Research by CRISIL Ratings predicted that tire manufacturers will report revenue growth of 7-8 percent this fiscal year, driven by a 3-4 percent increase in both volume and realizations. For the second consecutive year, sales will grow in the single digits (albeit it will be nearly double that of the previous fiscal year), following a compound annual growth rate of 21% between the fiscal years 2021 and 2023.
Throughout this fiscal year, realization growth is anticipated to remain uneven as tire manufacturers raise prices gradually to counteract the spike in the price of natural rubber. About half of the necessary raw materials are made of natural rubber. In contrast, replacement demand will be the primary driver of volume growth.
Operating profitability will drop by about 300 basis points (bps) over the fiscal year as a result of the high cost of natural rubber and the limited capacity to pass these expenses on due to the small volume growth. Cash flow will still be significant despite the slight impact.
The credit profiles of tire manufacturers will remain stable due to their strong balance sheets and steady capacity expansion. To report the results, CRISIL Ratings examined the major six tire markets, which together generate around 87% of the industry’s revenue.
According to the estimate, the operating profitability of tire manufacturers would decrease to about 13 percent this fiscal year from about 16 percent the previous fiscal year due to higher freight expenses and the fact that the price increase of natural rubber is only partially passed on because of low demand.
In the meantime, poor demand in important countries like North America and Europe, which account for over 60% of India’s total exports, is predicted to restrain export growth to 2-3% this fiscal year. Export demand has also been impacted by supply-chain delays brought on by geopolitical worries, which have increased freight prices and lengthened transit times.
Due to a worldwide scarcity brought on by bad weather in key producing nations like Thailand and Vietnam, which produce roughly half of the world’s supply, natural rubber prices have skyrocketed. Since they are derivatives of crude oil, the other essential raw materials used in the production of tires, such as nylon tire cable, carbon black, styrene-butadiene rubber, and poly-butadiene rubber, are also susceptible to price changes.
Stable credit profiles will arise from prudent capital expenditures and robust cash production, which will prevent the accumulation of substantial debt. Similar to the previous fiscal year, gearing and interest coverage are seen at roughly 0.3 times and 7-8 times, respectively. According to CRISIL, raw material costs, OEM demand, tariff adjustments, and Extended Producer Responsibility rules are important metrics to track.
