Higher spend towards servicing debt-funded capex will squeeze the margins as well.
Chennai: Slowdown in automotive industry will drag down revenue growth in the tyre industry to low single digits in the current fiscal. Higher spend towards servicing debt-funded capex will squeeze the margins as well.
Subdued vehicle production due to weak consumer sentiments amidst slowing economic activities, rising cost of vehicle ownership and softened rural demand will impact the tyre demand in FY20, finds Icra.
Being a derived product, fortunes of tyre are linked with auto sector and overall economy's growth, said Rajiv Budhraja, Director General Automotive Tyre Manufacturers Association. "With auto sales and economic growth touching multi year lows, tyre industry is facing revenue pressure,' he said.
"Following two strong years of growth — 12 per cent in FY18 and 14 per cent in FY19 respectively — tyre industry revenue is estimated to grow at a lower rate of 3-4 per cent in FY20 affected by modest growth in original equipment tyre demand on the back of sluggish auto demand and expected moderation in tyre exports," said K Srikumar, Vice President and Co-Head, Corporate Ratings, Icra.
In volume terms also, the domestic tyre demand is estimated to grow at a lower rate of 3-4 per cent during FY20. The replacement segment, which represents over 55 per cent of industry volumes, is likely to grow by 5-6 per cent in FY20, while demand growth in original equipment (OE) segment is pegged at 2-3 per cent. The lower global growth forecast and trade tensions will affect the export prospects as well.
The margins also will get affected as the industry has been investing heavily on capacity expansion. The industry is investing over Rs 17,000 crore over next three years ending FY22 and part of this is funded through debt. The companies are likely to incur higher interest costs due to this higher debt-funded capex and this will affect the net margins.
Further, the raw material costs too have escalated owing to the rise in natural rubber prices.