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Corporate Rati ngs

Anjan Deb Ghosh
+91 22 6179 6392

Subrata Ray
+91 22 6179 6386

Pavethra Ponniah
+91 44 4596 4314

K Srikumar
+91 44 4596 4318

Subrat Dwibedi
+91 22 6179 6382

A M Pradeep
+91 44 4596 4312

Softer input costs continue to pay dividends even as the demand environment remains


Tyre Feature August 2013

Tyre demand to revive by ~8-10% supported by the replacement tyre growth engine
The OEM segment in the domestic tyre industry reported around ~2% volume growth in aggregate during 2012-13, as volume declines in Truck and Bus (T&B)
segment (-23%) and the tractor segment (-3%) was offset by growth in LCV (~11%), relatively modest growth in high volume segment like passenger vehicles (PV,
~4%) and flat Motorcycle volumes. On the other hand, the trends in the replacement segment were quite different, with healthy volume growth in T&B segment
and weak volumes in two-wheeler (2W) segment.
Overall the Indian Tyre Industry domestic demand is estimated to have posted flat to marginal volume de-growth (0% to -1%) during 2012-13. However in terms
of tonnage the industry growth was supported by strong replacement demand in high tonnage contributing segments like T&B and PV leading to an estimated
growth of ~ 4.5-5% during 2012-13. This, coupled with marginal improvement in realisations has resulted in ~8-9% growth in revenues for the industry.
During 2013-14, ICRA expects the OEM tyre demand (volumes) to grow by a muted ~2% while the replacement demand (volumes) is expected to be much
stronger at 15% supported by growth in high volume segments like 2W. However tonnage growth during 2013-14 is expected at ~5-6% only, driven by relatively
slower growth in T&B replacements.

Update on quarterly trend
The industry witnessed robust revenue CAGR of 21% during the period 2008-2012. The demand from the OEM segment however moderated substantially during
2012-13. However, strong growth in replacement tonnages, coupled with product mix of tyres improvements supported a moderate industry-wide growth of 4.7%
(in tonnage) for 2012-13. This was despite a relatively weak Q4 2012-13, where revenues grew by ~2% only, in line with the ongoing weakness in the domestic
auto markets. The silver lining, however, was in the continued margin expansion at the operating (60bps) and net levels (140bps) on the back of benign rubber
prices and easing of interest burden with cash accruals supporting debt retirement.
In Q1, 2013-14 too, while demand growth from OEM segment remained muted, operating and net margins are estimated to have held ground at over 12.0% and
5.5% respectively supported by lower global rubber prices and replacement demand.

Benign rubber prices supported industry wide margin expansion of over 200 bps during 2012-13. However flat margins expected for 2013-14 supported by a strong H1;
margins may moderate in H2 with volatility in crude and NR. Strong high margin replacement tyre demand a positive
Rubber prices, after having peaked at Rs. 240 per kg in April 2011, trended down to Rs. 160-170 kg during 2012-13. With bulk of the 2012-13 revenues coming
from replacement volumes (segment enjoying relatively high profitability), domestic tyre manufacturers were able to hold on to prices for a large part of the year,
leading to an industry wide margin expansion of over 200 bps during 2012-13.
ICRA expects the industry to benefit from lower priced raw material contracted during H1, 2013-14 to support margins. Coupled with healthy replacement
demand volumes we expect industry wide margins to hold at 2012-13 levels, despite any firming in NR and crude prices during H2, 2013-14. Slowing pace of debt
funded capacity additions and relatively lower depreciation are also expected to support net margins.

