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INDIAN
Contacts

TYRE

INDUSTRY:

MARGINS

MAY

COME

UNDER

PRESSURE

NOTWITHSTANDING ROBUST VOLUMES

Overview
The Indian tyre industry staged a strong recovery in FY 2009-10, supported by a sharp revival in demand and relatively stable rubber prices. However, benefits accruing from a low-cost structure were shortlived, as natural rubber prices surged since December 2009, thereby making a severe impact on margins, despite industry wide price revisions by tyre manufacturers. Over the next 12-15 months also, ICRA expects the profitability of tyre manufacturers to be affected by the expected supply gap for rubber, despite the robust demand for tyres. ICRA expects a robust, medium-term demand for tyres from original equipment manufacturers (OEMs) of all categories of automobiles. The lagged effect of the current demand surge will be witnessed in replacement demand, which should continue to underpin demand, thereby lending stability and margin premium, even as OEM demand reverts to long-term mean. Replacement demand could, however, be affected by increasing demand for retreading, as tyre prices continue to escalate.

Anjan Ghosh aghosh@icraindia.com (Tel. No. +91-22-30470006)

Subrata Ray subrata@icraindia.com (Tel. No. +91-22-30470027) Pavethra Ponniah pavethrap@icraindia.com (Tel. No. +91-44-45964314) Subrat Dwibedy subrat.dwibedy@icraindia.com (Tel. No. +91-22-30470017)

April 2011

The domestic industry faces the threat of increasing penetration of Chinese tyre imports into the Indian truck and bus (T&B) radial tyre segment, at least partly contributed by domestic capacity constraints. The industry also faces challenges from unfavourable trade pacts and substantially cheaper Chinese products. This is likely to curb the ability of participants in the domestic market to pass on the price increases resulting from input cost hikes. The industry is currently at a structural inflexion point in the T&B segment, with the Indian markets converging towards the global trends of radials in Commercial Vehicles (CV). Anticipating the immense potential in the industry, particularly for radials, many industry majors have announced large capital expenditure plans for the next two years (201113). With the industry pumping in over Rs. 17,500 Crore in order to increase capacities by around 47% (by 2013), capital structures are likely to witness some deterioration. Rising raw material costs as well as higher interest and depreciation charges are likely to keep the industry profitability under pressure over the medium term in spite of the strong growth potential.

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Revival in economic activity and automotive demand drives tyre demand Demand for tyres arises from two markets, namely, OEM and replacement. The demand from the OEM market fluctuates directly in line with end-use demand for the automobile/ construction equipment segment and hence is prone to a high degree of cyclicality. In contrast, the replacement market is sizeable (around 75% of the global sales) as well as stable. Replacement demand for tyres depends on on-road vehicle population, road conditions, vehicle scrappage rules, overloading norms, retreading intensity and miles driven; is less cyclical than OEM demand and is generally a higher-margin business for tyre manufacturers. The outlook for the domestic automobile industry in India remains robust supported by strong GDP growth; favourable demographic profile and rising disposable income. Also, the proposed investments in roads (35,000 kms of highways during FY 2008-09 FY 2013-14; four laning of over 5,184 km of National Highways and twolaning / improvement of about 4,756 km of State roads) to improve connectivity are expected to increase mileage and tyre demand over the medium term. Indias growing importance as an automotive export hub for small cars is another key demand driver for tyres. In FY 2009-10, India manufactured 35.4 lakhs vehicles (29% growth); 105.1 two-wheelers (25% growth); 4.4 lakh tractors (29% growth) and over 45,000 mining and construction equipment. While domestic OEM demand is expected to be robust over the medium term, the lag effect of the current phase of OEM demand growth is expected to lead to strong, long-run replacement demand. Input costs are linked to natural rubber and crude oil The Indian tyre industry is highly raw material (RM) intensive, with RM accounting for about 65-70% of the production cost for tyres. The key raw materials used in the manufacturing process are natural rubber (NR, about 43% of the total raw material); synthetic rubber (SR, about 15%); nylon tyre cord fabric (NTCF, 18%); 1 carbon black (about 11%) and rubber chemicals (about 5%) . SR is a crude derivative, with comparable properties to NR and can either be used along with NR or as a substitute for NR (but to a limited extent) in various industries such as automotive, industrial additives and construction material. While NR and SR are typically used in 70:30 proportions in the Indian tyre industry, this ratio can vary depending upon specification of the end product and on the relative prices of NR to SR to a lesser extent. The proportion of SR in truck radials is about 14-15%, while it is much higher at 57-73% in passenger car radials. The two types of SR used in tyres are Styrene Butadiene Rubber (SBR) and Poly Butadiene Rubber (PBR). Tyre grade SBR is not manufactured domestically, while domestic production of PBR falls short of consumption by about 30%; effectively, India imports over 65% of its SR requirements. The other 2 key raw materials consumed by the tyre industry are crude derivatives such as nylon tyre cord fabric (NTCF) , carbon black and rubber chemicals. While NTCF provides strength and imparts tenacity, carbon black enhances the life span of the tyre. With only two domestic manufacturers for NTCF, India imports 45-60% of its requirements. Additionally, about 20% of the rubber chemicals are also imported by India. On an average, tyre manufacturers in India import about 30-40% of their total raw materials. Besides NR, almost all the key raw materials are crude derivatives and are hence linked to crude oil prices. Although the current oil price spike due to ongoing political uncertainty in the Middle East is likely to be temporary, crude prices are expected to trend higher over the medium term on global economic recovery. In this backdrop, prices of SR and other crude derivatives used in the manufacture of tyres are expected to remain firm over the medium term.

