Tire manufacturers are expected to increase their capital expenditure from Rs 3,700 crore in the last two fiscal years to Rs 5,000 crore in the current financial year, AA CRISIL reports.
CAPEX growth is due to improved market demand.
Confirming that tire manufacturers’ credit profiles are ready to remain stable, the report said that segments, including exports, replacements, passenger vehicles and commercial vehicles (PVs and CVs) would play a major role in increasing demand.
Rajeshwari Karthigian, Associate Director, CRISIL Ratings, said, “Better savings with higher revenue and operating margins will support CAPX funds and keep balance sheets healthy, ensuring a stable credit profile for CRISIL-rated tire manufacturers.”
The credit rating agency said it based its analysis on the country’s top six tire manufacturers who accounted for 80 per cent of the sector’s Rs 75,000 crore market share.
However, the average registered CAPEX between this fiscal year 2018 and 2020 is expected to be less than Rs 62,000 crore as capacity utilization is still below 70-75 per cent.
“Demand for the replacement market is expected to return to about 4 percent in the current fiscal year, up from about 12 percent in the previous fiscal year. CV-driven OEM demand will increase by about 12 percent due to higher government spending on infrastructure and improved fleet use.
The demand for genuine equipment manufacturers (OEMs) from PVs should be healthy due to strong consumer preferences for personal income growth and personal mobility. However, demand for the two-wheeler and tractor OEM segment will remain low, ”said Anuj Sethi, Senior Director, Crisil Ratings.
Factors such as cost-competition, the advantage of the China +1 strategy of international OEMs, and increased demand for off-road tires across the United States and Europe have contributed to a 14-15 percent increase in exports on a high base. In the last financial year, the growth has been more than 45 percent.
The report further warns that the impending wave of the Covid-19 epidemic, the shortage of semiconductors (which could affect the demand for passenger vehicles) and the volatility in the cost of raw materials will require deep attention.