Replacement market helps tyre cos end 2020 with better capacity utilisation

Tyre makers have started seeing capacity utilisation going up on the backdrop of demand recovery, mainly driven by the replacement market. While some players have deferred part of the capex, some have decided to expand ont the hope that demand will be better in the coming fiscal.

According to Automotive Tyre Manufacturers' Association (ATMA), tyre production dropped by 30% during the first half of FY21 in view of lockdown and restrictions on mobility in the first quarter which severely hampered the production. Reduced demand from both replacement and OE segments also affected the production. Total tyre production went down by 30% YoY in the Apri-September period. Turnover was down by 5% to Rs 60,000 crore in FY 2019-20 from Rs 63,000 crore in 2018-19, first decline in more than a decade.

Post the relaxation, the industry has started seeing an uptake in demand, largely driven by a stable replacement market.

While sales to original equipment manufacturers declined 16.3% year on year in FY20, the replacement market sales declined by a modest 2.6% over the same period. The replacement market share increased to 58% in FY20, according to IndiaRatings.

Satish Sharma, President, Asia Pacific, Middle East & Africa (APMEA), Apollo Tyres Ltd said "we have seen extremely good traction in the passenger car and truck bus tyre segments, especially in the replacement market, with record sales being witnessed in the last few months".

Raghupati Singhania, Chairman and Managing Director, JK Tyre & Industries added, demand recovery is quite robust across segments. The passenger car, LCV, 2-3 wheelers and farm tyres are finding good traction. It is quite rewarding to see that passenger segment sales are hitting all time high numbers ever achieved. The larger commercial tyres are relatively low in uptake. Here again the replacement demand is moving well but the OEM uptake is slowly coming back. The company's manufacturing facilities are currently operational at a consolidated capacity utilisation of over 80%. This is better than the pre-Covid levels.

Arnab Banerjee, COO, CEAT added that farms and two wheelers are doing very well, riding on the liquidity and growth in the rural economy. Passenger car segment too is doing well especially in smaller towns and a general aversion towards shared mobility. Commercial tyres are more closely correlated to overall GDP growth and hence gradually picking up. Measures taken by GOI for 'Atmanirbhar Bharat' by blocking imports have helped.

Capacity utilisation at CEAT is at 95% levels, higher than pre Covid. "We consider long term capacity utilisation of 80% to be good which is what it was approx pre-Covid".

On the outlook, Sharma said the capacity utilisation is likely to remain in the high 80s to early 90s, with demand, either at the same levels, or witnessing an improvement in some product categories. During the current fiscal company's capex would be around Rs 1,000 crore, and for the next fiscal, it would be around Rs 1,500-1,600 crore.

Banerjees said, CEAT is investing in all major categories such as TBR, PCR and two wheelers, as well as in agri radials. The capacity ramp up continues and so does the utilisation.

Singhania said he is optimistic about the next few quarters and expects the industry to continue its journey towards recovery. In 2021, government spending on infra, scrappage policy and preference for personal vehicles are expected to act as tailwind for the industry. However, as of now, company's investments have been put on hold.

On the restrictions on imports, they said, it has helped because industry has set up significant capacities and are still expanding. "We are capable technology-wise to produce what the customer requires both in India and globally as well. Hence the ban on imports has helped us," said Banerjee.

Sharma added, while the imposition of anti-dumping duty on truck bus tyres has been ongoing for a few years now, the recent order has been a positive for us in the passenger car tyre category as well. "We are also looking at launching our premium European brand, Vredestein, in India early next year, especially for the high-end cars, to capitalise on the ban on tyre imports".

Ind-Ra expects a mid-single digit decline in the tyre industry volumes, despite a sharper decline of 20%-25% in OEM volumes as the replacement market, would continue to support the industry. The overall industry could also benefit from any further restriction/duties on imported tyres. Ind-Ra expects the tyre sector revenue to recover in FY22, supported by a better demand from both OEM and replacement markets.

To compensate for the hike in raw materials, companies increased prices and planned to increase further.

Raw material prices have increased by around 10 per cent in the current quarter compared to the previous quarter, said Sharma, adding that prices are expected to increase further in Q4.

Apollo has raised prices (2–3%), depending on different product categories, towards the second half of the current month, to partially offset the steep increase.

Banerjee added, raw material prices are seeing an upswing both for rubber and petroleum based items. “We are also substituting some imports from China as well. We have already taken a small price hike for aftermarket in November. We are planning price hikes by the end of this month as well to cover the margins”.