Chart 1:-CY2010 production of NR Others China 3% Vietnam 7% 8% Thailand 33% India 9% Malaysia 10% Indonesia 30%

Demand and supply trends pose headwinds of rising rubber costs for the industry The natural rubber price has seen a spike during 2010-11 Source: Association of Natural Rubber Producing Countries and ICRA Estimates and touched unprecedented highs of over Rs. 232 per kg as st on 1 April 2011. As can be seen from Chart 2 and Chart 3, the NR price has seen a relatively stable rise in the past, except for a spike since January-10. In the past, NR prices have been influenced by demand-supply balance; relative strengths of the currencies of rubber exporting countries (Thai baht, Indonesian rupiah and
1 2

ATMA Carpolactum, the main raw material for NTCF, is a petroleum derivative

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Indian Tyre Industry: An ICRA Perspective

the Malaysian ringgit) and the influence of the futures markets. Appreciation of the currency of the exporting country against the US Dollar leads to stronger NR prices globally. Interests and volumes in the rubber future market also have a strong influence on NR prices. The sharp price spike in NR since 2010 has been contributed by a combination of revival in global automotive demand; weather conditions disrupting supplies from key rubber producing countries and strong speculative interest in futures. Japan accounts for almost 7% of global th demand for NR. The Middle East crisis coupled with the earthquake which hit Japan on 11 March-11 lead to a temporary decline in demand and a large sell off in the rubber futures market resulting in a temporary but sharp decline in NR prices during March-11. However NR prices have since recovered to an extent and are continuing to reign high.
200 Chart 2: Rubber price trends 180 160 140
Rs. per MT

70% 60% 50% 40% 30% 20%

1700 1500
% increase

Chart 3:- Price index for NR since January-2010

Average price of RSS-4 (Rs./Kg) Growth rate

MRESM10C Index-Malaysian standard rubber

120 100 80 60

1300 1100 900 700

Aug-10
Dec-10

10%
40
101.1 114.9 187.3 50.4 55.7 67.0 92.0

20 0

90.9

0%
-10%

Impact of the middle east crisis and the Japanese earthquake

Apr-10 Oct-10 Jan-10 Nov-10 Feb-10 Sep-10
Jan-11

May-10

Mar-10

Feb-11

Jun-10

Jul-10

FY04

FY05

FY06

FY07

FY08

FY09

FY10 YTD Feb-11

Source: Indian Rubber Board and ICRA Estimates

Source: Bloomberg

The global demand for OEM tyres witnessed a stronger-than-expected rebound of 25% (passenger and light 3 truck) and 33% (heavy trucks) as against a relatively steady replacement demand growth of 9% and 17%, respectively, during CY 2010. This is as against a sharp 12% decline in passenger vehicle OEM tyre demand and a 39% decline in truck tyre demand during CY 2009. Replacement markets fell by a lower 3.2% and 10.0%, respectively, in CY 2009 as miles driven and freight tonnage fell. Nevertheless, the demand declines in 2009 had a relatively limited impact on natural rubber prices due to supply constraints and speculative interests. The tropical countries of Thailand, Indonesia, Malaysia and India are the four largest NR cultivators in the world, accounting for about 82% of the global output of over 9.4 million metric tonnes (MT). Thailand, Indonesia and Malaysia are the largest exporters of rubber in the world, while India, despite producing around 4 0.85 million MT per annum, is a net importer . Global supply of rubber is dependent on climatic conditions; area under cultivation and yield per hectare in the key NR cultivating countries. In India, over 62% of NR is consumed by the tyre industry, with the balance being consumed by non-tyre industries of automotive, industrial additives and construction material. China, Japan, India and the United States are the key consumers of NR. An extended winter and unseasonal rains disrupted tapping of rubber in Thailand, India and China during 2010. In addition, there was a decline in Indonesias harvest due to adverse climatic conditions, which capped the supply growth of NR at about 5.7% in CY 2010. These climatic conditions are likely to curb the supply of rubber in 2011 also, leading to relatively stagnant supply volumes and a fall in rubber inventory worldwide. Due to supply constraints and strong speculative interest witnessed in rubber futures, NR prices are likely to remain firm over the next 12-15 months until the next anticipated shift in the supply curve starts with the expansion in area under cultivation. As the crop planted in the 1980s ages and production declines, the large-scale replanting undertaken in 2003-09 globally is expected to be ready for commercial tapping by 2012, with a gestation of six to seven years. Despite the resultant increase in acreage, the industry estimates a widening demand supply gap in India over the longer term; demand is expected to grow by over 6-8% while supply is expected to grow by around 5% per annum. Supply to an extent is limited by lack of available high-yielding cultivatable area. Consequently, the tyre industry is likely to face strong headwinds from escalating costs over the immediate term.

