Ratings agency Icra today said the margins of tyre companies in the second quarter of this fiscal are likely to be affected as the auto sector is witnessing a demand slowdown.
It will also be hit due to rising imports, following removal of the anti-dumping duty on the Chinese and Thai products, the ratings agency said in its report.
The recent softening in rubber prices and benefits of trye price hikes over the past 18 months are expected to provide some relief to tyre manufacturers in the second half, it added.
"While the short-term outlook appears stretched in view of the demand slowdown and removal of anti-dumping duty, strong replacement demand is expected to cushion the demand slowdown," Icra Senior Group Vice-President & Head (Corporate Sector Ratings) Subrata Ray said in the report.
"Though the recent softening in rubber prices is expected to provide some relief, Icra anticipates the pricing power of the industry to be affected by large supply additions from the next fiscal," Ray said.
Domestic car sales fell by 16% for the first time in July in the past 30 months, mainly due to hikes in the lending rates and lower production by market leader Maruti in that month.
Car sales nosedived in August due to steep slide in sales by the three biggies-- Maruti, Hyundai and Tata Motors -- even though foreign players as well as two-wheeler companies saw sales picking up in the month, as higher interest rates and rising prices of fuel kept people off the market, it said.
While revenue growth of tyre makers in 2010-11 was supported by healthy demand from both OEMs (original equipment manufacturers) and replacement market, margin was adversely impacted by a sharp spike in the input costs, especially that of natural rubber, the report said.
During the first quarter, the tyre industry continued to post a healthy revenue growth to the tune of 25-30%, supported by strong OEM, replacement and export demand, the agency said.
The report also said that the pricing power of the companies will come under pressure, following large capacity additions in the last fiscal.
While strong growth in OEM sales in the last two fiscals is likely to translate into higher replacement demand during this fiscal, the overall demand growth is likely to be relatively muted, capping margins, it added.
