Tyres industry comprises companies that produce, manufacture

and sell automobiles or any motor vehicle tyres to the

consumers, dealers, retailers or industries whose main
operation is related to tyres. This industry focuses mainly on
either new or re-conditioned and used goods, in this case tyres,
for motorcycles, cars, SUVs, Vans, buses, trucks and trailers or
any heavy goods transportation vehicles.

SECTOR GROWTH - The overall market value for

specialty tires is expected to grow with a
CAGR of 4.2% for the next 5 years to reach
nearly USD 21.5 billion in 2020

The Indian Tyre Industry is an integral part of the Auto Sector – It

contributes to ~3% of the manufacturing GDP of India and ~0.5% of
the total GDP directly. So, let’s understand the dynamics of the Tyre
Industry in India.
Indian tyre industry has almost doubled from ~Rs 30,000 crores in
2010-11 to ~Rs 59,500 crores in 2017-18 of which 90-95% came
from the domestic markets. The top three companies – MRF, Apollo
Tyres and CEAT have ~60% of the market share in terms of
revenue. In terms of segmentation tyres can be divided in two ways
– based on end market and based on product.
Replacement, OEMs & Exports
Indian tyre market is clearly skewed towards the replacement
segment which contributes ~70% of total revenues. Whereas in
volume (tonnage) terms the replacement segment contributes ~60%
indicating realizations in the after-market are clearly higher than
OEMs (Original Equipment Manufacturer) market

Truck & Bus (T&B), Passenger Vehicle (PV), 2/3-Wheeler, Off-

Highway Tyres (OHT) & Others
T&B tyres in India generates the major revenue i.e. 55% of total
revenue whereas globally it’s the PCR (Passenger Car Radials)
contribute the largest portion of the revenue. This is mainly because
of very low penetration of passenger vehicles in India – below 20
per 1,000 people whereas in China the number is ~69 per 1,000
people and 786 per 1,000 people in US. In terms of volume
(tonnage) T&B contributes around ~50% of the total volume

Cost Structure :
Tyre Industry is known for its capital-intensive structure where 60%
to 65% of the revenues is raw material cost. The other important
cost involved are SG&A (selling general & administrative) which
roughly contribute from 6% to 12% of the revenues and employee
cost contributing from 7% to 14% of revenues.

Raw Material Costs :

As we saw above that around 250 different raw material are put
together to manufacture a tyre but the major cost generating raw
materials are natural rubber, synthetic rubber and crude derivatives
like carbon black which contribute to ~80% to 85% of the total raw
material cost. Hence, rubber and crude price are key variable to tyre
company’s profitability
Historical average gross margins vs rubber & crude prices :
The Indian tyre industry has been under raw material pressure for
last two year due to increase in rubber and crude prices which can
be clearly seen in the above comparison charts. As per the
managements the pressure on the raw materials is expected to
continue in the shorter term due to increasing crude prices

A Quick Glance At A Few Indian Tyre Companies :

Capacity Expansion Plans :
The Indian tyre industry is expected to see significant capacity
expansion in the upcoming two to three years. All major players in
the industry have announced their plans
MRF : MRF has announced to set up a new facility in Gujarat where
it plans to spend ~Rs 4,500 crores over next few years
Apollo Tyres : Apollo tyres laid foundation for their fifth Indian
facility in Andhra Pradesh which they will manufacture passenger
vehicle tyres. The company is spending ~Rs 1800 crores in the first
phase of the project. The facility is expected to commence operation
in two years from now. Apollo is also planning to expand its T&B
capacity at the Chennai plant which is expected to commence
operations in this financial year
CEAT : CEAT has announced a capex of ~Rs 3,000 to 4,000 crores
over next 4 to 5 years. The company is entering into the OHT (off-
highway tyre) segment with a new facility in the Amber Nath. The
company has started its operations at a very small scale and plans
to expand it further to capacity of ~100 MTPD. CEAT is also
planning to expand its capacity significantly PCR with a greenfield
expansion in Chennai which Is expected to come online in line with
Apollo’s Andhra greenfield facility. It also has plans to expand it T&B
and 2/3-Wheeler capacity by brown field expansion at Halol and
Nagpur plant

Important Financial Metrics To Look At :