3 Michelin 4 The Indian tyre industry consumed about 0.95 million MT of NR in Calendar year 2010.

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The inverted duty structure a challenge for the industry India is estimated to have imported ~0.18 million MT of NR in fiscal 2010 as against the ~0.16 million MT imported in the previous year. With insufficient domestic NR capacities to match the robust demand, Indias 5 dependence on NR import is expected to increase further. There are over six trade agreements , largely between the Asian countries, covering both import of tyres and raw material for tyre manufacture. Excluding the impact of the trade agreements, the duty on NR stands at 20% as compared to the 10% customs duty on 6 import of tyres. Factoring in the impact of the trade agreements, customs duty on new tyres falls to ~8.6% while NR customs duty falls to only 16% (both under the Asia Pacific trade agreement). In December-10, acceding to industry demands and in a bid to control inflation, the GoI undertook a temporary and quantity limited import duty cut on NR to 7.5% for shipments up to 40,000 tonnes applicable till March 31, 2011. NR import beyond March 31, 2011 will attract duty of 20% or Rs 20 per kg, whichever in lower. With international rubber prices reigning higher than domestic produce due to regional differences in demand and inventory, this duty cut so far has not impacted domestic price.
Chart 4: Spot crude price (Brent $/bbl

Chart 5:Price index for SR and carbon black

50.0%
40.0%

120 100 80
$/bbl

Brent

Growth

300 250
% increase

India Wholesale Price Index - Carbon Black

SRUBJSR index - Synthetic Rubber

30.0% 20.0% 10.0%

60 40 20
29 38 55 97
65 72

0.0%
-10.0% -20.0% -30.0%

200 150

62

71

-40.0%

0
CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10

-50.0%

100
Nov-08 Nov-10
Nov-09

Jan-09

May-08

Sep-08

May-09

Sep-09

May-10

Source: BP Statistical Review of World Energy 2010 and Bloomberg Margins hinge on the ability to pass on price increases In spite of volume declines during 2008-09, particularly in the T&B segment, the industry benefited from decline in raw material (rubber and crude) costs starting from September 2008 due to the global slowdown. With the industry maintaining three months of inventory on an average, the benefits of lower RM costs were felt from Q4, 2008-09. With prices relatively soft for the next 12-15 months, coupled with the strong demand revival in automobiles, the tyre industry enjoyed healthy profitability during the subsequent three-four quarters, until Q4, 2009-10, with operating margins of 12-17%. However, starting December 2009, the raw material price trend reversed with NR prices growing by over 50% in the subsequent 12 months. As tyre is a relatively commoditised business, usually the ability to pass on sharp rises in raw material prices remains a challenge for industry participants. Strong presence in the OEM segment is critical for tyre manufacturers to establish their brand in the retail market (first replacement is typically in favour of the OEM fitted model). The pricing power with OEMs, however, is weak leading to low profitability, although assured bulk off-take offsets this pricing disadvantage to some extent. Generally, many tyre manufacturers are unable to have raw material indexing with OEMs to offset the impact of any steep cost increases. In contrast, established tyre brands typically enjoy better pricing power in the replacement market, thereby leading to higher profitability. The pricing power in the replacement markets, however, has been curbed to an extent, especially in the T&B segment, due to competition from lower-priced Chinese imports. However, capacity constraints in domestic markets have lent some pricing power to tyre manufacturers. Indian tyre manufacturers have undertaken several price hikes of over 20-25% during the past 12 months. The price hikes have partly compensated for the overall cost increases and is in line with similar price hikes in international markets. In view of the continuing robust demand and increasing rubber prices, further phased hikes of 2-6% are expected to be witnessed during the coming months.

5 Asia Pacific trade Agreement, Indo-Sri Lanka Free Trade Agreement, SAARC Preferential Trading Agreement, India-Singapore Comprehensive Economic Co-operation agreements, India-south Korea CEPA, ASEAN Agreement 6 With China and South Korea (both covered under the Asia Trade agreement) accounting for 70-90% of total import of tyres into India, the effective weighted average duty on import of tyres falls.

