Indian Tyre Industry: Q1-25 Performance & Outlook
Indian Tyre Industry: Q1-25 Performance & Outlook
While expecting headwinds from volatile raw material prices & increased competition intensity, there remains optimism about long-term growth prospects.
1. Indian Tyre Industry - Q125 Performance & Outlook
1.1 TLDR:
Insights from earnings calls of 4 major players: Balkrishna Industries, Apollo Tyres, JK Tyre and CEAT
Muted volume growth due to a high base effect & moderated vehicle sales.
Profitability improved due to price increases implemented to offset elevated raw material costs, particularly natural rubber.
Optimistic about long-term growth driven by infrastructure development & favourable monsoon conditions,
Expects headwind from volatile raw material prices & competitive intensity.
Focus on premiumisation, exports, and strategic investments positions it for long-term growth
Ability to manage cost pressures effectively, respond to evolving demand patterns, and innovate continuously will be key to success in this market.
1.2 Muted Volume Growth:
Moderated Vehicle Sales: Muted demand in the commercial vehicle segment, attributed to a high base effect, impacted volume growth across the industry.
"Vehicle sales also moderated during the quarter due to high base effect..." - JK Tyre
Inventory Build-Up: Channel inventory increased across segments as manufacturers ramped up production in anticipation of demand recovery.
"Channel inventory is increasing…the Q1, which numbers you've seen has helped them increase it." - Balkrishna Industries
Two-Wheeler Segment Recovery: The two-wheeler segment showed signs of recovery, primarily due to improved demand sentiments in rural areas.
"The two-wheeler segment witnessed recovery, largely due to improved demand sentiments in rural areas." - JK Tyre
1.3 Profitability Supported by Price Hikes:
Elevated Raw Material Costs: All manufacturers highlighted the impact of inflationary pressures on their input costs, primarily driven by a surge in natural rubber prices.
"RM basket went up by 5% Q-o-Q" - Apollo Tyres
Aggressive Price Increases: Companies implemented price hikes across segments, with a more pronounced impact on the Truck and Bus Radial (TBR) and Passenger Car Radial (PCR) segments, to mitigate the impact of rising input costs.
"In commercial segment including July we have already taken about close to 2.3%, 2.4%. In passenger including July we would have taken again close to maybe 2.5% to 2.8%." - CEAT
Margin Accretive Segments: Players focused on higher-margin segments like PCR and larger sizes in TBR, leading to an overall improvement in profitability despite inflationary pressures.
"We have been able to continue our premiumization thrust. On the passenger car radial side 15 inch and above mix has gone up to almost around 50%." - JK Tyre
1.4. Focus on Exports and Premiumisation:
Expanding Global Footprint: Companies continued to focus on expanding their presence in international markets, particularly in Europe and the US, driven by strong demand for Agri and OTR tyres.
"International business has been a focus. 20% is saliency in quarter 1, and we have targeted at levels of 25% in 2 to 3 years." - CEAT
Premium Product Offerings: Emphasis on launching technologically advanced, premium tyres with enhanced features and performance characteristics to cater to evolving customer demands.
"We have introduced the Next-Generation Tyres for Commercial Vehicles to cater to the evolving needs of the market." - JK Tyre
1.5. Strategic Initiatives:
Capacity Expansion: Investments in capacity expansion, particularly in the high-growth segments of Agri and OTR tyres, to capitalize on increasing demand.
"We are embarking on a new capex spend of up to INR1,300 crores for 35,000 metric ton per annum at Bhuj. This will be executed in various phases." - Balkrishna Industries
Digital Transformation: Leveraging digital technologies like AI and machine learning to improve operational efficiency, enhance customer experience, and drive innovation.
"On the Digitalisation front, we have started rolling out domain-specific generative AI models...like manufacturing, customer pricing, R&D, etc." - Apollo Tyres
Sustainability Focus: Increased emphasis on sustainability initiatives, including responsible sourcing of natural rubber and adherence to environmental regulations, to meet global standards and consumer expectations.
"We will provide further details in due course...BKT recently announced its membership to the Global Platform for Sustainable Natural Rubber or the GPSNR" - Balkrishna Industries
1.6 Outlook
Cautious Optimism: While the industry is optimistic about the long-term growth potential of the Indian tyre market, it remains cautious in the near term due to uncertainties in raw material prices and potential economic slowdown.
"For the year, it is difficult to predict but overall, we expect the market to be flattish. " - Balkrishna Industries
Competitive Intensity: The industry is expected to remain competitive, with companies focusing on gaining market share through strategic pricing, new product launches, and expanding distribution networks.
"So, we really don't play in that segment. And again, on the HCV side, we play on the highest premium segments, okay?" - Apollo Tyres
Passing on Cost Increases: Manufacturers will likely continue to implement price increases to counter cost pressures, but the extent of pass-through will depend on competitive dynamics and demand elasticity.
"So far, we have not taken anything." - Balkrishna Industries on passing on freight cost increases
2. India Tyre Industry Growth Drivers & Company Positioning
Key factors driving growth in the Indian tyre industry, include:
Rising economic progress and disposable income: Leading to increased car sales.
