The capital expenditure of tire makers is expected to increase to around Rs 5,000 crore this fiscal on the back of improving demand, as against around Rs 3,700 crore annually in the preceding two fiscals, according to a CRISIL report.
The demand is likely to be driven by segments such as replacement, commercial, and passenger vehicles (CVs and PVs), along with exports, the credit rating agency said, adding that credit profiles of tire makers are expected to remain ''stable''.
The report is based on the analysis of the top six domestic tire makers, who account for 80 percent of the Rs 75,000 crore of the sector, CRISIL said.
However, with capacity utilization still below 70-75 percent, Capex this fiscal will be lower than the annual average of around Rs 6,200 crore between 2018 and 2020, it said.
Meanwhile, production volume growth attire companies is set to halve to 6-8 percent this fiscal to around 2.5 million tonnes, compared to 12-14 percent last fiscal.
According to the rating agency, the moderation will be on account of growth last fiscal benefiting disproportionately from the low-base effect created by the preceding two fiscals, when volume had contracted due to economic slowdown and the COVID-19 pandemic, it said.
''Demand from the replacement market is expected to normalize to around 4 percent this fiscal from around 12 percent last fiscal. OEM demand should grow around 12 percent, driven by CVs owing to higher government spending on infrastructure and improving fleet utilization.
''Original equipment manufacturer (OEM) demand from PVs should be healthy given the rise in personal incomes and strong consumer preference for personal mobility. However, demand from the two-wheeler and tractor OEM segments will continue to be modest,'' said Says Anuj Sethi, Senior Director, CRISIL Ratings.
According to CRISIL, exports are seen growing at 13-15 percent on a high base of over 45 percent growth last fiscal, owing to factors such as cost-competitiveness, benefits of the China+1 strategy of global OEMs, and buoyant demand for off-road tires in the US and Europe.
As per the report, in fiscal 2022, operating margins crimped to an estimated 10 percent -- a level last seen in fiscal 2012 -- as the price of natural rubber surged over 20 percent, and that of crude-based inputs such as carbon black and nylon tire cord jumped 40-50 percent. However, the price hike was not completely passed on since demand was reviving after two weak years, the report added.
These account for 70 percent of the raw material cost of tire makers.
''Better accrual, along with higher revenue and operating margin, should support CAPEX funding and keep balance sheets healthy, ensuring stable credit profiles for CRISIL-rated tire makers,'' said Rajeswari Karthigeyan, Associate Director, CRISIL Ratings.
This fiscal, CRISIL expects gearing and interest coverage ratios at around 0.5 times and 5-6 times, respectively, a tad better versus the 0.6 times and 4-5 times seen last fiscal, he noted.
CRSIL cautioned that further waves of the pandemic, continuing shortage of semiconductors (which can impact demand for passenger vehicles), and the trend in raw material prices would bear watching.
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