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Sep-10

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Jan-11

Jan-10

Jul-09

Jul-08

Jul-10

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Chart 6:Quarterly performance trend 8,000 7,000 6,000 5,000 4,000 3,000 2,000 4.2% 5.2% 4.8% 4.5% 2.5% 12.1% 10.3% 11.1% 10.8% 8.4% 3.1% -0.5% 3.8% -1.4% 4.5% 11.1% 8.2% 7.8% 6.5% 16.6% 16.6% 20%

13.6%
11.6% 9.1% 5.7% 3.5% 3.7% 3.5% 9.6% 9.6%

15% 10% 5% 0% -5%

4,195

4,598

4,464

4,858

6,145

6,305

3,976

3,994

4,777

4,824

5,108

5,296

5,579

6,680

1,000 0

Q1FY08

Q2FY08

Q1FY09

Q2FY09

Q1FY10

Q2FY10

Q1FY11

Q2FY11

Q3FY08

Q4FY08

Q3FY09

Q4FY09

Q3FY10

Q4FY10

OI

OPM (%)

NPM (%)

Source: Company Results and ICRA Estimates Increasing tyre prices to push re-treading With an estimated turnover of Rs. 2,700 Crore, the Indian tyre-retreading industry at present is a fraction of the overall tyre industry (with a turnover of about Rs. 25,000 Crore) and is largely focussed on commercial vehicles (heavy and light) and off-the-road Tyres (OTR) tyres. Over 80% of the Indian re-treading industry is fragmented and lies with numerous un-organised participants. Organised participation in re-treading is limited in India to a few participants like the Elgi group, Indag Rubber Limited and Vamshi Rubber Limited, which operate through the franchisee route and some tyre manufacturers like MRF and JK tyres. Globally, however, large tyre manufacturers like Michelin and Bridgestone play a key role in the re-treading business. Tyre manufacture is a raw material and energy intensive process, with over 75% of the cost being expended in the manufacture of the tyre body and the balance in the tread. The process of re-treading simply lies in replacing the treads and providing a fresh lease of life to the tyre at an estimated cost of 25-35% of a new tyre. Typically, a heavy commercial vehicle tyre is re-treaded for about 2-3 times in India, provided the casing is intact. With tyres being one of the primary costs for a fleet operator, retreading helps increase the service life of tyres and reduce the operating cost for owners/drivers. It also promotes the reduction of scrapped tires and environment pollution. ICRA expects the increasing price of tyres and the supply deficit of rubber for tyre manufacturers to result in increased re-treading in the Indian M&HCV industry. Further improvement in quality of roads and reduced overloading are expected to support tyre quality and push re-treading. However, re-treading could have a detrimental impact on replacement demand for tyres. Structural changes in the domestic industry towards higher radialisation Technologically, the tyre industry is split into two segments, cross ply tyres and the technologically superior radial tyres. Radial tyres were first commercially manufactured by Michelin in the late 1940s and rapidly gained acceptance in Western Europe, Japan and finally in the USA by the mid 1970s. While radialisation in the Indian passenger car segment has reached almost 100%; it is currently low in the T&B segment at 9-10%, compared to a world average of 68%. However the trends in economies like China, with high industry wide radialisation of 75%, points to the prospects of increased radial penetration in the Indian T&B markets. The radial penetration in China has also been supported by its better quality of road infrastructure and significant investments made by global tyre majors in building large capacity. A radial tyre, by virtue of its built has a longer life (~80%); offers ~5% higher fuel efficiency, better manoeuvrability and hence is effectively cheaper than cross ply tyres over the life of the product. However, a
7

In a cross ply tyre, the reinforcement material made of nylon and rayon with the cords of the fabric at an angle of +60 degrees and -60 degrees to the direction of travel so that they criss-cross each other. By comparison, in radial tyres, the reinforcement material is made up of polyester, fibre glass and steel and all cord plies are at 90 degrees to the direction of travel. This design avoids having the plies rub against each other as the tire flexes thereby increasing the longevity of the tyres. Radial tyres also have lower rolling friction which improves the fuel efficiency of the vehicle. The tyre morphology also ensures a lower aspect ratio (height to width), lower weight and higher road contact, supporting better manoeuvrability.

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6,771

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Chart 7: Radialisation levels in T&B tyres (%) World

India 9 72

68

Chart 8: Radialisation trends across various tyre segments (%)

T&B LCV Passenger Car
97

Africa/Middle East Asia

South America

Radialisation (%)

