indian tyre industry 2017

ICRA RESEARCH SERVICES Contacts: Subrata Ray

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Pavethra Ponniah +91 44 4596 4314 [email protected] K Srikumar +91 44 4596 4318 [email protected]

February 2017

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INDIAN TYRE INDUSTRY Demonetisation hits demand; rising commodity basket nails margins

mailto:[email protected]

Tyre Feature – February 2017

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Contents

Summary

FY2017: Domestic volume demand growth outlook revised ------------------------------------------------------------------------------------------------------------------------------------ 5

Indian automotive industry - Demand trends and outlook

Automotive demand scenario --------------------------------------------------------------------------------------------------------------------------------------Error! Bookmark not defined. Demonetisation hit domestic volumes in November and December-16 -----------------------------------------------------------------------------------Error! Bookmark not defined. Growth expectations scaled down for Commercial vehicles and Two-Wheelers ------------------------------------------------------------------------Error! Bookmark not defined. M&HCV demand hit by weak load availability --------------------------------------------------------------------------------------------------------------Error! Bookmark not defined.

Indian tyre industry - Demand trends and outlook

Tyre demand scaled down as OEM demand weakens in CVs and demonetisation hits replacement volumes ------------------------------------Error! Bookmark not defined. Tyre exports rebound after two years of decline ---------------------------------------------------------------------------------------------------------------Error! Bookmark not defined. Tyre imports see a moderation post demonetisation --------------------------------------------------------------------------------------------------------- Error! Bookmark not defined.

Supply additions

Is this the beginning of the next capex cycle? ----------------------------------------------------------------------------------------------------------------- Error! Bookmark not defined.

Raw material price movements

Domestic NR prices up 30% in the last three months vis-a-vis 50% rise in global NR prices; imports fall ---------------------------------------Error! Bookmark not defined. Prices of crude derivatives spike sharply with rise in crude oil prices -------------------------------------------------------------------------------------Error! Bookmark not defined.

Industry financials and ICRA ratings on the sector

Q2FY2017 operating margins contracts; revenue growth remain stunted by price cuts and weak T&B tyre demand -------------------------Error! Bookmark not defined. FY2017: Growth scale down sharply on price cuts and weaker demand -------------------------------------------------------------------------------------------------------------------- 7 Long term return on Capital indicators continue to be strong --------------------------------------------------------------------------------------------------------------------------------- 8 Industry-wide comparison of players’ profile ------------------------------------------------------------------------------------------------------------------Error! Bookmark not defined. ICRA credit ratings on tyre players ------------------------------------------------------------------------------------------------------------------------------Error! Bookmark not defined. Tyre industry – median financials -------------------------------------------------------------------------------------------------------------------------------Error! Bookmark not defined.

Company Section

Apollo Tyres Limited --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 41

Balkrishna Industries Limited --------------------------------------------------------------------------------------------------------------------------------------------------------------------- 44

Ceat Limited -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 47

Goodyear India Limited ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 50

JK Tyre And Industries Limited ------------------------------------------------------------------------------------------------------------------------------------------------------------------- 53

MRF Limited ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 56

TVS Srichakra Limited ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 59


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List of Tables and Charts

Automotive industry demand

Exhibit 1: Automotive Industry Production Growth (Volumes)

Exhibit 2: Automotive Industry Segment Wise Production Growth

Exhibit 3: Domestic Volume Growth Trends Across Segments

Exhibit 4: M&HCV Domestic+Export sales trend

Exhibit 5: LCV Domestic+Export sales trend

Exhibit 6: Tractors Domestic+Export sales trend

Exhibit 7: Two-wheeler Domestic+Export sales trend

Exhibit 8: PV Domestic+Export sales trend

Tyre industry demand

Exhibit 9: Tyre Industry Volume Demand Growth

Exhibit 10: Tyre Industry Tonnage Demand Growth

Exhibit 11: Domestic tyre demand (volumes) during FY2016

Exhibit 12: Segment Wise Domestic Demand (Volume) Growth Forecasts

Exhibit 13: Segment Wise Domestic Demand (Volume) from OEM

Exhibit 14: Segment Wise Domestic Demand (Volume) from replacements

Tyre Exports

Exhibit 15: Historical trends: Export sales (value)

Exhibit 16: Tyre exports: Composition

Exhibit 17: Growth in segment wise tyre exports

Exhibit 18: Exports to USA - Segment mix (values)

Exhibit 19: Exports to Germany - Segment mix (values)

Exhibit 20: Segment-wise exports growth (%)

Exhibit 21: Country wise tyre exports: Top 10

Exhibit 22: CVD rates on Indian OTR tyre exporters

Exhibit 23: Key milestones relating to investigations of OTR tyres imports from India

