Despite declining profitability, Indian tyre makers capitalising on CV radialisation

India based investment information and credit rating agency ICRA Limited has issued a report warning that the profitability of tyre makers there will decline over the coming 12 to 15 months despite a “robust” demand for tyres. The agency notes the Indian tyre industry staged a strong recovery in the 2009-10 financial year with a turnover of around Rs 250,000 million (£3.4 billion); this performance was supported by a sharp upturn in demand and relatively stable rubber prices. “However, benefits accruing from a low-cost structure were short-lived, as natural rubber prices surged since December 2009, thereby making a severe impact on margins, despite industry-wide price revisions by tyre manufacturers.”

The ICRA expects robust medium-term demand for tyres from original equipment manufacturers of all vehicle categories and believes the lagged effect of the current surge in demand will be witnessed in replacement demand, which should continue to underpin overall demand and lend stability and margin premium even if OEM demand doesn’t maintain its current impetus. Yet the agency cautions that demand for new replacement market tyres could be affected by a demand for retreading that is growing in response to the escalating price of new tyres.

A threat to India’s tyre industry singled out for attention is China. “The domestic industry faces the threat of increasing penetration of Chinese tyre imports into the Indian truck and bus radial tyre segment, at least partly contributed by domestic capacity constraints,” states the ICRA. “The industry also faces challenges from unfavourable trade pacts and substantially cheaper Chinese products. This is likely to curb the ability of participants in the domestic market to pass on the price increases resulting from input cost hikes.” The landed cost of imported Chinese truck and bus radials, the agency says, are some 20 to 25 per cent lower than that of their domestic radial counterparts and is comparable to the prices of Indian produced crossply truck and bus tyres.

Radial prices are significant as the agency notes India’s industry is currently at a “structural inflexion point” in the truck and bus segment: It pegs commercial vehicle tyre radialisation rates in India at only nine to ten per cent as opposed to a global average of 68 per cent yet notes that the experience of China, whose industry has reached 75 per cent radialisation, points to the direction the Indian CV tyre market is heading in. Anticipating the immense potential this sector holds, a number of the larger manufacturers have announced large capital expenditure plans for the years between 2011 and 2013. The ICRA says the industry is investing more than Rs 170.5 billion (£2.4 billion) to increase commercial vehicle radial capacity approximately 47 per cent by 2013.