SECTOR RESEARCH September 04, 2017

Indian Tyre Sector

A smooth ride

OEM DEMAND OUTLOOK

Two wheelers: Growth likely to improve
Passenger cars and UVs: Sustained strength Motorcycle demand growth is likely to pick up following an expected
We expect passenger car demand to stay strong over the medium term on strength in the rural India market on the back of normal monsoons.
the back of 1) strong rural demand premised on higher farm incomes, Demand for scooters, however, would continue to outpace the demand
infra spend pickup & normal monsoons, 2) cushion of low interest rates for motorcycles given the under‐penetration of the segment in rural India.
ensuring reduced cost of ownership, 3) likely soft fuel price trend given Lower interest rates along with growing finance support from OEM arms
our modest crude price outlook 4) an upcoming model launch spree. should further fuel demand growth.

Figure 1: Demand outlook
M&HCV: Weakness to persist FY13 FY14 FY15 FY16 FY17 FY18E
We expect demand for CVs to remain weak due to 1) advancement of Pass vehicles 1.3% ‐6.1% 3.9% 7.2% 9.2% 10‐12%
buying in Q4 FY17 due to change in emission norms, 2) fleet operators yet M&HCV ‐23.1% ‐25.3% 16.0% 29.9% 0.0% 0‐5%
awaiting clarity on GST roll out impact on logistics sector, 3) impact of LCVs ‐2.0% ‐20.2% ‐2.8% 11.5% 4.2% 10‐12%
higher vehicle prices on fleet operator profitability post BSIV 3Ws 4.9% ‐10.9% 11.0% 1.0% ‐4.9% ‐5%‐0%
implementation given no commensurate improvement in freight rates, 4) 2Ws 2.9% 7.3% 7.9% 3.0% 6.9% 8‐10%
expected improvement in rail transport viability vis‐à‐vis road transport Source: SIAM, IIFL Research
from the impending dedicated rail freight corridors and 5) lower
replacement demand given weak CV sales during FY13 and FY14 (4‐5 Figure 2: 2Ws dominate in terms of volume, CVs dominate in value terms
years of replacement cycle). The impact of these factors would be Volume Value
partially offset by 1) improvement in mining and infrastructure activities
to support tipper demand (17% of M&HCV sales) and 2) growing demand Truck
11% Truck
from the consumer durables sector. 7%
21.4%
LCV 30.4%
LCV
LCVs: Strong momentum to sustain Pass Pass
52%
26% 16.1%
Demand for LCVs should remain strong on the back of rising last mile Tractor 3.6% Tractor
connectivity demand given the upsurge in organized retail segment. 4% 2W 28.6% 2W
Notwithstanding the impact of dedicated rail freight corridor on the
demand for M&HCVs goods carriers, last mile connectivity would be a
business need. Falling interest rates would allow financers to improve
their penetration in the segment. Source: ATMA, IIFL Research
Analyst: Prayesh Jain, Tushar Rathod
1
Indian Tyre Sector

REPLACEMENT DEMAND OUTLOOK Figure 3: Projected trend in tyre demand from passenger cars
Replacement cycle for commercial vehicles is around 12 months. With a OEM yoy Replacement yoy
18%
life of about 10 years (4‐5 years with the first owner and another 4‐5 years
in second hand market), CVs generally undergo around 8‐9 replacements 16%
over their lifetime. Considering strong trend in M&HCV vehicle sales in the 14%
past couple of years, replacement demand should gather some momentum 12%
in FY19 following weak trends in FY17 and FY18E. Further boost would
10%
come from the recent imposition of anti‐dumping duty on Chinese radials.
8%
In any case, demonetization and GST have significantly dented imports of
Chinese tyres. Hence, overall, we expect a strong near‐term replacement 6%
demand trend in the CV segment. 4%
2%
Passenger car and two wheelers generally see replacement cycle of four
0%
years. With a life of about 12‐16 years, tyres of these vehicles are replaced FY17P FY18E FY19E FY20E
3‐4 times over their lifetime. During FY18, vehicles sold in FY13 would see Source: ATMA, SIAM, IIFL Research
their first replacement while vehicles sold in FY09 should witness their
second replacement. During these fiscals, vehicle sales saw muted trends, Figure 4: Projected trend in tyre demand from two wheelers
indicating a moderate increase in near‐term replacement demand. OEM yoy Replacement yoy
However, FY19 could see much stronger trends. With CVs accounting for 16%
bulk of the demand, we expect overall replacement demand to be stronger 14%
vis‐à‐vis recent past.
12%

