READY FOR ACCELERATION

READY FOR ACCELERATION

TA News Bureau

The stunning electoral victory of Prime Minister Narendra Modi augurs well for the Indian economy, including the automobile and tyre industry as economic reforms are expected to get further traction under stable governance.

“There is indeed an optimistic wave sweeping around the result of the recently concluded elections. We expect more reforms to come up in the infrastructure segment leading to better mobility between tier 2 and 3 towns,” says Jayasree Ram, a top research analyst with Karvy Financial Services.

The economic environment is set to become more conducive to growth. This is likely to help improve automobile sales on account of higher road connectivity that will eventually drive tyre sales as well. The main reason for her to see better trend in the tyre industry is the higher replacement demand.

An engineer by training, Ram has an MBA in finance from Cardiff and she is focused on financial and market analysis. Her research shows that the Indian tyre manufacturers are set to see better times in the next two years.

“Tyre sales are predominantly driven by the replacement demand,” she points out. Considering that the domestic automobile sales have increased by 7% Year-on-Year (YoY) during the financial year (FY) 17 and 14% YoY during FY18, is an indication of a higher sample of vehicles running which is likely to be due for tyre replacement.

“However, the current demand scenario for tyres looks bleak but it is expected to revive during the next 3-4 months,” she says

Regarding the impact on Indian tyre makers of the imposition of anti-dumping duty on truck and bus radial tyres from China, Ram says it has certainly benefitted and this will continue to be an advantage for Indian manufacturers.

In fact, the key tyre producers are expanding capacities to take advantage of the favourable emerging market conditions. Still, pricing is quite critical for the industry and it mostly likely to follow a Kinked Demand curve. This curve theory is a term regarding oligopoly and monopolistic competition.

Capacity expansion

Competition has certainly benefitted the tyre makers and it will continue to be an advantage for them. In fact, key tyre manufacturers are expanding capacities to take advantage of the emerging positive trends.

Commenting on reports that in the past few months there has been a slowdown in the automobile sector due to credit crunch, higher fuel costs etc, she said it is in fact difficult to forecast when exactly the higher growth impulses would return to the tyre and automobile sectors.

However, the situation is set to improve when the new government comes out with a new economic policy formulation. Furthermore, the automobile sector is undergoing a change on the back of the upcoming BS VI transition norms.

Ram, however, does not expect any direct impact on the tyre industry following the implementation of Bharat Stage norms to reduce vehicular emissions by the end of Financial Year 2020.

She thinks the increasing emphasis on electric vehicles is also likely to bring about a shift in customer preference (more likely if the government subsidizes electric vehicles).

So, all these factors have initially led to some uncertainty in the automobile sector. Anyways, demand for tyres will eventually follow suit when the industry picks up.

Regarding the major challenges facing the Indian tyre companies in terms of pricing of raw materials such as natural and synthetic rubber, steel cord etc, it is the price fluctuations of these raw materials that add to uncertainty.

“Most of the listed Indian tyre manufacturers have a relatively higher standard deviation in the stock price indicating high volatility. This is primarily due to fluctuating raw material prices and also factors such as how best a tyre maker could pass on these costs to the end consumer.”

Since most of the manufacturers are net importers of raw materials, foreign exchange fluctuations also impact profitability in addition to commodity prices. However, manufacturers with an export presence may benefit from being hedged both ways.

Therefore, higher profitability can be achieved during lower commodity cycles considering other things constant.

Product innovation

Product design and innovation are key factors that would impact the tyre industry following government’s decision to accelerate electrification of the mobility sector by 2030.

While auto parts (especially engine components) is likely to be altered or replaced as electrification of vehicles picks up, tyres are here to stay.

“However, the impact, whether positive or negative, will be determined by the current market scenario during that time,” says Ram.

“In addition to this, customization of tyre design to suit specific model may be introduced. So, this falls under product design and innovation.”

Technological innovation in tyres is actively being implemented by most of the manufacturers, such as improved rolling resistance, RFID etc.

She says the stiff competition from multinational tyre companies has helped trigger more investments in R&D by Indian tyre companies to improve quality and fuel efficiency.

“Companies are striving to achieve better cost optimization through product innovation. The average R&D spend is about 2% of the revenue,” she points out.

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