Tyres: Focus shifts to dissect future demand trends : ICICI Securities

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Focus shifts to dissect future demand trends
In the auto ancillary universe, tyre companies have enjoyed possibly a
unique sweet spot keeping in mind both demand and cost angles.
Demand growth remains tepid throughout in domestic automotive
market with major expectations of growth in coming periods. On the cost
side, global rubber prices have spiralled downward, benchmark Bangkok
RSS-4 rubber prices declined to <$1.6-1.7 levels ($2.2/kg in March).
We believe the price fall has seen the worst and investor focus needs to
shift away from costs. Thus, in this series of tyre sector analysis, we
focus on possible demand pockets that could provide the thrust to sales!

Demand outlook:
Indian tyre market:
The size of the Indian tyre industry (production), as per our analysis, is
estimated at ~ | 46,000 crore (FY14) with exports contributing ~9-10%
of the stated industry size. In terms of total tonnage, we estimate the
industry at ~ 1.6 million MT, in terms of production volume with exports
at ~7-8% of the same. The market size of the domestic tyre industry, in
value terms, has grown at a CAGR of ~12% FY10-14P. However, in the
recent past, the CAGR has been a meagre 3% in FY12-14P, mainly driven
by mixed trends in automotive growth.
Exhibit 1: India tyre sales breakup
Exports
11%
Replacement
61%
OEM
28%
Source: Company, ATMA, CEAT PD, ICICIdirect.com Research
The key question is which pockets would lead the demand?
On the basis of end-user categories:
Tyre demand originates from two end-user categories, namely OEMs
and the replacement segment. Consumption by OEMs is dependant on
fresh vehicle sales trend while the replacement segment is linked to
economic growth, usage characteristics and replacement cycles. On an
overall basis, demand from the replacement segment always dominates
the Indian tyre market contributing ~68% of demand, in terms of
tonnage. The major reason for high replacement share is due to the fact
that the number of registered vehicles/annual sales remains at ~10 x at
close to ~20.3 crore registered vehicles (our estimates) vis-à-vis ~2.1
crore annual vehicle sales.

LINK
http://content.icicidirect.com/mailimages/IDirect_TyreSectorUpdate_Dec14.pdf