The institutional tire industry relies on more stable alternative markets and is therefore somewhat insulated from the cyclicality of auto sales. Mumbai: Growth in tire demand in FY2021-24 may not be sufficient to absorb the new capacity generated by the current capex cycle, and overall capacity utilization may remain as high as 20%, ratings agency India Ratings said.-Ra) revealed. Ind-Ra While original equipment manufacturers are also expecting a sharp decline in (OEM) sales by 20-25%, the tire industry will still see a mid-single digit decline in sales as alternative markets continue to support the industry.

Based on the industry segmentation, the agency expects to reach 2023-24 2000 with 70-75% capacity utilization for two or three wheelers and 80-85% capacity utilization for passenger car radials. Setting up or adding additional capacity.

By FY 2023-24, Trucks and Buses, Trucks and Buses (TB) expects capacity utilization in the sector to be 65-70%. In a press release, Ind-Ra said that despite weak demand for OEMs in the sector, alternative markets are likely to provide support.

The ratings agency said the analysis is based on the capacity of the top five listed tire companies—-Apollo, CEAT, JK Tires, MRF and TVS Srichakra.

Tire Companies FY 2016-20 Capital Expenditure (capex) This cycle has been very aggressive. The rating agency said that leverage metrics slowed in 2019-20 as most of the capex was financed through debt.

As the expansion of these facilities will take time and as demand declines leading to 2020-21 Scenario and operating leverage is expected to decline in FY2021-22 Leverage will remain high at around two times 2.5 in FY.

However, these metrics will improve from fiscal 2022-23 onwards as a significant portion of the capital expenditure cycle is completed. The ratings agency said it expects that overall capex intensity is likely to remain low this year, even though some companies have delayed some of their capex for a year or two due to slowing demand.

Ind-Ra said the successful implementation of the end-of-life policy will benefit the tire industry, especially the TB segment. Considering the short replacement cycle of TB tires, it may encourage vehicle owners to scrap their existing vehicles and buy new ones.

However, even in COVID-19: Structural changes such as working from home, increased spending on public transportation, and managing pollution levels after the end of the pandemic are likely to weaken replacement demand, especially in the passenger car radial and automotive sectors. They say it’s a two-wheeled tire.

With more than 50 percent of demand coming from replacement markets in the sector, it may take longer than expected to use the additional capacity, the company said.

The industry’s asset turnover and return on equity are at historically low levels, and in this case are likely to remain at these levels for the foreseeable future. With limited operating leverage, declining profitability could prolong the deleveraging process and impact credit ratings, the report said.

The tire industry is somewhat insulated from cyclical auto sales because it relies on a more stable replacement market.

According to the credit rating agency, original equipment manufacturer (OEM) sales were down 16.3% in the last fiscal year compared to the previous year, while replacement market sales were down 2.6% in the same period.

The alternative market share also increased to 58% of total domestic tire sales in 2019-20 due to decline in OEM sales, the report said.

The industry as a whole is also likely to benefit from additional restrictions and tariffs on imported tires. Ind-Ra announced that because of OEMs along with increasing demand in the replacement market, the tire industry revenues are expected to recover by 2021-22.

The ratings show that the top five tire companies achieved excellent Ebitda margins of around 16% in the second quarter of the current fiscal, driven by stable rubber and crude oil prices. Ebitda represents earnings before interest tax depreciation and amortization.

Ind-Ra expects margins to improve over the medium to long term due to economies of scale, product diversification and increased market share in radial tires. However, the company said in a press release that its profits will be affected by changes in raw material prices.