Overall demand for tyres is expected to pick up and see a growth of 10%
7‐9%, with OEM demand likely to grow in the region of 8‐10% and 8%
replacement demand likely to see 6‐8% growth.
6%

4%

2%

0%
FY17P FY18E FY19E FY20E
Source: ATMA, SIAM, IIFL Research

2
Indian Tyre Sector

Figure 5: Projected trend in tyre demand from commercial vehicles OUTLOOK ON RUBBER PRICES
OEM yoy Replacement yoy
9% Figure 6: Benchmark Tocom Rubber futures c2 & Crude oil
8% Monthly JRUc2, CLc1 31-03-2006 - 31-03-2018 (TOK)
Price Cndl, JRUc2, Trade Price, 31-08-2017, 118.759, 126.097, 117.526, 123.925,
7% USD 3MA, JRUc2, Trade Price(Last), 8, 20, 100, Exponential, 31-08-2017, 130.186, 126.674, 126.310, Price
Bbl Line, CLc1, Trade Price(Last), 31-08-2017, 47.60, +0.22, (+0.46%) INR
6% 150 Kg

5% 120 200
130.186
126.674
4% 90 150
126.310
123.925
3% 60 100
47.60
50
2% Auto Auto
MACD, JRUc2, Trade Price(Last), 12, 26, 9, Exponential, 31-08-2017, 7.7, 8.3
1% 8.3
Value
7.7
JPY
0% RSI, JRUc2, Trade Price(Last), 14, Wilder Smoothing, 31-08-2017, 49.698
FY17P FY18E FY19E FY20E Value
49.698
JPY
Source: ATMA, SIAM, IIFL Research 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2000 2010

Assumptions for replacement market:

Pass vehicles – replacement cycle of four years, two 100% replacement and third 50% replacement Source: Reuters, IIFL Research
Two wheelers – replacement cycle of four years, two 100% replacement and third 50% replacement
M&HCV – replacement cycle of 1 year, nine 100% replacement Outlook: Natural Rubber (NR) prices fell sharply in the first half of 2017

on reports of increase in Rubber output in producing countries amid
softening of Crude oil prices. With prices falling nearly 50 % from their
peak in the last 7 months, it seems Rubber prices may have reached a near
term bottom at Rs115‐120/kg levels.

Crude oil prices are hovering above US$47/bbl with limited downside due
to OPEC efforts to reduce inventories and shore up prices. However,
compliance issues among OPEC member countries amid rising US output
would likely prevent sharp gains. We expect Crude oil prices to continue
in the US$45‐55/bbl range.

Expecting strong tyre demand amid robust economic and industrial
growth in China, USA and India, we expect Rubber prices to stay firm and
even rally towards Rs140‐145/kg levels in the coming months.

3
Indian Tyre Sector

Figure 7: India Production and Consumption of NR and SR According to Association of Natural Rubber Producing Countries (ANRPC),
Type FY17 FY16 % Change a sharp fall in NR prices should place global supply of NR near 12.756 m
PRODUCTION MT in 2017 vs. output of 12.401 m MT in 2016. In 2016, supply deficit was
Natural Rubber (NR) in the range of 200,000 MT. Trade estimates of global NR consumption in
Ribbed Smoked Sheet (RSS) 473,375 375,495 26.1 2017 are near 12.88 m MT hinting at a supply deficit of 120,000 MT. With
Solid Block Rubber 106,560 92,785 14.8 better growth prospects this year, supply deficit could be larger than that
Latex Concentrates 83,200 71,835 15.8 of 2016.
Others 27,865 21,885 27.3
Total 691,000 562,000 23.0 ANRPC stated that for the first seven months of 2017, the global
Synthetic Rubber (SR) production of natural rubber (NR) amounted to 6.838 million MT,
whereas the world consumption recorded at 7.486 million MT. This has
Styrene Butadiene (SBR) 96,637 76,999 25.5
resulted in supply deficit of 648,000 MT.
Poly Butadiene(BR) 116,557 111,807 4.2