Tyre Imports

Exhibit 24: Historical trends: Tyre imports (value)

Exhibit 25: Tyre Imports : Composition

Exhibit 26: Growth in segment wise tyre imports

Exhibit 27: T&B tyre imports and share of demand

Exhibit 28: PV tyre imports and share of demand

Exhibit 29: 2w tyre imports and share of demand

Exhibit 30: Country wise tyre imports: Top 10

Capacities and Supply

Exhibit 31: Planned capacity additions during FY17 onwards

Exhibit 32: Trends in industry wide capacity utilization

Input Costs

Exhibit 33: Trends in NR Supply gap and net imports in India

Exhibit 34: Trends in domestic and international NR price movements

Exhibit 35: Trends in NR production and price movements

Exhibit 36: Price trends of Crude oil and rubber

Exhibit 37: Movement in WTI oil prices and price index of crude derivatives

Exhibit 38: Synthetic rubber - Production, consumption and imports

Industry Financials

Exhibit 39: Quarter-wise comparison of NR prices and Operating margins

Exhibit 40: Quarterly coverage indicators

Outlook

Exhibit 41: Trends in Revenues and growth

Exhibit 42: Operating and net margins estimates

Exhibit 43: Movement in RM and employee costs as % of revenues

Exhibit 44: Industry wide capex estimates

Exhibit 45: Debt metrics

Industry wide peer comparison

Exhibit 46: Operational and financial comparison across players

ICRA ratings in the industry

Exhibit 47: ICRA’s Ratings in the Tyre industry

Industry median

Exhibit 48: Profitability ratios Exhibit 49: Capitalisation ratios Exhibit 50: Liquidity ratios Exhibit 51: Coverage ratios


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Summary


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FY2017: Domestic volume demand growth outlook revised from 6%-7% to 4%-6%

Demand growth halted by demonetisation

ICRA research has scaled down the demand estimates for FY2017 from 6-7% to 4-6% while maintaining the three years CAGR growth outlook for tyre industry

volumes at 6-7%. As compared to our earlier expectations of 8% and 5% growth in the OEM and replacement segment respectively, OEM demand has been scaled

down to 5-7% and replacement to ~4-6% for FY2017. Replacement accounts of over 65% of the share of the industry. Volume growth in the domestic tyre industry

was robust in the passenger segments during H1FY2017—both for 2W and passenger cars. Agri-segment volumes, particularly in the replacement segment was

strong at 18% plus. However, Q3 FY2017 played spoilsport. After a particularly robust April-May’16 of 21-22% growth, M&HCV OEM volume growth tapered off into

the negative territory in Q2FY17. The demonetization announcement of November 8, 2016, worsened the situation, with M&HCV OEM growth falling to 1% in YTD

Dec-16. Tractor and Two wheeler sales which were growing at a healthy clip until October-16 were also impacted by the November-16 policy move.

TBR imports: TBR imports remains at elevated levels; ADD on Chinese tyres by USA to further re-route imports to India

Tyre imports grew by 14% YoY during 8m FY2016 with sustained rise in T&B tyre imports (up 30% YoY). The Nov ’16 demonetization drive affected the imports

during Dec ’16 and Jan ’17 as imported tyres are largely fed in the unorganized, replacement segment. Tyre imports are estimated to be down by ~20%-30% in these

two months in comparison to monthly average, with major impact being on the 2W tyre segment. However, this is expected to be short lived as overall imports are

still likely to be up by ~10%-12% (values) for FY2017. Nevertheless, as the industry witnesses correction in pricing with the spike in global NR prices higher than

domestic prices, the imported tyres may lose some of its price competitiveness leading to reduction in tyre imports.

Tyre Exports: To grow by 6%-8% (in value) during FY2017-20

Following subdued performance in last three years, Tyre exports from India have seen a rebound in the current year (up 9% YoY till November 2016) aided by strong

volumes across product segments – overall during April-November 2016 volumes are up by ~23% even as realisations continued to slide (down 14% YoY). Volume

growth has been supported by the pent up replacement demand in the Agri / construction segments and moderate growth in T&B and 2-wheeler segments.

However realizations remained under pressure till Nov 2016 as tyre makers continued to pass on the benefits of lower RM prices. With surging RM prices, the

exporters are expected to hike the prices leading to improvement in overall realizations during FY2017. For FY2017, ICRA expects exports to grow by ~15%

(volumes) supported by favourable demand from agri/construction and T&B, and 10% (in value terms) affected by weak realisations. Exports are projected to grow

at 6%-8% over next three years led by stable demand and increased acceptance of Indian tyres in overseas markets, both in terms of quality and pricing. That said,

the Feb 23rd 2017 ruling by the United States International Trade Commission (USITC) in favour of the Chinese T&B exporters against dumping, competition from

China will remain a challenge for Indian tyre exporters.