52
65

87

90

95

98

99

North America
Eastern Europe Central Europe

96 27
95

Western Europe

100

11

11

12

15 5

18
9

20 10

FY05

FY06

FY07

FY08

FY09

FY10

Source: Michelin fact book 2009, ATMA confluence of structural inefficiencies (low awareness, poor road infrastructure and vehicle overloading) coupled with the initial higher investments required for radial tyres (~25-35%) by a fleet owner, inhibited this transition in the past. However, initiatives at driver education (largely by the tyre manufacturers) on the longer term benefits of using radials Table 1: Radial vs. Cross-ply T&B tyre coupled with measures by Bias Radial Variance various State Governments Price (Rs) 13,000 17,500 35% towards implementing Life of new tyre (Km) 55,000 100,000 82% overloading restrictions and Retreading Possible (Times) 2 3 improving road conditions are Cost per retreading (Rs) 3,800 4,200 expected to provide the much Total cost of retreading (Rs) 7,600 12,600 needed impetus in driving this Increase in life after retreading (Km) 82,500 225,000 structural shift in the Indian Total life of tyres 137,500 325,000 markets. Moreover, tyre Mileage (Km/l) 4.5 4.7 5% manufacturers, who had in the past delayed setting up TBR Diesel Cost (Rs/l) 37.8 37.8 facilities due to the high capital Fuel Cost/Km (Rs/Km) 8.4 8.0 -5% requirements (over 3.0x that of Effective Cost/Km (Rs/Km) 8.5 8.1 -5% a cross ply plant of similar Source: Industry, ICRA Estimates capacity), have lined up large investments in TBR facilities (over 60% of the industrys proposed capex of Rs.17, 500 crores) over the next three years, in anticipation of growing radialisation. This is expected to ease supply constraints and aid rapid radialisation over the medium term. Price competitiveness of Chinese tyres, unfavourable regional trade agreements and domestic capacity constraints drive radial imports Tyre imports into India have grown sharply at a CAGR of 36% (volume) since FY06 and currently account for ~5% of domestic consumption in volume terms and ~6% in value terms; T&B tyres account for bulk of the imports (53% in value terms in FY10). Despite their perceived inferior quality and shorter life, Chinese tyres, by virtue of their price competitiveness, have dominated tyre imports (particularly so in the price sensitive replacement markets) and currently account for 70% of imports in the T&B segment. The scope for further significant increase in imports is however limited by constraints on after sales service. With about 62.5 million tyres, China is the worlds largest manufacturer of tyres catering to domestic demand as well as exports (constituting 40% of production). Chinese manufacturers derive their competitive advantage from scale economies; higher labour productivity and government subsidies on raw material; power and fuel costs, interest costs and tax exemptions which enable it to price its products aggressively. The landed cost of imported Chinese TBRs in India is about 20-25% lower than domestic TBRs and is comparable to the prices of domestic T&B cross ply tyres. Further, Indias regional trade agreements (RTAs) with various countries have enhanced the price competitiveness of imported tyres. New tyres imported from China and South Korea, two of the signatories of the Asia Pacific Trade Agreement, attract a custom duty of 8.6% as against a basic custom duty of 10%. This is in addition to the inverted duty structure discussed earlier. With an installed capacity of ~1.0 million TBRs per annum in FY10 as against an estimated requirement of ~2.7 million tyres, the domestic
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industry currently also faces a large demand-supply gap. The supply shortage has been largely met through imports, resulting in a CAGR of 113% in imports of TBRs since 2005-06. Despite the capacity shortage, easy availability of competitively priced imported tyres has resulted in relatively weak pricing power for domestic manufacturers.
Chart 9: Proportion of domestic demand met through imports
Tyre demand (In Rs. Crore) % of demand met through imports
Chart 10: Growth in import of TBRs despite imposition of ADD

30,000 25,000

5%
4%

6%

6%

7%

1,200 1,000

Import of TBRs (In '000 Nos)

Growth (%)

