The imposition of anti-dumping duty on Truck and Bus radial tyres for five years is likely to result in a 200-300bp EBITDA Margin expansion for major tyre companies, says India Ratings and Research (Ind-Ra).
This will be credit positive for certain Ind-Ra rated domestic manufactures. The profitability of tyre companies has been declining due to increased rubber prices and pressure from imported Chinese tyres in the truck and bus radial (TBR) segment.
The recent decline in domestic rubber prices (down 20 per cent from February 2017 levels), along with the imposition of anti-dumping duty is likely to provide relief to these companies.
Among Ind-Ra rated issuers, JK Tyres & Industries and Apollo Tyres are the market leaders in the TBR segment and have expanded capacities in this segment on the anticipation of demand.
Both the companies are likely to see an improvement in profitability as a result of anti-dumping duty, along with higher utilisation of domestic capacities.
Ind-Ra’s expectation of a slowdown in the domestic medium & heavy commercial vehicle segment in FY18 has played out; 5MFY18 sales were down 13.60 per cent yoy, leading to lower revenues from sales to original equipment manufacturers.
However, the replacement demand will persist. Hence, Ind-Ra expects tyre manufactures to increase prices in the range of 5-6 per cent gradually in the TBR segment due to the imposition of anti-dumping duty.
Chinese tyres are available at a discount of 20-25 per cent to the tyres from the Indian tyre manufacturers. The anti-dumping duty is likely to increase the prices of Chinese radial tyres by 10-15 per cent.
Assuming that domestic manufacturers increase prices by 50 per cent commensurate with the duty on Chinese tyres, on a consolidated basis, the EBITDA margin for these tyre companies could see an improvement in the range of 2-3 per cent.
Ind-Ra believes JK Tyres & Industries benefits more among the other rated issuers due to its larger presence in the TBR segment (around 31 per cent of the market share), followed by Apollo Tyres and CEAT.
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