With auto sector in slow lane, tyre makers begin to feel pinch

Industry is pinning hopes on steps by government on scrappage policy for vehicles and GST rate cut to spur tyre demand

While the replacement cycle till now has helped the tyre industry to mitigate the impact of the severe demand slowdown in the automobile sector, the segment — which accounts for about 50% of the tyre market — has started to fill the pinch.

While the sector is somewhat hopeful of an uptick in demand due to the festive season and expectations of pre-buying due to the shift to BS-VI norms, their hopes are largely pinned on measures such as scrappage policy and a reduction in GST rates to spur demand.

“The tyre sector being directly linked to the auto sector has been impacted by the slowdown as well. Although the replacement demand had somewhat cushioned the impact initially, particularly for commercial vehicles, in recent months it is also showing worrisome signs,” Rajiv Budhiraja, director-general at Automotive Tyre Manufacturers Association (ATMA) told The Hindu.

He added that if the current situation continues, tyre demand would soon be in the negative territory across all the key segments.

In a recent report, rating agency ICRA forecast a revenue growth of 3-4% for the tyre industry due to subdued vehicle production, weak consumer sentiment amid slowing economic activity, rising cost of vehicle ownership and softened rural demand. This is in contrast to a growth of 12% in FY18 and 14% in FY2019.

Replacement market

The replacement market accounts for over 50% of the tyre supplies on an average. For trucks and buses, it is as high as 70%. “The replacement segment, which represents over 55% of industry volumes, is likely to grow by 5-6% in FY2020 as against 5.7% in the previous year, while demand growth in the original equipment (OE) segment is pegged at lower levels of 2-3% as against 7.8% in the previous year, affected by subdued vehicle production in FY20,” as per ICRA.

Mr. Budhiraja added that the total tyre production in the first quarter of the current fiscal (April-June 2019) declined by 4% year-on-year. This has forced tyre makers to defer capital expenditure, and cut down production and temporary jobs, while pushing exports to help lessen the impact of the slowdown in the domestic market.

Output rationalisation

Apollo Tyres spokesperson said: “Our production is tuned to the market demand and as such this has called for rationalisation from time to time. In the current scenario as well, there is a need to rationalise the production, including rationalising of the contractual manpower.”

The spokesperson added that for Apollo Tyres, the demand from the replacement market was still strong and expressed hope that with good monsoons, along with the recent stimulus package by the government and the upcoming festivals will see a turnaround in demand from the original equipment manufacturers.

Similarly, JK Tyre too has delayed its capital expenditure plans, while also rationalising production in what CMD Raghupati Singhania had at the company’s AGM described as “extremely concerning and if anything, grim” economic environment.

Liquidity issue

Rajiv Prasad, president of India operations at JK Tyre, said the company was working on pushing replacement sales and tapping opportunities in the export markets. “... in the short-term, the industry needs to cope with this change in demand... cash is also tight in the marketplace so, that is putting a constraint which is reflecting a bit on the replacement side as well.”

He, however, added that the replacement market is still seeing growth. He remained optimistic about the long-term prospects of the industry. “... till the time people and goods keep moving, tyres would be required... there is no impact from a long-term perspective.”

Stating that the company is trying to keep volumes up in the remaining three quarters of the fiscal, Mr. Prasad said the industry faced another stumbling block in the form of transition to BS-VI. “...nobody can really make a comment on it very strongly... how the whole auto industry is going to play out. This is something that you have to watch,” he said.

Mr. Budhiraja added that festive buying and the pre-buying on account of BS-VI were unlikely to be strong demand triggers.