500% 400%

393% 800 600 400 200

0
729 1,127

6%
5% 4%

20,000 15,000
10,000

300%
112%

2%
19,017

3%
13,461 16,601 21,056 24,750

141%

200% 100%

0%

50

50

248

1%

351

5,000

-18%

1%

598

2%

55%

22%

0%
-100%

FY06

FY07

FY08

FY09

FY10

FY05

FY06

FY07

FY08

FY09

FY10 Q1FY11

Source: Capital Line, DGFT, ICRA Estimates In order to protect the domestic industry, GoI classified TBRs under the restricted list in November 2008. While import restrictions favoured domestic tyre manufacturers, it made sourcing of TBRs difficult for OEMs 9 and tyre traders. In February 2010, the government further imposed a definitive ADD on TBRs imported from China and Thailand; and removed TBRs from the restricted list in May 2010. Despite the imposition of ADD, Chinese tyres continue to remain cheaper than domestic tyres. Apart from India, Chinas aggressive pricing has also led several other countries such as Australia, Egypt, Mexico, Peru, South Africa, Turkey and Venezuela to initiate anti-dumping measures into tyre imports from China. In September 2009, the United States imposed an additional 35% duty on imports of passenger vehicles and light truck tyres from China. While Chinese imports into the United States dropped by about 40% (from October 2009 to June 2010), imports from other low-cost countries like Thailand, Indonesia and Taiwan filled the demand gap in the United States. On the other hand, re-directed Chinese production could lead to increased exports to India. The industry is likely to face continued capacity constraints in the TBR segment over the next two years (201113), as the bulk of the greenfield capacities are expected to be fully operational by only 2013. Hence, ICRA expects the imports of TBRs to remain strong over the next two years. Although the ADD has reduced the price differential and would help improve the pricing power of domestic manufacturers, timely execution of planned radial tyre projects and competition with cheaper Chinese tyres would remain the key challenges for domestic tyre manufacturers. The new capacities should, however, improve operational efficiencies and scale economies for domestic participants over the longer term. Industry in the midst of a major capacity expansion phase; however, given the buoyant demand, utilisation levels are likely to remain high; cash flows however are likely to be stressed Following a phase of investments and underutilised capacities prior to 2002, the domestic tyre industry witnessed six years of continuously increasing demand and high capacity utilisation. During this phase, capacity additions were gradual with large manufacturers opting to outsource relatively low-end products to smaller participants to meet incremental demand. After peaking in fiscal 2008, utilisation levels lowered to 87% in 2009 on account of weak demand from the auto industry. Despite a strong revival of auto demand in 2010, overall utilisation dropped further to 79% on account of large capacity additions by Birla Tyres and TVS Srichakra Limited, particularly in the two-wheeler segment. However, light passenger vehicle and T&B utilisation continued to remain above 90%. Encouraged by the strong growth in domestic auto demand, favourable financing environment and relatively stronger balance sheets, the industry has initiated another phase of aggressive capital expenditure of over Rs. 17,500 Crore over 2010-13 and proposes to add an effective capacity of over 57 million tyres.
8

Goods on the restricted list' are importable only against a license from the Commerce Ministry In the range of $24.97 to $99.05 depending on the manufacturer and country of import and levied on a set of tyre, tube and flap

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Table 2: Major Tyre Projects Completed/Scheduled for Completion during 2010-2013 Company MRF Ltd. Project Medak, AP Trichy, TN Vadodara, Guj Ceat Ltd. Nashik, Mah Ambernath, Mah Orangadam, TN Mysore Uttaranchal Haridwar, Uttarkhand Balasore. Orissa Haridwar, Uttarkhand Product PCR + 2W PCR PCR + UV TBR TBR Speciality Tyre TBR PCR 2W Tyres 2W/3W Tyres TBR PCR Tyres TBR Phase 1 PCR Phase 1 TBR Phase 2 PCR Phase 2 TBR TBR Radial Tyres TBR PCR Speciality Tyre OTR Tyre TBR 1,10,000 50.0 Ton per annum Tons/day Capacity 26.7 7.0 50.0 40.0 1.7 200.0 6,000 8,000 60.0 5.0 85.0 80.0 4.0 25.0 2.0 25.0 2.0 400.0 6,000.0 Unit Lac/annum Lac/month Tons/day Tons/day Lac/annum Tons/day No/day No/day Lac/annum Lac/month Tons/day Tons/day Lac/annum Lac/annum Lac/annum Lac/annum Lac/annum No/day No/day Investment (Rs. Crore) 472 900 600 Expected Compl. Dt. Sep-11 Jun-11 Oct-10 Oct-10 Dec-12 Apr-11 Dec-10 Jul-11 Mar-12 Sep-11 Sep-11 Mar-13 Mar-12 Mar-13 Jun-11 Dec-10 Mar-11 Jan-13 Aug-13 Dec-12 Dec-11 Dec-12

140 2,300 300 570 350 450 1,000 1,000 500 315 180 260 2,600 1,200 450 4,000

Apollo Tyres Ltd. Falcon Tyres Ltd. Kesoram Industries Ltd.

JK Tyre & Industries Ltd.

Sriperumbudur, TN

Mysore, Karnataka Bridgestone India Pvt. Ltd. Balkrsihna Industries Dunlop India Michelin Pithampur, MP Chakan, Pune Bhuj, Gujarat Guwahati Chennai, TN

Source: CMIE, Company Announcements ICRA estimates the total installed domestic tyre capacity to increase by more than 47% from 122 million tyres 10 in 2009-10 to around 180 million tyres by 2012-13 . In line with demand trends, the TBR segment is expected to attract the highest share of investments (over 50%) over the next three years followed by the PCR segment. Given the strong demand expectations from the domestic auto industry and the possibility of some delays in project implementation, we expect utilisation levels to remain high over the medium term, especially in the TBR segment. This incremental domestic capacity is, however, expected to reduce imports, especially in the TBR segments, over the medium-to-long term. However, coupled with the expected margin pressure from raw material inflation, these expansion projects are likely to result in depressed cash flows, higher leverage and subdued RoCE over the next few years. International participants are looking at making India a hub for radial tyre manufacturing Unlike other emerging markets, the Indian tyre industry is dominated by domestic participants (barring the presence of Bridgestone and Goodyear in the passenger car segment), which cater to over 85% of the domestic requirement. The premium charged by international participants for their relatively superior products has found limited acceptance in the highly price-sensitive Indian markets, especially owing to the poor road conditions which curb the benefits of these tyres in terms of higher durability, lower emissions and safety. Further, the dominance of cross-ply tyres in the Indian markets also discouraged global majors from entering into domestic markets. As a result, investments in India by international players have been relatively modest in the past. However, increasing levels of radialisation, gradual improvements in road infrastructure and launch of advanced vehicle platforms (World Truck from Tata Motors, new Volvo trucks and Actros range from Mercedes Benz) is expected to increase the demand for premium tyres. Also, with automotive OEMs (like Hyundai, Nissan, Suzuki) increasingly looking at India as a manufacturing hub, demand for high quality radial tyres in the Indian market is set to grow at a robust phase over the medium term.