Is this the beginning of the next capex cycle?

Just when the industry appeared to be at the fag end of its mega capacity building cycle—between FY2010 and FY2016, the domestic tyre industry commissioned

investments worth over Rs. 200 billion during this period —new announcements have started trickling in. MRF announced Rs. 45 billion worth Greenfield project in

Gujarat, while Apollo Tyres announced a Greenfield facility in Andhra Pradesh. While the cumulative magnitude of investments pending full commercialization is

high at ~Rs. 160 billion over the next five years (FY18-23), part commercialization of several projects like CEAT’s Halol and Nagpur project; and Apollo’s Chennai TBR

happened during FY2017. Commercialization of projects worth over Rs. 60-80 billion (capex undertaken 2-3 years back) are expected to be completed in FY2017

across the 2W and TBR segments.


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FY2017: Domestic volume demand growth outlook revised from 6%-7% to 4%-6%

Input costs: Domestic NR prices up 30% in the last three months vis-a-vis 50% rise in global NR prices; imports fall

Domestic NR prices are currently trading at three year highs of Rs. 160 per kg following a 30% spike in the last three months (Nov ‘16 to Jan ‘17). Global NR prices

are up by a sharp 50% in last three months and are trading at Rs. 190 per kg, at levels last seen in June 2012. The sudden spurt in global NR prices in recent months

was because of: (i) curtailed supplies from Thailand due to heavy rains and flooding since November 2016, (ii) increasing consumption from China and USA, and (iii)

rising crude oil prices. NR production in the Indian markets is expected to grow by ~15% in FY2017. However, with the higher prices vetting farmer appetite and

anticipating further rally in prices, domestic farmers are stocking their produce towards the end of current tapping season. Over next three months, domestic NR

prices are expected to find support at current levels of Rs. 150-170 per kg.

WTI crude oil prices have surged by ~20% during Nov ’16-Jan ‘17 with OPEC’s production cuts since Jan ’17, and rising crude imports by China with improving

domestic demand and falling crude output. Synthetic rubber prices draw cues from movement in oil and butadiene (key RM) prices, apart from fundamental

demand and supply. Against the 20% spike in oil prices, butadiene prices have doubled owing to tight supplies amidst rising demand from auto segment Like SR, the

prices of Carbon black (CB) and Nylon tyre chord fabric (NTCF) have also witnessed sharp spikes since Nov ’16.

Contraction in profit margins expected for FY2018; but long term return indicators remain strong

Following five quarters of strong margins, industry wide operating margin witnessed a 100 bps contraction (stood at 18.9%) during Q2FY2017 as input costs started

inching up. NR prices averaged at Rs. 134 per kg in Q2 FY2017 against Rs. 118 per kg in Q1 FY2017. The industry net margins stood firm at 11.0%. However, revenue

growth was affected (down 0.8% YoY in Q2FY2017) by weak realisations on the back of price cuts taken by tyre makers; the price cuts during the quarter ranged

from 6% to 10%. On the volume front, demand remained favourable for tractor, two wheeler and passenger vehicle tyre segments, but T&B tyre demand was weak.

Owing to sluggish freight demand, M&HCV sales during Q2FY2017 fell by ~10%; both OE and replacement tyre segments were affected during this period. Price cuts

coupled with the fall in T&B volumes masked volume growth from other segments considerably, thus leading to an overall revenue de-growth during Q2 FY2017.

Given the steep price cuts (passing on RM benefits), impact of demonetization on replacement sales, continued Chinese imports and the slowdown in the 2W and

CV sectors, ICRA research has scaled down the revenue growth for domestic tyre industry (represented by ICRA’s sample of seven major tyre companies) to 0-2%,

from 6%-7% in August-16. Following over 6% price cuts in FY2016, YTD Dec-16 has witnessed further price cuts of 5-7%. That said, given the recent increase in crude

linked derivatives, some players are considering/have taken segment specific price hikes of 1-3% during January 2017. Consequently, operating margins for the

industry are expected to moderate from an all-time high of 19.2% in FY2016 to 17.8-18.5% in FY2017. That said, the return indicators and debt coverage indicators

of the industry is unlikely to be strained.


