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Indian tyre industry to gain strength

Published March, 2016

With the expected turnaround in Indian economy that will lead to a surge in sales of commercial vehicles, passenger cars, and two- and three-wheelers, tyre manufacturers in India expect good growth over the coming years, writes Huned Contractor.

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Good news, at last! As per the findings of an ICRA study, the credit metrics of the Indian tyre industry will remain strong with industry-wide revenue growth estimated at 4-6 per cent for FY 2017 as against 2-4 per cent de-growth estimated for FY 2016. Following a 15 per cent volume growth in FY 2015, the domestic tyre demand is estimated to grow by a muted 0-2 per cent during FY 2016 supported by 2-2.5 per cent growth in the original equipment manufacturer (OEM) segment and 1-1.25 per cent growth in the replacement segment. Continued weakness in OE demand in certain key segments, weak agricultural activity and consequent subdued rural demand as well as relatively muted infrastructural activity for most of the year affected tyre demand during FY 2016.

Domestic tyre production was also affected by the deluge in tyre imports (up 12-14 per cent FY16e) and falling exports (down 13-15 per cent FY16e). Imports of two-wheelers and truck and bus radials (TBR) surged; two-wheelers on capacity constraints in the local market and TBR post the February 2015 sunset of an anti-dumping duty (ADD) against China. With an expected broad-based revival in OE demand and economic activity in the country, and a likely improvement in rural demand given the weak base, ICRA expects the domestic tyre demand to grow by 4-6 per cent over the next three years (FY 2016-18).

Meanwhile, continued softness in input material prices - natural rubber (NR) and crude oil - has kept the industry profit margins at elevated levels throughout FY16. With the build-up of accruals and expectation of demand improvement, tyre manufacturers are expected to continue to invest towards capacity expansions, particularly in the two-wheeler (2W) segment, which suffers from capacity shortage. Around 60 per cent of the proposed capacity additions (in volume terms) are focused on the 2W industry, while in value terms, over 45 per cent of the investments are being made in the TBR segment.

 "As such, with expected improvement in demand, industry-wide revenues are expected to grow over the next 12-18 months, despite the fall in prices with the expected on-streaming of ongoing capacity addition in the industry. Profit margins are likely to remain at elevated levels with bearish outlook on rubber and crude oil prices, but the current levels are unlikely to be sustained over the next 12-18 months," states the report. In short, the Indian tyre industry has been witnessing tremendous growth for the past few years on account of growth in automobiles' demand, especially in passenger vehicles and two-wheeler segments.

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The segmentation

Traditionally, tyres are classified as cross-ply (bias) and radial based on the technology deployed in their manufacture. In India, the commercial tyre segment continues to be dominated by cross-ply tyres due to road conditions, loading patterns and the high initial cost of radials. There is a steady growth in radialisation across segments with the highest in passenger cars (98 per cent) followed by heavy commercial vehicles (25 per cent) and light commercial vehicles (22 per cent). The tyre industry consists of three distinct markets namely replacement, institutional/OEM and exports. By value, replacement accounts for around 60 per cent of the industry with institutional/OEM and exports making up 22 per cent and 18 per cent, respectively. In the commercial and farm segments, replacement sales form a major chunk. Meanwhile, both institutional/OEM and replacement sales play an almost equal role in the passenger segment. Of the total tyres produced in India, the top 10 tyre companies account for about 90 per cent of the volume.

Developments

Given the positive outlook for the industry, there have been several new projects announced by the major tyre manufacturers in India. JK Tyre & Industries is planning to enter the two-wheeler segment through the trading route. CEAT has launched a new store in Sultanpur, Uttar Pradesh as part of its growth plans to expand its network all over India. Apollo Tyres will double capacity at its Chennai plant with an investment of Rs 2,700 crore over the next 3-4 years. MRF is planning to invest Rs 4,500 crore at its Perambalur and Arakonam plants in Tamil Nadu in the next seven years. The company has also bagged Ultra Mega Project Status for the proposed expansion. TVS Srichakra is planning to invest Rs 150 crore in capacity expansion this year as it bets on replacement demand for two-wheeler tyres.

There have been tangential growth factors too. For instance, the Indian fighter jets have begun the process of changing over to Indian tyres, probably signalling an end to escalating cost and non-availability concerns. According to source in the Indian Air Force, the 'India shining' story is being scripted by MRF, which has got clearance from military airworthiness officials to produce the main wheel tyres of frontline fighters Sukhoi (Su-30 MKI). The indigenous tyres named Aeromuscle are 30 per cent cheaper than the imported ones. The MRF took the tyres for dynamometer tests thrice to a facility in China. Later, the tyres were sent for trials at the IAF bases in Bareilly, Jodhpur and Leh in 2011. They were finally cleared for getting on to the IAF assets in 2012. The MRF has so far delivered 350 tyres and the remaining are being manufactured at their plant in Medak, near Hyderabad.