Improved road infrastructure: Enabling longer drives and higher vehicle utilization.
Growth in the electric vehicle (EV) sector: Spurring demand for EV-specific tyres.
Government focus on infrastructure development: Driving demand, particularly in the commercial vehicle segment.
Favourable monsoon conditions: Boosting agricultural activity and demand for farm tyres.
Festive seasons: Driving increased consumer spending and tyre sales.
2.1 Balkrishna Industries (BKT):
Strong growth in OTR (Off-the-Road) tyre segment: Leading to a new capacity expansion plan of 35,000 metric tons per annum at their Bhuj plant.
Focus on sustainability: Joining the Global Platform for Sustainable Natural Rubber (GPSNR) to promote environmentally friendly practices and comply with regulations like the European Union Deforestation Regulation (EUDR).
Expanding renewable energy use: Utilizing 5 megawatts of wind power and 7 megawatts of solar power across their plants.
2.2 Apollo Tyres:
Focus on premium OEM partnerships: Securing supply agreements with a "marquee German passenger car manufacturer in India," enhancing their OE mix and brand positioning in the premium segment.
Leveraging digitalization and AI: Implementing generative AI models to improve efficiency and address issues across various business functions.
Strengthening brand building: Signing Giancarlo Fisichella, a former Formula One driver, as brand ambassador for their Vredestein tyre brand.
Commitment to sustainability: Achieving improved ratings from EcoVadis, reflecting their focus on environmental and social responsibility.
It's important to note that Apollo Tyres acknowledges facing challenges in balancing profitability with market share. They highlight a need to improve revenue growth while maintaining a focus on profitable margins and return ratios.
2.3 JK Tyre & Industries:
Focus on premiumization: Increasing the proportion of larger, more profitable tyre sizes in their sales mix.
Expansion into EV tyre market: Claiming market leadership in EV bus tyres in India.
Expanding market reach: Adding brand shops, fleet customers, and mobility business accounts.
Capitalizing on government policies: Welcoming import duties on Chinese tyres to protect domestic manufacturing.
2.4 CEAT
Focus on profitable segments: Outgrowing the industry through "electrification, international business, premiumization, and digital measures."
Strong position in EV OEM market: Holding a 30% share in 2-wheeler and 3-wheeler EV OEMs.
Expanding international presence: Targeting 25% of sales from international business within 2-3 years, focusing on Latin America, Europe, and the US.
Investing in brand repositioning: Shifting from a commuter brand to a highway brand focused on larger vehicles, longer distances, and higher speed ratings.
Leveraging digitalization: Improving supply chain efficiency and customer engagement through digital platforms and data analytics.
3. Impact of Raw Material Costs & Price Increases on Tyre Companies' Profitability
Indian tyre manufacturers are navigating a challenging environment of rising raw material costs, especially for natural rubber. While price increases are a common strategy, their implementation varies based on factors like market leadership, competitive pressures, and demand elasticity. Additionally, they are focusing on premium product segments and strategic inventory management to mitigate the impact on profitability
3.1 Balkrishna Industries Limited
Impact of Raw Material Costs: Balkrishna Industries anticipates a 2-3% rise in raw material costs in the coming quarters
Mitigation Strategies:
Price Increases: The company has not yet implemented price increases due to a weakening market demand, but they are assessing the situation and exploring options to pass on the increased costs.
Passing on Freight Surcharges: Balkrishna Industries has been partially passing on the increased freight surcharges to customers. However, this strategy is noted to have delayed their price hike planning.
3.2 Apollo Tyres
Impact of Raw Material Costs: Apollo Tyres experienced a 200 basis point sequential decline in consolidated operating margin due to raw material cost pressures, particularly from natural rubber. They anticipate raw material costs to increase further by mid-single digits in the next quarter.
Mitigation Strategies:
Price Increases: The company implemented price hikes of around 2% for passenger cars and 1% for trucks in the previous quarter. In the current quarter, they have implemented a 1% price increase across segments and are planning further increases to offset the 5% rise in raw material costs experienced in Q1.
Product Premiumization: Apollo Tyres is focusing on premiumizing its product portfolio and moving away from less profitable 12-inch tyre sizes. They have secured supplies to a German passenger car manufacturer in India, aiming to strengthen their presence in the premium segment.
3.3 JK Tyre & Industries Limited
Impact of Raw Material Costs: JK Tyre experienced a 3-4% rise in raw material basket costs compared to the previous quarter, primarily driven by natural rubber price hikes due to supply chain disruptions and the monsoon season impacting rubber production. The company anticipates a 5-6% increase in the raw material basket in the next quarter
Mitigation Strategies:
Price Increases: JK Tyre implemented a 1-1.5% price increase across different categories in July. They plan to further assess the raw material situation and may implement additional price hikes in the coming months
Strategic Inventory Management: JK Tyre is strategically managing inventory levels, working closely with suppliers to minimize the impact of price fluctuations and ensure consistent production.