10

Excludes investments by Bridgestone India at its Chakan project.

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Indian Tyre Industry: An ICRA Perspective

Bridgestone has announced three radial tyre projects in India at an aggregate investment of Rs. 3,040 crore. While Bridgestone has been largely focussing on the Indian passenger car segment in the past, it is now foraying into the TBR segment with a brownfield expansion at its Indore plant and a green field project at Chakan for both PCRs and TBRs. Michelin is also in the process of setting up its first factory in the country (in Chennai) for manufacturing radial tyres. The project is expected to entail an investment of Rs. 4,000 crore and is expected to be completed by December 2012. The company has so far been importing tyres mainly from China and Thailand to cater to the Indian markets. The future in tyre technology Fuel efficiency and safety concerns are key drivers for investments in tyres in developed markets, which are 11 transitioning into higher performance tyres. Effective 2010, 2011 and 2012 , Japan, the United States and Europe will move to a more stringent tyre performance criteria (covering rolling resistance related fuel saving wet grip-related braking distance reduction and longevity). Europe anticipates a potential reduction of 20 million tonnes of traffic-related carbon-di-oxide emission per year from enhanced tyre performance. Compulsory labelling of passenger car, light truck and truck tires is expected to be implemented in the European Union (EU) by 2012, taking into account rolling resistance/fuel efficiency, wet grip, greenhouse gas rating and durability (thread wear). Investment by Indian tyre manufactures in research and development (R&D) at 0.2-3% of turnover is currently way below global averages of over 2-3.0%, highlighting the technology investment gap between developed and Indian markets. The limited ability of the price-conscious Indian customer to compensate for investments in advanced technology through higher prices has limited demand for superior technology in India. Further, it will be some time before the Indian market faces such stringent emission norms that drive the demand for superior tyre technology. However, over the longer term, tyre technology in India is likely to witness a major change. The entry of global market participants into the domestic market and Indias growing importance in global economy is likely to initiate technology tie-ups between Indian tyre manufacturers and global participants that have already pioneered in advanced technology; similar to Bridgestones entry in the Indian markets that helped push radicalisation trends in the passenger car segment. Over the longer term, these collaborative efforts are likely to support technology transition that is much required in the Indian markets. Conclusion The favourable outlook on OEM demand, growing replacement base and the overall recovery in the economy underpins ICRAs favourable secular demand outlook for tyres. The benefits of the ongoing OEM demand growth is also expected to trickle down to robust replacement demand with a lag. As with all auto ancillaries, raw material cost volatility and price pressure from OEMs remain inherent risks for this industry. Following close on the heels of four-five healthy quarters of demand growth and softer rubber costs, the industry is witnessing margin pressure due to rising input costs. With no significant supply additions for rubber expected over the next 12-15 months, rubber prices are expected to remain high over the next four-six quarters. Further, pressure from OEMs and cheaper Chinese imports will curb pricing power in the domestic industry to some extent. In addition, the envisaged capital expenditure plans for the next two fiscals is expected to limit the financial flexibility of tyre manufacturers. With their large scale economies and favourable cost structures, Chinese manufacturers are likely to continue to be an import threat for domestic participants. However with the anticipated increase in domestic capacities by 2013, issues of domestic capacity constraints will be remedied. Further, with the commissioning of the new tyre capacities by 2013, the changing dynamics of demand- supply and technology transition towards radials are set to bring about a marked change in the industry over the medium term.

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Michelin

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ICRA Rating Feature Annexure:-