Softer input costs continue to pay dividends even as the demand environment remains subdued AUGUST 2013


Tyre Feature August 2013
Pace of capacity additions expected to continues; albeit at a moderately lower level on the back of recent large capacity additions
Over the last few fiscals, the domestic tyre industry has been gearing up for the imminent structural change in the T&B segment with cross ply tyres giving way to
the technically superior radial tyres. Between March 2009 and March 2012, the industry is estimated to have added 62.4 million tyres capacity, reflecting a CAGR
of 16%, in order to bridge the demand gap. Although the current subdued demand outlook would warrant some moderation in capacity addition, tyre
manufacturers are unlikely to defer capex materially at this stage of their expansion. Overall, over the last four years, domestic tyre majors have incurred over Rs.
120 billion capex, resulting in increased interest and depreciation burden. The industry-wide leverage, which has been on an uptrend over last several years,
however moderated (from 1.4x to 1.2x) during 2012-13, supported by healthy cash accruals.
Keeping in mind the eventual permeation of radial tyres, tyre manufacturers (both domestic and international) have committed substantial amount of
investments (Rs. 51.5 billion) between CY13 and CY15 towards addition of ~13.2 million tyres, primarily in the radial space.

Imports from China on the decline
After witnessing CAGR of 19% in import growth, tyre imports, especially from China, have declined considerably in the last two fiscals. This is on the back of
reduction in export subsidies and increasing cost inflation in China leading to erosion of price competitiveness of Chinese tyres and significant rupee depreciation
narrowing the price differential between imported and domestic tyres. The ramp up of domestic TBR capacities backed by massive domestic investments and
slowdown in the domestic T&B OEM market (major segment for imported TBRs) have also supported the moderation in TBR imports.

Apollo-Cooper acquisition; risky bet that could reap rich dividends in the long run
On June 12, 2013, Apollo Tyres Limited announced its proposed acquisition of USA based Cooper Tire & Rubber Company, in an all cash deal totalling USD 2.5
billion (~Rs. 14,500 15,000 crore). The acquisition, once concluded, will make Apollo Group the 7
largest tyre manufacturer globally.
While this large sized acquisition is based on leverage and consequently strains the balance sheet, in the longer term there could be potential for significant gains
from potential synergy between the two entities.


Tyre Feature August 2013
Subscribe to the full report for the following and more

I. Brief overview of the Indian Automotive Industry
- Trends in the key segments - M&HCV, Passenger Cars, Two wheelers and Tractors
- Demand drivers and ICRA's demand estimates for these segments

II. Update on the impact of auto demand slowdown on the domestic Tyre industry
- Replacement and OEM demand scenario
- Growth trends, imports scenario and ICRA's expectations for domestic tyre demand in Truck & Bus, Passenger car, LCV and Two Wheelers

III. Trends in Raw material prices
- Price movement of natural rubber and ICRA's estimates on the rubber production and expected supply gap
- Price movement of Synthetic rubber and rubber chemicals; and a comparison with crude oil prices

IV. Update on profitability indicators
- Impact of moderation in demand and falling rubber prices on the profit margins
- Quarterly trends in operating and net margins of the tyre industry
- ICRA's margins expectations

V. Update on capacity additions in the industry
- Addition of capacities during 2012-13
- Key projects scheduled for completion over the medium term

VI. Global Tyre Industry - Performance and outlook
- Update on global tyre production
- Outlook on the global tyre demand

VII. Brief coverage on the following tyre majors -
a) Apollo Tyres Limited; includes a separate commentary on Apollo's acquisition of Cooper Tire
b) Balkrishna Industries Limited
c) Ceat Limited
d) Elgi Rubber Company Limited
e) Goodyear India Limited
f) JK Tyre and Industries Limited
g) MRF Limited
h) TVS Srichakra Limited


Tyre Feature August 2013

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Mobile: 9940648006
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Mobile: 9821086490
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Pune-411 020
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E-mail: shivakumar@icraindia.com

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Mobile: 9871221122
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Gurgaon 122002
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E-mail: vivek@icraindia.com

Mr. Animesh Bhabhalia
Mobile: 9824029432
907 & 908 Sakar -II, Ellisbridge,
Ahmedabad- 380006
Tel: +91-79-26585049/2008/5494,
Fax:+91-79- 2648 4924
E-mail: animesh@icraindia.com

Mr. Jayanta Chatterjee
Mobile: 9845022459
'The Millenia', Tower B,
Unit No. 1004, 10th Floor,
Level 2, 12-14, 1 & 2, Murphy Road,
Bangalore - 560 008
Tel: +91-80-43326400,
Fax: +91-80-43326409
E-mail: jayantac@icraindia.com


Tyre Feature August 2013

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