Product Premiumization: The company emphasizes shifting towards premium tyre segments, particularly in passenger car radials (PCR) where the mix of 15-inch and above tyres has reached nearly 50%. They are also focusing on premium sizes in truck radials (TBR), with a mix of around 92%.
Government Support: JK Tyre welcomes the government's decision to continue the countervailing duty (CVD) on TBR tyre imports from China, as it is expected to benefit domestic manufacturing and sales.
3.4 CEAT Limited
Impact of Raw Material Costs: CEAT experienced a 5% quarter-on-quarter surge in raw material costs, primarily due to a 25-30% increase in domestic natural rubber prices in recent months. The company anticipates raw material prices to increase by 5-6% in the next quarter
Mitigation Strategies:
Price Increases: CEAT has implemented price hikes across all segments: 2.3% in the commercial segment (including July), 2.5-3% in the passenger segment (including July), and 1% in the two-wheeler segment. Further price increases are being considered, with a potential 3-4% hike required to recover cost gaps.
Product Premiumization: CEAT is focusing on premium categories in both the passenger and two-wheeler segments, supported by brand repositioning efforts.
Focus on Profitable Segments: The company aims to accelerate growth in profitable segments such as electric vehicles, international business, and premiumization.
4. International Challenges and Opportunities for Indian Tyre Manufacturers: JK Tyre, CEAT, and Balkrishna Industries
Overall, these tyre companies are facing a mixture of opportunities and challenges in their international operations. They are adapting by focusing on specific markets, developing tailored products, building strategic partnerships, and ensuring compliance with evolving regulations.
4.1 Balkrishna Industries Limited:
Opportunities:
Strong Q1 FY25 Performance: The company achieved 24% year-on-year volume growth in Q1 FY25, driven by healthy demand trends.
Growth in Europe: The company generated 47% of its sales from Europe in Q1 FY25.
OTR Tyre Demand: Balkrishna Industries sees continued strong demand for their Off-the-Road (OTR) tyre range, leading them to invest in additional capacity.
Challenges:
Global Macroeconomic Slowdown: The company anticipates slower demand in the coming quarters due to recessionary fears in the US, geopolitical sanctions, and inflationary pressures.
EU Deforestation Regulation: The EU's new regulations on sustainable sourcing of natural rubber (EUDR) will likely increase raw material costs.
Adaptation Strategies:
Capacity Expansion: To meet the demand for OTR tyres, Balkrishna Industries is investing in a new capex project worth INR 1,300 crore for an additional 35,000 metric tons of capacity at their Bhuj plant.
Sustainable Sourcing: The company is working to ensure its natural rubber supply chain complies with the EUDR regulations. They have already started securing contracts for sustainably sourced rubber.
4.2 JK Tyre & Industries Limited:
Opportunities:
Mexico: JK Tornel Mexico, the company's Mexican subsidiary, sees potential for growth due to positive foreign direct investments and government expenditure plans.
Latin America and North America: JK Tornel has increased exports to these markets from 40% in FY21 to nearly 50% in FY24.
Challenges:
Mexico: In Q1 FY25, JK Tornel Mexico experienced a double-digit sales decline due to elections, holidays, and a temporary appreciation of the Mexican peso against the dollar
Adaptation Strategies:
Pricing: JK Tornel implemented strategic price increases across major markets to offset rising raw material prices and currency fluctuations.
Export Focus: The company has focused on expanding exports to North and Latin American markets to capitalize on growth opportunities.
4.3 CEAT Limited:
Opportunities:
International Business Expansion: CEAT aims to increase international business from 20% to 25% in the next 2-3 years. They see this as a margin-accretive opportunity.
US Market:
CEAT is building its distribution network for truck and bus radial (TBR) tyres in the US, with 60% of targeted geographic coverage achieved.
They have started receiving orders and shipping TBR tyres, with positive feedback on product performance.
CEAT plans to launch passenger car radial (PCR) tyres in the US market by Q4 FY25 or Q1 FY26.
European Market: CEAT is experiencing good traction with PCR, TBR, and agricultural radial tyres in Europe.
Latin American Market: The company has experienced strong growth in TBR tyre sales in Latin America.
Challenges:
International Shipping: Significant freight cost increases (3x-4x) and container shortages have impacted international business growth.
US Market Entry: Building a robust distribution network and establishing brand presence in a competitive market like the US takes time and resources.
Adaptation Strategies:
Targeted Market Focus: CEAT is focusing on specific geographic regions and product categories within the US and European markets.
Product Development: The company is investing in R&D to develop products tailored for international markets, including the US and Europe.
Local Distributors: CEAT is partnering with local distributors in the US and Europe to leverage their expertise in retail placement and fleet operations.
Brand Building: They are investing in independent product testing and leveraging positive reviews to build brand credibility.
5. Sources
Balkrishna Industries Limited Q1 FY'25 Earnings Conference Call Transcript
JK Tyre & Industries Limited Q1 FY'25 Earnings Conference Call Transcript
CEAT Limited Q1 FY25 Results Earnings Call Transcript
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