The tyre manufacturers capital expenditure is expected to rise to Rs 5,000 crore in this fiscal on improving demand, compared with Rs 3,700 crore annually in the preceding two fiscals.

However, with capacity utilisation still below 70-75%, capex this fiscal will be lower than the annual average of about Rs 6,200 crore between 2018 and 2020, according to a report by Crisil Ratings.

The production volume growth at tyre companies is set to halve to 6-8% this fiscal to about 2.5 million tonne, compared with 12-14% last fiscal. Demand will be driven by segments such as replacement, commercial (CVs) and passenger vehicles (PVs) and exports.

The moderation will be because growth last fiscal had benefited 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. Operating margin should rise to about 12% this fiscal, up 200 basis points from last fiscal’s decadal low of about 10%, as price hikes ease the pressure of high raw material costs.

“Demand from the replacement market is expected to normalise to about 4% growth this fiscal from about 12% last fiscal. The original equipment manufacturer (OEM) demand should grow to 12%, driven by CVs owing to higher government spending on infrastructure and improving fleet utilisation. The 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,” Anuj Sethi, senior director at Crisil Ratings.

The credit profiles of tyre makers are expected to remain stable. Better cash accruals should help fund higher capital expenditure and keep debt metrics healthy, the study of India’s top six tyre makers, which account for 80% of the Rs 75,000 crore revenue of the sector, said.

The sector derives 60% of its volume from the replacement market, 27% from OEM and the balance from exports.

Tyre exports are growing 13-15% on a high base of over 45% growth last fiscal, because of cost-competitiveness and buoyant demand for off-road tyres in the US and Europe.

Higher volume will be accompanied by expansion of operating margin by 200 basis points (bps) to 12%, backed by price hikes in the first half to offset higher raw material costs, especially of natural rubber and crude-linked inputs.

In fiscal 2022, operating margins crimped to an estimated 10% — a level last seen in fiscal 2012 — as the price of natural rubber surged over 20%, and that of crude-based inputs such as carbon black and nylon tyre cord jumped 40-50%. These account for 70% of the raw material cost of tyre makers. The increases were not completely passed on since demand was reviving after two weak years.

“Better accrual, along with higher revenue and operating margin, should support capex funding and keep balance sheets healthy, ensuring stable credit profiles for tyre makers. This fiscal, we expect gearing and interest coverage ratios at about 0.5 time and 5-6 times, respectively, a tad better versus the 0.6 time and 4-5 times seen in last fiscal,” said Rajeswari Karthigeyan, associate director at Crisil Ratings.

Further waves of the pandemic, continuing shortage of semiconductors — which can impact demand for passenger vehicles — and the trend in key raw material prices would bear watching, the report said.