Feature

Cruising through

Despite headwinds in the auto sector, tyre stocks ride on replacement demand and falling raw-material cost

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Over the past couple of years, automakers were on a fast lane. FY18, in particular, was one of the best years for the industry when automobile sales went up by 14.22% with passenger vehicles growing by 8% (hitting a record high of 3.28 million units); commercial vehicles (CVs) by 20%; and two-wheelers by 14.8%. Between FY16 and FY18 too, passenger vehicles, CVs and two-wheeler segments saw a CAGR of 8.5%, 12% and 10.7% respectively driven by ease of access to credit and robust demand.

Tyre companies too had a decent growth of 6.7% (average) between FY16 and FY18 thanks to the original equipment manufacturers’ (OEMs) sales, imposition of anti-dumping duty on truck and bus radial (TBR) tyres from China, and implementation of the Goods and Services Tax (GST) that gave them an advantage over the unorganised market.

It was a good run until FY19, when the slow down began due to factors such as insurance regulations, credit crunch and higher fuel cost. Growth in automobile sales turned tepid with a mere 5% rise; passenger vehicle saw growth of 2.7%, the lowest in the past five years; and two-wheelers grew at 4.8%. CVs however managed to buck the trend by clocking an annual growth of 17.6%.

 Though auto manufacturers are facing a bumpy ride, with some even cutting down production, tyre makers are set to bask in the warmth of the three good years (FY16-18). “Vehicles which were sold in those years — especially commercial vehicles — their tyres should be due for replacement. So, tyre makers are expected to see better demand in the next two years,” says Jayasree Ram, an auto analyst at Karvy (See: Growth uptick). 

Market leaders, particularly in the CV tyre segment such as Apollo Tyres and JK Tyre, are expected to benefit as trucks and buses continue their good run. More than 70% of the revenue of the two companies comes from the CV category. “Volume growth in the MHCV (medium and heavy commercial vehicle) tyre segment is primarily driven by replacement demand, which has historically accounted for around 70% of the market,” Vaikam Kumar, auto and auto ancillaries sector analyst at JM Financial Institutional Securities.

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