What drove the tyre recovery in FY23?

FY23 must have made tyre manufacturers in India happy.

The industry faced major challenges in FY22 because of higher raw material costs and deteriorating profitability. However, the industry recorded a strong revival in FY23 thanks to strong volume growth and lower raw materials costs.

All major companies, except Balkrishna Industries , reported double-digit growth in revenue and net profit in FY23.

Likewise, the market has responded kindly, with nearly all these companies generating a stellar one-year return for shareholders.

What factors are working in favour of the industry and its growth?

Better demand

The strong demand and sale of passenger and commercial vehicles and two-wheelers in the domestic market had a ripple effect on the growth of the tyre industry. In addition, the OEM segment (newly purchased vehicles) registered a double-digit growth in sales volume, which offset the muted growth in the replacement market segment and negative growth in exports.

The SUV boom

Tyre companies produce and sell multiple products with different characteristics based on the vehicle's requirements. In the passenger vehicle segment, the bigger sets of tyres sold for SUVs have better profit margins for the tyre companies. The demand for SUVs has been growing over the years, and it peaked in FY23, which highly benefited the tyre industry.

Lower raw material prices

Rubber, carbon black, and petrochemicals are the key materials needed to produce tyres. The cost of these materials increased significantly between H1 FY22 and H1 FY23, which had an adverse impact on the profit margins of all the companies.

However, the input prices started to stabilise from Q3 FY23. An improvement in the supply and the prices of raw materials led to an improvement in profit margins and a jump in the PAT.

The only exception was Balkrishna Industries, which procured raw materials at higher prices, and the management has claimed complete absorption of high-cost raw materials by the end of June 2023.

The road ahead

The management of these companies expects the growth to continue in the current fiscal year based on strong market demand and moderating input prices. However, as per the nature of the industry, any supply chain constraint or rise in the prices of raw materials will have a major impact on the industry's profit margins.

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