Improving demand, peak CAPEX to trigger tyre industry's growth

Improving demand along with stable competitive intensity, and peak capex is expected to trigger linear growth for the Indian Tyre industry.

Accordingly, Motilal Oswal Financial Services said the Indian Tyre industry is expected to clock a 12 per cent CAGR over FY21-25E.

Besides, MOFSL expects sustained recovery in demand from both replacement and OEM segment, coupled with increase in exports.

"While OEM demand is expected to see a cyclical recovery over the next 2-3 years, replacement demand is expected to benefit from pent-up demand, import restrictions, and premiumization witnessed across the automotive segments in the last five years," said MOFSL.

In the last five years, demand environment was impacted by weak OEM volumes, a feeble economic environment, impact of GST, and higher imports.

"We estimate '2W', 'PCR', 'T&B' tyre volumes to clock 8 per cent, 11 per cent, 13 per cent CAGR over FY21-25E."

"This coupled with a reasonable pricing environment and operating leverage, will enable a recovery in profitability and capital efficiency."

According to MOFSL's analysis, '2Ws' appear to be the best placed segment, followed by 'PCR'.

Furthermore, it cited that since December 2020, tyre companies have taken a price hike of 8 per cent till June 2021.

"We estimate gross margin for tyre companies to decline by 80-110bp over FY21-23E."

"This coupled with operating leverage, will enable a recovery in profitability and capital efficiency."

In addition, it said that heightened competitive intensity might impact profitability of the sector.

"Tyre sector is witnessing intense competition, with almost all players undertaking huge capacity additions in pursuit of market share."

"Under the circumstance, where demand remains subdued, we might see heightened competitive intensity, impacting profitability for the sector," it said.