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FY2017: Growth scale down sharply on price cuts and weaker demand

Exhibit 41: Trends in Revenues and growth

Source: ICRA research. Based on a sample of seven of the largest tyre entities in India

Exhibit 42: Operating and net margins estimates

Given the steep price cuts taken by several players (from the peaks of

February-16), impact of demonetization on replacement sales,

continued Chinese imports and the slowdown in the policy hits 2W

and CV sectors, ICRA research has scaled down the domestic tyre

industry (represented by ICRA’s sample of seven major tyre

companies) revenue growth to 0-2%, from 6%-7% in August-16.

Following over 6% price cuts in FY2016, YTD Dec-16 has witnessed

further price cuts of 5-7% depending on the segment. That said, as

expected and given the recent increase in crude linked derivatives,

some players are considering/have taken price hikes of 1-3%.

Following the sharp decline in NR prices during FY2016, prices started

moving up during June-August’16, hitting a high of Rs. 144/kg in July-

16; crude prices also increased during this period.

While carry-over inventory, and a basket of inputs neutralized the

crude hikes, the overall input basket is estimated to have increased.

ICRA research’s tyre input index increased (yoy) by 4% during Q2

FY2016

Competitive intensity in the industry continues to be high, particularly

in the TBR segment where Chinese imports have further gained

market share. In the absence of any duty protection, this segment is

expected to face the brunt of cheaper imports.

The high margins in the 2W segment have drawn several new

entrants; competitive intensity in this segment is also set to intensify.

Consequently, operating margins for the industry are expected to

moderate from an all-time high of 19.2% in FY2016 to 17.8-18.5% in

FY2017 (Exhibit: 42).

During FY2016, the industry sample witnessed a 2.4% decline in

37

0

39

1

41

4 4

07

40

7

45

8 5

21

9%

5.9% 5.8%

-1.6%

0.0%

12.4% 13.9%

-5%

0%

5%

10%

15%

0

100

200

300

400

500

600

FY2

01

3

FY2

01

4

FY2

01

5

FY2

01

6

FY2

01

7P

FY2

01

8P

FY2

01

9P

Revenue (Rs. bn) Growth (%)


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revenues — ~4% increase in volumes and a 6% plus decrease in

realizations as all the tyre majors took sizable price cuts to pass on the

fall in natural prices.

Long term return on Capital indicators continue to be strong

Exhibit 43: Movement in RM and employee costs as % of revenues While several players are nearing the culmination of their large capex

programs like CEAT, few others have announced new plans.

Recently announced capex plans include, MRF’s plans to invest Rs. 48

billion over the next ten years in a greenfield facility in Gujarat and

CEAT’s plans to spend Rs. 28.0 billion over the next five years increasing

Ceat's capacity by 1 million tyres per annum for truck bus radials, 17

million tyres per annum for 2-wheelers and 6 million tyres per annum for

passenger car radials. Apollo has also announced a Rs. 5 billion

greenfield project, scope of which is yet to be disclosed. While the

proposed entry into 2W tyres is likely to be through the outsourced

mode for few players, others have started planning their new projects.

Given the current comfortable state of the industry, ICRA research does

not expect these new announcements to strain credit metrics.


Exhibit 44: Industry wide capex estimates Exhibit 45: Debt metrics

11%

14% 15%

19.2% 17.8%

15% 14%

4% 6% 7%

11% 9%

7% 7%

19%

23% 23%

27%

19%

16% 16%

0%

5%

10%

15%

20%

25%

30%

FY2

01

3

FY2

01

4

FY2

01

5

FY2

01

6

FY2

01

7P

FY2

01

8P

FY2

01

9P

OPM (%) NPM (%) ROCE(%)

67.4%

61.9% 60.0%

53.3% 54.2% 57.3%

58.4%

5.0%

5.4%

6.2%

7.2%

7.7% 7.5%

7.2%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

FY2

01

3

FY2

01

4

FY2

01

5

FY2

01

6

FY2

01

7P

FY2

01

8P

FY2

01

9P

RM Costs / OI (%) Employee costs / OI (%)


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23 17

30

40 49

35 35

98 96

86 85

95 86

76

-

20

40

60

80

100

120

FY2

01

3

FY2

01

4

FY2

01

5

FY2

01

6

FY2

01

7P

FY2

01

8P

FY2

01

9P

Capex (Rs. bn) Net Debt (Rs. bn)

1.1

0.9

0.6 0.5 0.4 0.4 0.3

2.4

1.7

1.4 1.1

1.3 1.3 1.0

-

0.5

1.0

1.5

2.0

2.5

3.0

FY2

01

3

FY2

01

4

FY2

01

5

FY2

01

6

FY2

01

7P

FY2

01

8P

FY2

01

9P

Net Debt/Tangible Networth Net debt/OPBDITA


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