Indian Tyre Industry: An ICRA Perspective

Industry Structure: With over 39 tyre manufacturers and 60 manufacturing plants, the Indian tyre industry enjoyed a turnover of about Rs. 25,000 Crores in 2009-10. India has the technical capability to manufacture the entire gamut of tyres for catering to its domestic requirements but still imports about Rs. 1,430 crores worth of tyres, largely lowcost passenger car tyres and T&B tyres from China due to capacity constraints and cost advantage. India also exports Rs. 3,000 crore of tyres, largely CV tyres, to over 60 countries. The ten largest tyre companies (MRF India Limited, Apollo Tyres Limited, JK Tyre & Industries Limited, CEAT Limited, Balakrishnan Industries Limited, Goodyear India Limited, TVS Srichakra Limited, Falcon Tyres Limited, Kesoram Industries Limited (Birla Tyres)) in India, account for over 85-90% of the industry by value. MRF India Limited (MRF) is the largest tyre manufacturer in India with a market share (value) of about 30-32%, followed by Apollo with about 20-22% and JK tyres with about 15-16%. Table 3 below captures the segmental market share of the various players by volumes.
Table 3: Segmental market share of key industry majors by Volume Passenger Tractor T&B LCV Car Front Apollo Birla Bridgestone CEAT Falcon Goodyear JK Tyre Metro # Modi Tyres @ MRF TVS Srichakra Others 21% 18% 0% 13% 0% 0% 22% 0% 4% 21% 0% 1% 24% 1% 19% 2% 0% 13% 14% 0% 0% 24% 0% 3% 23% 8% 0% 13% 0% 0% 18% 0% 0% 27% 0% 11% 10% 6% 0% 8% 4% 22% 6% 0% 0% 26% 0% 17%

Tractor Rear 16% 8% 0% 7% 1% 35% 7% 0% 0% 25% 0% 1%

Tractor Trailor 7% 0% 0% 9% 0% 0% 5% 0% 0% 8% 0% 71%

OTR 1% 6% 0% 25% 0% 4% 28% 0% 0% 27% 0% 9%

2W/3W 0% 0% 0% 9% 14% 0% 0% 2% 0% 29% 22% 23%

Motorcycle 0% 7% 0% 8% 19% 0% 0% 2% 0% 27% 24% 13%

Source: ATMA & ICRA Estimates @ Modi Tyres: Modi Tyres Company Private Limited ( MTCPL);# Metro: Metro Tyres Limited While two-wheeler (2W) tyres account for the bulk of the domestic production (51% of volumes), truck & bus tyres (T&B) dominate industry revenues at 65% of the industry turnover. Over 51% (by volumes) of the production of tyres goes to the replacement sales (largely from the T&B segment), 44% goes to OEMs and the 12 balance to exports . India continues to be largely a bias belted tyre market, although radial tyres have made significant inroads into the passenger car market. Healthy return in demand coupled with increased prices supported robust revenue growth for the Indian tyre 13 industry during 2009-10 (Table 4) . Benign input costs during most parts of the year led to industry-wide increase in profits and accruals. Consequently, industry-wide capital structure continues to be comfortable despite high capex and some borrowings to fund the same.
Table 4: Industry Financials Particulars Operating Income Raw Material Costs Power Costs Employee Costs Other Costs Total Manufacturing Costs OPBDITA Depreciation
12 13

2006-07 15,664 10,607 716 886 1,987 14,197 1,467 427

2007-08 17,574 11,548 796 1,011 2,377 15,732 1,841 473

2008-09 21,513 14,079 953 1,207 3,349 19,588 1,925 621

2009-10 23,769 14,760 1,024 1,374 3,436 20,595 3,174 631

ATMA The transition of JK Tyres from a December year-ending to March year-ending in March 2009 resulted in 18-month revenues being captured for Fiscal 2009. This has muted the growth rates.

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ICRA Rating Feature

Particulars Interest Other Income PBT PAT NCA Net Block Net worth Debt OPM NPM TD/(TNW+MI) TD/OPBDITA RoCE % % Times Times %

Indian Tyre Industry: An ICRA Perspective

2006-07 331 24 744 491 833 4,703 3,536 3,932 9.4% 3.1% 1.1 2.7 16.5% 2007-08 394 43 1,103 746 1,113 5,305 4,107 4,347 10.5% 4.2% 1.1 2.4 21.2% 2008-09 560 65 794 510 1,045 5,854 4,609 4,290 8.9% 2.4% 0.9 2.2 18.1% 2009-10 410 73 2,181 1,483 1,978 7,657 5,893 5,204 13.4% 6.2% 0.9 1.6 30.9%

Note: Amounts in Rs. Crore Source: ICRA Sample and Estimates The global tyre industry (passenger car and trucks) is around US $140 billion/ 1.46 billion tyres (growing by 13%) with the replacement market accounting for three-forth of the total sales. While mature markets currently account for the bulk of the demand (70%), the incremental demand over the next five years is 14 expected to come largely from faster growing newer markets , which include China and India. The top three tyre companies (Japan-based Bridgestone with a market share of 16.2%; France-based Compagnie Generale des Etablissements Michelin with a market share of 15.5% and U.S.-based Goodyear Tire & Rubber with 12.4%) account for 44% of the global sales. The other key global market participants are US-based Continental Tyres, Pirelli of Italy and Sumitomo of Japan. Bridgestone and Goodyear already have a manufacturing presence in India while Michelin is in the process of setting up a facility in Chennai.

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As per Michelin, the estimated demand growth in new markets over the next five years is at 9.6%.

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ICRA Rating Feature

Indian Tyre Industry: An ICRA Perspective

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