In Apollo Tyres' investor meeting, the Gurugram headquartered company also reiterated its vision target for the financial year 2025-26 to achieve US$ 5 billion (Rs 40,000 crore) in revenues.
28 Jun 2023 | 9821 Views | By Shruti Mishra
Apollo Tyres expects India’s business revenue to grow 10 percent in the ongoing fiscal year 2023-24, on the back of a healthy demand scenario in the domestic market, as per the company’s recent investor conference.
During the financial year 2022-2023, the company reported a 73 percent growth in net ...
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Apollo Tyres expects India’s business revenue to grow 10 percent in the ongoing fiscal year 2023-24, on the back of a healthy demand scenario in the domestic market, as per the company’s recent investor conference.
During the financial year 2022-2023, the company reported a 73 percent growth in net profit to Rs 1,105 crore and a 17.3 percent increase in revenue to Rs 24,568 crore. As the raw material prices subside, it is expected that the company will reach a revenue of Rs 26,470 crore - Rs 27,000 crore in the current financial year.
In Apollo Tyres' investor meeting, the Gurugram headquartered company also reiterated its vision target for the financial year 2025-26 to achieve US$ 5 billion (Rs 40,000 crore) in revenues. It is betting high on structural margin catalysts like stronger growth in the passenger vehicle (PV) segment both on replacement and OEM fronts, where profitability is better; a shift towards premiumisation in the industry that will accelerate the sale of higher rim sizes, and market share gains in the premium PV categories. It has also been passing on commodity inflation to the replacement market in a disciplined manner in order to focus on margins.
The premium car segment is about 5 percent of the industry currently, and Apollo Tyres aims to gain market share in this segment with its Vredestein brand, although, the company management highlighted that the segment is too small to make an impact on the financial performance. Apollo Tyres is the market leader in the domestic PCR segment with a market share of 21 percent, while in Europe its PCR market share stands at 2.5 percent.
In the TBR segment, its market share stands at 28-29 percent in India, a loss of 100-150 bps over the past one year, due to an increase in competitive intensity. The company is the leader in value terms, while MRF is the leader in volume terms.
In a bid to achieve its target, Apollo Tyres is looking to attain a compound annual growth rate (CAGR) of 17 percent during the financial year 2023-2026 and has raised its margin target from 13.5 percent to over 15 percent for FY26. Rather than focusing on growth and overall market share like some of its peers, the tyre maker is focused on achieving about a 15 percent return on capital employed (RoCE), up from the 10.1 percent predicted earlier.
“We expect India's RoCE to be better than Europe's RoCE. Older plants here would have better RoCE as machinery would be depreciated,” the company said in the investor presentation. Notably, the tyre manufacturer crossed the double-digit mark for RoCE in the last fiscal year, which stood at a healthy level of 13.4 percent. The company also aims to keep its net debt below two times of its EBITDA. As on March 31, the net debt of Apollo Tyres stood at Rs 4,300 crore, which is 1.4 times its EBITDA.
According to brokerage firm Motilal Oswal, after remaining subdued until the first half of the last fiscal year, gross profit/kg (GP/Kg) for domestic automotive tyre makers jumped up to one standard deviation (SD) level above long term mean levels. In the past 12 years, this is the third occasion when GP/kg has breached the 1-SD level above the mean, and it will last for a period of 2-3 quarters. "We believe a major decline in commodity prices followed by a period of no cut in replacement market prices, may result in a sharp jump in GP/kg and EBITDA. Thus, we do not expect 15 percent plus EBITDA levels to sustain beyond FY24. We are enhancing FY24 and FY25 EBITDA by 50 bps each, resulting in a 6 percent increase in earnings for both years," the brokerage firm added.
Capex and production plans
Apollo Tyres has earmarked no growth capex for its India operations for the current financial year. For the next two years, the company has opted for a capex light model, which would be mainly maintenance, IT digitalisation, and sustainability related. As per the company, future capex will be only brownfield, which costs 10-15 percent less than greenfield expansion. The overall capex for India would be around Rs 1,100 crore, out of which Rs 680 crore will be for India operations.
The company's management also highlighted that capex costs have increased notably over the past few years. For instance, India's capex could be at Rs 1500-2000 crore for 8,000 PCR tyres per day. The same capex in Hungary would be higher at Euro 400 million, the company told investors.
“All the capex that we're putting in now in digitalisation, Artificial Intelligence, and machine learning is going towards enhancement of productivity. And that's why we are looking at a capex light model to try and see how we can free up more capacity in both PCR and TBR. And hence we believe that, that itself will provide the cushion if the market growth is beyond a certain level,” Neeraj Kanwar, Vice Chairman and Managing Director of Apollo Tyres said over an analyst call last month. Last year, the company invested close to Rs 800 crore as growth capex, which was significantly below the Rs 1500 crore-Rs 2000 crore that it used to spend during FY17–FY22.
Its newly commissioned facility in Andhra Pradesh is producing 15,000 tyres per day of PCR (passenger car radial) and 3,000 tyres per day of TBR (truck, bus radial) at present. Spread across 257 acres, the plant’s capacity stands 340 tonnes per day (TPD) and there is additional land available that can support capex expansion to as high as 1,500 TPD. “Plant has a higher level of automation that leads to cost reduction, enhanced quality, and better productivity in comparison to other plants of the company. The machines have been sourced from Europe, India, and China. Most machines are from Europe, as the company's focus has been on quality and productivity,” Apollo Tyres management said during the conference.
With five manufacturing plants, the company is running a little below 80 percent capacity utilisation in India. "We are seeing signs of a pick up in the replacement demand. Given our strong focus on business fundamentals, cost control, and free cash flow generation, we expect the operating performance to remain strong in the coming quarters," Apollo Tyres CFO Gaurav Kumar told analysts over the same call.
Also in Indian operations, the company is strategically moving away from lower rim sizes towards higher rim sizes. “10 years back, our largest selling size was a 12-inch, it moved to 13-inch and now that's between 14-inch and 15-inch sizes,” CFO added.
“We expect Apollo Tyres to announce its next TBR brownfield capex sometime in FY25, by the time it reaches above 90 percent utilisation in capital intensive space. Until then, sub-Rs 1,200 crore capex per year would help the company reach about 15 percent RoCE amidst steady state India EBITDA of 14 percent,” Motilal Oswal said in its report. At present, the company's distribution network stands at 7,250 dealers in India and 6,500 dealers in Europe.