Daijiworld Media Network - New Delhi

New Delhi, Aug 25: India's leading tyre manufacturers are stepping up capacity expansion despite a sharp decline in operating margins, as strong replacement and original-equipment demand pushes utilisation at several plants close to peak levels.

According to CRISIL Ratings, six leading tyre manufacturers, accounting for around 85 per cent of the industry's Rs 1.36 trillion revenue in FY26, are expected to invest nearly Rs 18,000 crore during FY27 and FY28. The projected investment is almost twice the capital expenditure incurred by these companies in the previous two financial years.

“Sustained demand and peak utilisation has pulled forward the next investment cycle,” said Poonam Upadhyay, director, CRISIL Ratings.

She said phased commissioning, steady demand and a focus on higher-value radial tyres should limit the risk of overcapacity.

The expansion plans have become more visible following companies' April-June quarter results.

CEAT has retained its FY27 capital expenditure guidance of Rs 1,300-1,400 crore. Capacity utilisation remained high across most categories at its plants during the June quarter. The company's board has also approved an investment of Rs 1,205 crore to add capacity for around 53,000 two-wheeler tyres per day.

Apollo Tyres plans to spend more than Rs 3,000 crore in FY27. Its consolidated capex stood at Rs 650 crore during the first quarter, including around Rs 500 crore in India. The company expects spending to increase over the next two quarters.

JK Tyre is implementing expansion projects worth Rs 4,980 crore across passenger-car and truck-and-bus radial tyres. The projects are expected to increase its capacity by around 24 per cent.

Its India operations were running at around 95 per cent capacity utilisation during the June quarter. Capacity was nearly fully utilised in truck-and-bus radial and two- and three-wheeler tyres, while passenger-car radial utilisation stood at around 95 per cent.

CRISIL expects tyre volumes to grow 4-5 per cent in FY27, following 7-8 per cent growth last year. Original-equipment and replacement demand are each expected to rise 4-5 per cent, while exports could grow 3-4 per cent.

The first-quarter performance of major manufacturers also indicated robust demand. CEAT's replacement business grew in the mid-teens, while its original-equipment business recorded low-teens growth.

Apollo Tyres reported volume growth of 13 per cent in replacement tyres, 10 per cent in original equipment and 15 per cent in exports.

JK Tyre's domestic volumes increased 25 per cent year-on-year, with original-equipment volumes registering 42 per cent growth.

However, the expansion comes at a time when tyre manufacturers are facing significant pressure on profitability due to a sharp rise in natural rubber and crude-linked input costs.

CRISIL expects operating margins of the six manufacturers in its sample to decline to 11.5-12 per cent in FY27 from around 14.2 per cent in FY26. Margins could recover to 13-13.5 per cent next year if input costs stabilise and recent price increases take full effect.

“A sharp 35-40 per cent rise in key inputs is likely to compress tyre makers’ operating margins by 200-250 basis points in FY27, but this is a cost-pass-through lag rather than a structural profitability reset,” said Anuj Sethi, senior director, CRISIL Ratings.

Natural rubber, which accounts for nearly half of the industry's raw-material costs, rose to around Rs 275 per kg in June 2026 from around Rs 220 per kg in FY26, CRISIL said.

The increase was attributed to unseasonal rainfall and uneven monsoons in Kerala and Southeast Asia, which tightened supplies.

The conflict in West Asia further increased costs of crude-linked inputs such as synthetic rubber, carbon black and nylon tyre cord, while shipping disruptions added to supply-chain pressures.

The impact was reflected in the first-quarter results of major manufacturers. JK Tyre's consolidated earnings before interest, taxes, depreciation and amortisation (EBITDA) margin fell to 6.8 per cent from 10.9 per cent a year earlier after its raw-material basket increased by around 20 per cent sequentially.

CEAT's consolidated EBITDA margin stood at 8.6 per cent, down 238 basis points year-on-year, as raw-material costs rose 16-18 per cent sequentially.

Apollo Tyres reported a consolidated EBITDA margin of 11.7 per cent, compared with 13.2 per cent a year earlier, following a nearly 17 per cent sequential increase in input costs.

Companies expect their raw-material basket to rise by another 8-10 per cent sequentially during the September quarter as higher-cost inventory enters production.

To offset the pressure, tyre manufacturers have introduced staggered price increases, particularly in the replacement market.

CEAT had raised replacement tyre prices by around 11 per cent cumulatively by the time of its June-quarter earnings call.

“We have to take further price hikes,” managing director and chief executive officer Arnab Banerjee told analysts.

Apollo Tyres had increased prices by around 9 per cent for truck-and-bus radial tyres and 11 per cent in other categories.

“Overall, what we need is about a 15-16 per cent price increase, whereas we are currently at the 11 per cent-plus zone,” Apollo Tyres chief financial officer Gaurav Kumar said, adding that at least one or two more price increases would be required.

JK Tyre had also raised replacement tyre prices cumulatively by around 11 per cent. The company expects price increases, cost reductions and a greater share of premium products to support margin recovery during the second half of the financial year.

“We should be able to come back to the normal range of 11 per cent to 13 per cent in the second half,” JK Tyre CFO Sanjeev Aggarwal said.

CRISIL said strong balance sheets and adequate liquidity should allow major tyre manufacturers to undertake their planned investments without materially weakening their credit profiles.

The pace at which higher costs are passed on to consumers, movements in natural-rubber prices and demand following further tyre-price increases will remain key factors influencing the industry's profitability and expansion plans.