 "Shares of tyre companies rallied for a second consecutive day on Tuesday, with most of the big players registering cumulative gains of up to 6 per cent over the past two days.")
Tyre makers are expected to see a 7-8 per cent topline growth during the current fiscal, driven by a 3-4 per cent increase in realisations and volume, ratings agency Crisil Ratings said on Monday.
This would be for the second consecutive year that the estimated revenue growth for the tyre manufacturer will be in single digit (albeit nearly double than that of last fiscal) and after logging a compound annual growth rate of 21 per cent between fiscals 2021 and 2023, Crisil Ratings said.
It also said that realisation growth will be staggered throughout the fiscal as companies are raising prices gradually to offset the surge in the cost of natural rubber.
Volume growth, meanwhile, will be driven by replacement demand, Crisil Ratings said, adding that the analysis is based on the performance of top six tyre makers, which account for around 87 per cent of the industry's revenue.
According to the ratings agency, the high natural rubber prices and limited ability to pass on these costs due to modest volume growth will pull operating profitability for companies down by around 300 basis points, while cash flow, though moderately affected, will still be sizeable.
"Domestic demand accounts for around 75 per cent of the industry's sales (in tonnage terms), while the rest is exported. About two-thirds of the domestic demand is from the replacement segment and the rest is from original equipment manufacturers (OEMs)," said Anuj Sethi, Senior Director, Crisil Ratings.
This fiscal, Seth said, replacement demand, mainly from commercial and passenger vehicles, will drive volume growth, while OEM demand is expected to rise only 1-2 per cent due to slow growth in commercial vehicle sales.
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On the exports front, growth is expected to be muted at 2-3 per cent due to weak demand in key markets such as North America and Europe, which make up about 60 per cent of India's total exports.
Moreover, supply-chain disruptions due to geopolitical concerns have led to higher freight costs and longer transit times, weighing on export demand, it said.
According to Naren Kartic K, Associate Director, Crisil Ratings, "Given the sluggish demand and pressure on operating margins, tyre makers are implementing appropriate price increases and prudent capital expenditure to ensure that capital efficiencies remain satisfactory." With capacity utilisation at around 80 per cent, Crisil-rated tyre manufacturers are investing around Rs 5,500 crore this fiscal, slightly lower than last fiscal, with a focus on necessary capacity enhancements and debottlenecking, he said.
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
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