Demand outlook of Indian tyre industry remains favourable: ICRA

According to ICRA ratings agency, demand for Indian tyres is expected to rise by 13-15% in the original equipment manufacturer segment (OEM) and 13-15% in the replacement market segment. This follows two years of contraction.ICRA stated that capex executions have resumed in recent months following a hiatus in improving domestic and exports demand. Based on projected demand growth, ICRA estimated that capital expenditures of more than Rs. 20,000 crore are expected in the tyre sector between FY2022- FY2025. This would be partially debt funded.According to the agency, the demand outlook for the tyre sector remains favorable. Growth in the current fiscal will be helped by a sharp recovery of OEM tyres demand, lower base effect FY2021, improved pace of vaccination, continued preference of personal mobility, healthy rural cash flows, and normal monsoon forecasts.Srikumar Krishnamurthy, ICRA Vice President and Head of Co-Group Srikumar Krishnamurthy stated that tyre demand is more resilient than other components because the replacement demand in tyres protects it from cyclicality.He said that vehicle production had dropped by between 13-15 percent and 8 percent over the past two years due to weak consumer sentiments, subdued economic activity, and a drop in domestic tyre demand.Krishnamurthy stated that tyres demand declined sharply in Q1 FY2021, in line with the auto industry's overall lockdown. However, the recovery was faster and stronger as tyre volume reached pre-COVID levels by Q2 FY2021, and saw a healthy growth in both the second and third quarters.He stated that ICRA expects domestic tire demand to rise at a Compound Annual growth Rate (CAGR), of 7-9% in units, between FY2022- FY2025. This is due to stable replacement demand, an increase in OEM demand, and increased exports.The ratings agency stated that the demand for Indian tyres is expected to rise at 13-15 percent in OEM segment and 7-9% in replacement segment, respectively, in 2021-22. This follows two years of contraction and stable growth in both segments.ICRA stated that exports, which account for nearly one-fifth the industry's revenue, will be supported going forward by greater acceptance of Indian tyres.After a slight contraction in FY2020 it said that exports increased by 10 percent in terms of value and 8 percent volume terms in FY2021.The ratings agency stated that exports were supported by strong demand from top export destinations like the US and European countries in FY2021, which was primarily driven by the agriconstruction segment.The Director General of Foreign Trade (DGFT), which placed all categories of tyre imports in the restricted category against the free category earlier, had a significant impact on imports of tyres. This resulted in a drop in imports of 77 percent in volume terms, and 51 percent in values terms.Capex executions have been resuming after a hiatus due to improving domestic and export demand.ICRA said that based on forecasted demand growth, it estimated capital expenditures of more than Rs 20,000 crore between FY2022- FY2025. This would be partially debt funded. It also stated that healthy earnings and cash reserves would support the credit profiles and credit scores of tyre producers.ICRA stated that the ratings agency maintains a stable outlook for India's tyre industry.