We believe the most important metric while comparing / analyzing a
commodity business is its unit level economies, well tyre is no
different. As different tyre companies manufacture different type of
tyres it is very difficult to compare realizations of one tyre company
with other. The solution could be comparing them on per ton basis
 Realizations per ton (Net operational sales/tons sold) : Comparing
realization per ton could help us understand which company can
sell its products at premium compare to other tyre companies.
Looking at realization per ton over time could also help us
understand the pricing trend of the companies
 Cost per ton (COGS/tons sold) : Cost per ton could help us
understand which company is efficiently using its raw material
 EBITDA per ton (EBITDA/tons sold) : EBITDA per ton could
help us understand which company has been operationally more
efficient (higher the better)
Important Financial Metrics To Look At :
We believe the most important metric while comparing / analyzing a
commodity business is its unit level economies, well tyre is no
different. As different tyre companies manufacture different type of
tyres it is very difficult to compare realizations of one tyre company
with other. The solution could be comparing them on per ton basis
 Realizations per ton (Net operational sales/tons sold) : Comparing
realization per ton could help us understand which company can
sell its products at premium compare to other tyre companies.
Looking at realization per ton over time could also help us
understand the pricing trend of the companies
 Cost per ton (COGS/tons sold) : Cost per ton could help us
understand which company is efficiently using its raw material
 EBITDA per ton (EBITDA/tons sold) : EBITDA per ton could
help us understand which company has been operationally more
efficient (higher the better)
 Opportunities :
 Auto Industry

 Tyre industry is integral part of auto industry. OEM tyre

demand is directly related to auto production. As per
automotive mission plan 2026 (AMP 2026) the Indian
automotive industry is expected to grow 3.5 to 4 times in value
from its output of Rs 4.64 lakh crores in 2015 to Rs 16.16 to
18.88 lakh crores in 2026 with an average growth rate of 6%
Read more about AMP2026 – Link
Concerns :
Raw Material
As mentioned above tyre industry is raw material intensive and India
majorly depends on imports as the demand for raw materials like
rubber, crude & carbon black is more than supply by the domestic.

manufactures
In FY18, India produced ~694,000 tonnes and consumed
~1,112,000 tonnes of rubber whereas, the gap was fulfilled by
imports. India almost imported ~470,000 tonnes of rubber. Rubber
imports in India attract a duty of 25% or Rs 30 per KG whichever is
lower increasing input costs further
India has sufficient capacities of carbon black. However due to
increasing exports of carbon black the demand-supply gap has
increased in last two years leading to import of carbon black.
Inability To Pass Price Rise To OEMs
The ability to pass on sharp rises in raw material prices to OEMs
remains a challenge for industry players. Generally, many tyre
manufacturers are unable to pass on higher raw material prices to
OEMs, due to bulk demand fearing loss of market share.
Rising Interest Rates
As many players in the tyre industry have plans to further expand
their capacities which will be partly funded by debt. As RBI has
been recently increasing interest rates due to macro issues. The
expected increase in rate could lead to increase in finance costs of
the companies.
Global Trend :

The global tyre industry has been witnessing a shift in the tyre
manufacturing activity, with Asia carving a much larger piece of the
pie with regard to the number of plants. Almost 60% of the global
tyre plants are located in Asia today
Globally, ~$22 billion worth of investment have been planned
between 2016-2021. Asia account for the majority share with ~46%
of the total investments. Overall Asian economies accounted for
~50% of the global sales and China is the world largest tyre market
Among the advanced economies, the US tyre industry, both
replacement market and OEM segment has seen muted growth.
Passenger car and light truck markets have witnessed a decline in
both segments. However, the medium and heavy truck tyre market
has seen a rising demand across both segments
The European tyre industry continues to register improving growth.
Germany, the UK, France, Italy, Spain and Poland are the major
markets that contribute to more than 60% of the total Europe tyre
sales in terms of volume
In 2017, the global passenger car tyre demand grew by an
estimated 2.7%. The OEM demand sustained globally, except North
America. The replacement tyre segment grew by estimated 3% with
most of the growth coming from Europe, Asia and South America
The global truck and bus tyre segment witnessed strong demand
from OEM segment. Asia observed increased sales of estimated
26% in the segment with most of the growth coming from China
(~30% Y-o-Y). The demand in North America grew by an estimated
10%, while Europe recorded a growth of 8%. Globally, replacement
demand had muted growth, with most of the demand coming from
North America and Europe, while Asia observed almost stagnant
growth.

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