high cost of radials. Presently, passenger cars record the highest radialisation in the sector with almost 100% coverage, followed by CV’s (~45-50%). However, rising awareness of its favourable cost-benefit ratio and improved fuel efficiency has led to expansion in radial tyre capacities by tyre companies.

Imports available from Chinese manufacturers will however continue to remain the key sector monitorable.

Acuité believes the industry is less exposed to demand side risk owing to the buoyant replacement demand growth notwithstanding the subdued demand from OEMs amid waning economic growth.

The domestic tyre industry is controlled by 10 players, which account for 85-90% with MRF Ltd, Apollo and JK Tyre & Industries constituting ~60% of the total tyre market in India. MRF Ltd is the leading player, with an overall market share of around 28%, followed by Apollo and JK Tyre & Industries Ltd with share of 19% and 13%, respectively. The T&B segment is highly competitive with JK Tyre, MRF and Apollo as the leading players. In the passenger car segment however, Apollo and MRF enjoy an equal market share, followed by Bridgestone. While the industry is moderately consolidated, pricing flexibility has been impacted due to similar market shares amongst domestic players.

In the past few years, Chinese companies majorly accounted for replacement market in T&B segment, while the Indian capacities were underutilised. Consequently, the anti- dumping duty (ADD) was imposed on imports from China post September 2017 in order to protect domestic players for the next five years which led to drop in imports.

Acuité believes the competitive landscape is susceptible to moderate risk due to competition from low-cost radial tyres for the T&B segment imported from China. However, duties imposed on the same is likely to taper growth in imports going ahead.

India being one of the largest producers of natural rubber in the world, is primarily used in production of tyres (around 70%) as against 35-40% in developed markets (where rest is composed of synthetic rubber). The cost of the overall raw material used in tyre manufacturing in fact, accounts for about 65-70% of total cost of production. Subsequently any price fluctuations in rubber directly impacts the profitability of the players in the industry and the sector as a whole.

As per the Rubber Board, the gap between production and consumption of natural rubber widened by 46% between the first 10 months of FY19.

	Apr'17-Jan'18	Apr'18-Jan'19	Difference	YoY (%)
Production	5,97,000	5,56,000	-41,000	-7
Consumption	9,13,410	10,18,600	1,05,190	12
Gap	-3,16,410	-4,62,600	-	46

The demand–supply gap in domestic market and competitive prices of natural rubber in the international market results in high imports from the international market. Global prices have also shown a tendency to rise after Thailand, Indonesia and Malaysia considered cutting their exports. Currently, the imports are only allowed at Chennai and JNPT ports, resulting in high logistics cost. The exorbitant customs duty of 25% to curb import and the inverted duty structure on natural rubber have made it difficult to source the key raw material.

Other raw materials like synthetic rubber and carbon black are crude derivatives and their prices depend on the relevant crude oil prices. Ratio of natural rubber to synthetic rubber in tyre production in India is 73:27 as against 44:56 globally. However, change in consumption pattern of synthetic rubber over natural rubber is growing at a higher rate due to cost benefits and is likely to lead to higher demand.

Carbon black on the other hand, makes up to 12% of tyre cost and industry consumes around 60% of domestic production.

Acuité believes the industry is exposed to input risk as the overall profitability is impacted by high volatility in raw material prices and high duties on the import of rubber and carbon black.

India follows the inverted duty structure with regard to the tyre industry wherein natural rubber attracts a higher customs duty (~25%) compared to its finished product. Consequently, it has led to rise in cheap import of tyres from China. However, several associations such as Automotive Tyre Manufacturers Association (ATMA), had requested the government for imposition of anti-dumping duty on import of TBR tyres from China, which accounts a significant portion of TBR's import into India.

Moreover, as per the information available in the public domain, the Directorate General of Antidumping and Allied Duties (DGAD) too had opined the negative impact on domestic companies due to the dumped imports of these tyres from China. Subsequently, imposition of definitive anti-dumping duties on the imports of radial tyres has been recommended. Imposition of these duties is likely to be a positive step for domestic manufacturers and would be a key monitorable.

Further, with the banning import of waste tyres for direct reuse, the Government is working on a new legislation for waste tyre management for domestic manufacturers.

Acuité believes the industry is less exposed to regulatory risk as the policy changes are largely driven with respect to underpinning domestic industry.

Manufacturing of tyres is technology and capital intensive in nature. The rise in the market penetration of radials has driven a renewed capacity augmentation in capacities.

New tyre technologies are being developed in close collaboration with automobile companies with the introduction of electric and self-driven cars. Thus the demand for high product segmentation requires monitoring.

Tyre manufacturing companies to an extent face the risk of under-utilization of existing capacity and bearing its related fixed costs. Capacity utilisation levels for manufacturing Truck and Bus Radials (TBR) is around 60-65% due to increasing dumping of TBR tyres from China.

Acuité believes the technology risk is low in the near term as most of the large players have already started focusing on improving their technological advancement.

Industry financial performance risk score

Operating Margin
(Marginally favorable)

Interest Coverage Ratio
(Marginally favorable)

Return on capital employed
(Marginally unfavorable)

Debt/ Equity
(Favorable)

GCA days
(Marginally unfavorable)

Note: The industry financial performance risk score is provided on a 6-point scale