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Given this northward trend, CEAT and Pirelli have announced an exclusive partnership for distribution of Pirelli's global range of premium motorcycle tyres in the Indian market. This sole partnership will leverage CEAT's vast distribution and dealer network pan-India. Riding on CEAT's ever-expanding network, Pirelli will offer its entire gamut of motorcycle tyres. This move comes in the wake of sales of premium bikes pick up steam and expected to grow by 16 per cent for the next five years. "We at CEAT have always believed in offering world-class products to our consumers and the Pirelli range of premium tyres for specialised high-end motorcycles is another step in that direction. India has huge potential in premium and super sport motorcycle segment, and we feel we can grow very fast with our premium products," says Anant Goenka, Managing Director, CEAT.

In terms of corporate developments, JK Tyre & Industries Ltd and JK Asia Pacific Singapore Pte Ltd, a wholly owned subsidiary of JK Tyre, have signed a binding term sheet with Kesoram Industries Ltd (KIL) to acquire 100 per cent equity in Cavendish Industries Ltd (CIL). CIL houses a tyre business undertaking located at Haridwar (Laksar), which manufactures a range of tyres, tubes and flaps. JK Group has agreed for this acquisition at an enterprise value not exceeding Rs 2,200 crore, subject to conditions. The acquisition will provide JK Tyre with further impetus towards ready expansion in the truck and bus radials segment, where it is a market leader, as well as entry into the fast growing two- and three-wheeler tyre market. "The transaction is a reflection of the inherent strength of the company in undertaking acquisitions with turnaround potential and successfully delivering results to all the stakeholders in the business. This was recently evidenced by a similar success story in JK Tyre's acquisition of Tornel, Mexico," says Dr Raghupati Singhania, Chairman, JK Tyre.

New technologies

Given the increasing emphasis on making vehicles as safe as possible and also help in cutting down weight and emissions, most of the tyre majors are now engaged in intensive research projects to help create new products. One of them is Continental Tyres that has been working on introducing car tyres with Taraxagum™ dandelion-rubber tread. At the ContiWinter Roadshow 2014, Continental presented the first test tyres made from the innovative material that the company is calling Taraxagum™, derived from the botanical name for the dandelion (Taraxacum). Manufacture of the first WinterContact TS 850 P with natural rubber from dandelion roots has taken Continental an important step closer to reaching its long-term goal of making tyre production more sustainable and less dependent on traditional raw materials.

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"After several years of development work together with the Fraunhofer Institute, we are excited to be taking the first dandelion tyres on to the road. A very high-yield and robust kind of Russian dandelion has been cultivated as a result of extensive research carried out over recent years together with the Fraunhofer Institute for Molecular Biology and Applied Ecology (IME), the Julius Kühn Institute, and the plant breeding company Aeskulap. The research project's long-term goal is to find an ecologically, economically and socially viable solution for the increasing demand for natural rubber. This would ease the pressure on the traditional rubber tree plantations in the tropics," informs Nikolai Setzer, Member of the Executive Board of Continental and Head of Tyre Division.

Increasing radialisation

According to the sector outlook published by Indira Report, sourced from Ace Equity, sensing enormous scope and changing trends in the tyre industry, most of the tyre companies, both domestic and international, are heavily investing in radialisation of tyres, mainly truck and bus tyres. Radialisation has emerged as a key factor contributing to the Indian tyre industry growth. Given the global phenomenon of radialisation in the commercial vehicles (CVs) segment, bias exports are losing momentum, leading to a trigger effect on bias capacity utilisations. The Indian tyre industry is also reflecting the global trend. Backed by growing awareness of cost benefits, continuously improving road infrastructure and stringent implementation of overloading norms, radialisation levels in the commercial vehicle space are likely to double to 50 per cent over the next four years. Increased investments in radial capacities, in the backdrop of the growing radialisation, are expected to yield significant benefits, moving ahead.

Imports and exports

Tyre imports witnessed a sharp jump of 19 per cent in volume terms in FY15, led primarily by surge in two-wheeler tyres. The US anti-dumping duty on Chinese tyres has led to the Chinese tyre makers dumping some stocks in India, causing a 15 per cent surge in tyre imports in the first half of FY15. The trend of rising imports is expected to continue over the near term on account of capacity constraints in the two-wheeler tyre segment and re-routing of the US-bound Chinese exports to India. Further, the anticipated spike in truck and bus (T&B) imports in 2015-16 - with the February 2015 sunset of the erstwhile anti-dumping duty (ADD) on T&B imports - is also expected to drive imports.

On the other hand, the Indian tyre industry exports to some 65 countries, but global economic slowdown has stymied growth over the past few years. Exports of tyre declined by 3-6 per cent in FY15 in volume terms across segments on account of subdued global automotive demand, especially in Africa and parts of Asia. The global shift towards radials is also leading to a drop in exports as India primarily exports cross-plys. However, exports are projected to grow a little faster than 4-6 per cent as the US' decision to slap anti-dumping duty on cheaper Chinese tyres has created opportunities for Indian tyre makers.