With automobile sales and economic growth touching multi-year lows, the industry is facing revenue pressure.
However, infrastructure push and expected easing of liquidity, as announced in the budget, could emerge as growth drivers for replacement demand in the near-term, he said.
The pre-buying of BSIV vehicles especially in the commercial segment in FY2019-20 before BSVI emission norms come into effect is likely to provide a push to the segment benefitting tyre sales too. Tyre companies
are also stepping up on exports to offset declining volumes from domestic OEMs, said Budhraja.
Apart from lower revenue growth, the industry earnings will also be affected by higher raw material (RM) prices, said K Srikumar, Vice President and Co-Head, Corporate Ratings, ICRA.
The raw material price basket, which had softened in Q4 (down 5 per cent Q-o-Q with fall in oil prices) rose by over 10 per cent in Q1 FY2020 mainly due to 13 per cent spike in natural rubber (NR) prices during this period. ICRA expects industry wide operating and net margins to contract by 200 bps and 300 bps respectively to 11-12 per cent and 3.5-4.5 per cent respectively.
The net margins will also be influenced by the rise in interest costs (on debt taken towards expansion in tyre capacities).
Based on the announcement of tyre makers, the industry is investing over Rs 17,000 crore over next three years (ending FY 2022), part of which is funded through debt.
Lower accruals amidst rising debt of tyre makers, who lines up around Rs 17,000 crore capex for next three years, shall impact the industry RoCE levels and debt protection metrics during 2020-21. However, any scale down in capex by tyre makers
shall restrict the moderation in debt metrics.
“The industry capitalisation and coverage indicators are likely to remain comfortable over the long-term, although some moderation is expected in 2020-21,” added Srikumar.