Tyre makers are expected to increase their capital expenditure from Rs 3,700 crore in the last two fiscal to Rs 5,000 crore in the ongoing fiscal, says a a CRISIL report.
The increase in CAPEX is attributed to improved demand in the market.
Affirming that the credit profiles of tyre manufacturers are poised to stay stable, the report said that the segments including replacement, passenger vehicles and commercial vehicles (PVs and CVs), alongside exports, will play a major role in growing the demand.
“Better accrual, along with higher revenue and operating margin, should support capex funding and keep balance sheets healthy, ensuring stable credit profiles for CRISIL-rated tyre makers,” said Rajeswari Karthigeyan, Associate Director, CRISIL Ratings.
The credit rating agency says it’s findings are based on its analysis of the top six tyre makers in the country who account for 80 percent of the Rs 75,000 crore market share of the sector.
However, the capex this fiscal year is expected to be lower than the average of Rs 62,000 crore registered between 2018 and 2020 as the capacity utilisation still remains below 70-75 percent.
“Demand from the replacement market is expected to normalise to around 4 percent this fiscal from around 12 percent last fiscal. OEM demand should grow around 12 percent, driven by CVs owing to higher government spending on infrastructure and improving fleet utilisation.
Original equipment manufacturer (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,” said Anuj Sethi, Senior Director, CRISIL Ratings.
Factors such as cost-competitiveness, benefits of the China+1 strategy of international OEMs, and an increased demand for off-road tyres in the US and across Europe has contributed to the 14-15 percent growth in the exports on a high base of over 45 percent growth last fiscal year.
The report also cautioned that the forthcoming waves of Covid-19 pandemic, shortage of semiconductors (which can affect the demand for passenger vehicles) and instability in the raw material costs will require keen attention.