Others 9,550 11,039 (13.5)
Supply deficit in 2016 was near 200,000 MT whereas in 2017 it could
Total 222,744 199,845 11.5 be in the range of 120,000 to 300,000 MT on prospects of robust
Total NR & SR 913,744 761,845 19.9 growth.
CONSUMPTION
Natural Rubber (NR) Global Production and Consumption figures
Ribbed Smoked Sheet (RSS) 486,470 459,570 5.9
Solid Block Rubber 451,240 426,215 5.9 Figure 8: Country-wise production of NR (‘000 MT)
2016 2015 % growth
Latex Concentrates (drc) 82,100 86,530 (5.1)
Others 24,265 22,100 9.8 Thailand 4,469 4,473 (0.1)
Total 1,044,075 994,415 5.0 Indonesia 3,208 3,145 2.0
Out of which Auto Tyres 707,335 663,495 6.6 Vietnam 1,032 1,013 1.9
Synthetic Rubber (SR) China 774 794 (2.5)
Styrene Butadiene (SBR) 278,800 250,610 11.2 Malaysia 674 722 (6.7)
Poly Butadiene(BR) 184,720 172,155 7.3 India 624 575 8.5
Others 135,060 130,605 3.4 Others 1,620 1,549 4.6
Total 598,580 553,370 8.2 World Total 12,401 12,271 1.1
Source: Rubber Board
Out of which Auto Tyres 417,728 377,090 10.8
Total NR & SR 1,642,655 1,547,785 6.1
Out of which Auto Tyres 1,125,063 1,040,585 8.1
Source: Rubber Board

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Indian Tyre Sector

Figure 9: Country-wise consumption of NR (‘000 MT) Margins for tyre companies to remain flattish
Country 2016 2015 % growth Volume growth of 7‐9% for the industry is expected to bring operating
China 4,863 4,680 3.9 leverage benefits to tyre manufacturers. However, higher raw material
India 1,034 993 4.0 costs would eat into these gains. Growing competitive pressures would
USA 932 937 (0.5) limit passing of higher raw material costs onto consumers. Consequently,
Japan 677 691 (2.0) we expect operating margins for tyre manufacturers to remain steady
Thailand 650 601 8.2 over the next couple of years.
Indonesia 583 509 14.5
Figure 11: Margins for tyre companies to track close to 5-year average
Malaysia 497 475 4.7
Brazil 428 405 5.7 Apollo Tyres 5‐yr avg
20
Rep of Korea 381 388 (1.7) %
Others 2,555 2,462 3.8 18

World Total 12,600 12,140 3.8 16

Source: Rubber Board
14

Figure 10: India consumption of NR and SR 12
MT FY17p FY16 Growth (%) 10
Natural Rubber
8
Auto Tyres & Tubes 707,335 663,495 6.6
6
General Rubber Goods 336,740 330,920 1.8
Total NR 1,044,075 994,415 5.0 4
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E
Synthetic Rubber
Auto Tyres & Tubes 417,728 377,090 10.8 Source: Bloomberg, IIFL Research

General Rubber Goods 180,852 176,280 2.6

Total SR 598,580 553,370 8.2
NR & SR
Auto Tyres & Tubes 1,125,063 1,040,585 8.1
General Rubber Goods 517,592 507,200 2.0
Total NR & SR 1,642,655 1,547,785 6.1
Source: Rubber Board

5
Indian Tyre Sector

Figure 12: Margins for tyre companies to track close to 5-year average Figure 14: Peer comparison
Rs mn FY17 FY18E FY19E
CEAT 5‐yr avg
18 Apollo Tyres, CMP Rs253
%
16 Sales 130,555 145,885 164,814
yoy growth (%) 11.5 11.7 13.0
14
OPM (%) 13.2 11.3 12.2
12 PAT 9,819 7,175 9,271
10 yoy growth (%) (10.2) (26.9) 29.2
8 EPS (Rs) 19.5 14.2 18.4
P/E (x) 13.0 17.8 13.8
6
4 MRF, CMP Rs64,395
2 Sales 134,058 152,550 164,693
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E yoy growth (%) 13.8 8.0
Source: Bloomberg, IIFL Research OPM (%) 19.7 15.9 19.2

PAT 12,947 12,911 17,776
Figure 13: Margins for tyre companies to track close to 5-year average
yoy growth (%) (0.2) 37.7
MRF 5‐yr avg EPS (Rs) 3,053 3,045 4,192
25
% P/E (x) 21.1 21.1 15.4

20
Ceat, CMP Rs1,709
Sales 58,910 65,133 74,041
15
yoy growth (%) 0.1 13.8 13.7
OPM (%) 11.5 10.4 12.6
10
PAT 3,699 3,411 5,027
yoy growth (%) (19.6) (4.3) 43.8
5
EPS (Rs) 91.4 87.5 125.9
P/E (x) 18.7 19.5 13.6
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E Source: Company, Bloomberg, IIFL Research

Source: Bloomberg, IIFL Research

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