Apollo Tyres Limited
NSE:APOLLOTYRE
Earnings Call Analysis
Q3-2024 Analysis
Apollo Tyres Limited
Amidst a complex global landscape, the company has made definitive strides in enhancing its product mix. By honing in on high-margin products, particularly in the UHP (Ultra-High Performance) and UUHP (Ultra-Ultra-High Performance) segments, they've managed to cross the 45% threshold in Europe. This strategic emphasis on profitable products reflects in their margin improvement, alongside positive shifts in both Indian and European markets. In India, the company is veering away from less profitable small diameter tires, focusing instead on sizes 15 inches and above. Meanwhile, they've planted their flag in the luxury segment with the Vredestein brand, directly competing with prestigious names like Bridgestone and Michelin, and outstripping domestic players in terms of pricing.
Raw material costs, although increasing by about 2%, remained lower than the anticipated 3% to 4% climb, assisting in maintaining healthier gross margins, albeit with some inventory effects. The executives forecast raw material costs to remain relatively stable in the near term with a slight expected increase. Capital Expenditures (CAPEX) have been adjusted, with a reduction from the original target by INR 1 billion to INR 1.5 billion, mainly due to a reevaluation of cash flows rather than a diminution of investment plans.
The company is already in motion with its electric vehicle (EV) tire offerings, launched over half a year ago in Europe and India. The focus for these EV tires is on low rolling resistance and noise reduction, catering to the unique demands of electric mobility. Details on price and product comparisons to internal combustion engine (ICE) tires are yet to be refined, but commitment to the EV market is unconditional. Geographically, the company has felt some strain with exports impacted by disruptions in the Red Sea, causing a rise in freight costs by 30% to 40% and lengthening transit times to Europe by approximately two weeks, though these obstacles are recognized as transient.
You don't have any saved screeners yet
Hello, everyone. On behalf of Equirus Securities, I welcome you all on the third quarter FY '24 earnings call of Apollo Tyres. From the management side, we have Vice Chairman and Managing Director, Mr. Neeraj Kanwar; CFO, Mr. Gaurav Kumar; and members of IR team. Without further ado, I hand over the call to Mr. Kanwar for opening remarks, post which we can open the call for Q&A. Over to you, Mr. Kanwar.
Thank you, and good afternoon, and thank you for joining us today. As always, I welcome you all to our post results quarter call. Over the last few years, we have tirelessly focused on improving business fundamentals. Despite subdued demand conditions and challenging environment across some of our key markets, the team has really delivered its best operating performance with our highest ever consolidated EBITDA of more than INR 12 billion in quarter 3 FY '24. Let me take this opportunity to thank all our stakeholders for their continued support as we scale new heights. I remain very bullish in the future prospects of our company as we are extremely well placed to deliver superior, sustainable and profitable growth over the medium and long term.
Coming to our performance. Despite headwinds in some of our markets, we reported both Y-o-Y and quarter-on-quarter growth in consolidated revenues, along with impressive 410 basis points Y-on-Y improvement in consolidated EBITDA margin. The performance was driven by improved sales mix, a benign RM cost and tight control over our overhead costs.
Going forward, we maintain a cautiously optimistic stance on market demand. While we expect a recovery in demand environment in mid, long term, top line growth is expected to remain muted in the near term. In Europe, we expect the demand to further recover from current sales. We expect the operating environment to remain healthy, helping us further strengthen our balance sheet and pare down balance sheet leverages.
Let me now talk about our key pillars for our vision FY '26. Starting with technology, R&D remains one of the key focus areas. During the quarter, we gained OEM fitments for some of the biggest automotive companies globally, including nomination for vehicles in the new segments like electric SUVs. Continued work on new material compounds, development is playing a vital role in development of new age products. During the quarter, we introduced a new range in domestic commercial vehicle market. And over next few quarters, you would also witness several exciting launches across our key markets.
Moving to digitalization. It is increasingly becoming a cornerstone of our strategy as we harness and leverage best-in-class technologies and tools like data science, machine learning, generative, artificial intelligence to become future ready and improve our existing processes. We have identified and put in place actions to increase efficiency in our plants, thereby further adding to our ROCE journey.
Finally, we are engaged with several startups through our digital innovation hubs with clear focus on identified areas of work like customer experience, et cetera. Coming to sustainability, the team continues to scale new heights as we go ahead. As part of decarbonization strategy, we have taken initiatives to lower the emissions. For manufacturing, plants at Chennai and Limda in India and Gyongyos in Hungary has invested towards renewable energy projects, which has helped them increase share of renewable electricity in total electricity to 25%.
Talking about the brand, we continue to invest in brands across our key geographies. Starting with India, we launched our new Apollo 10 campaign, featuring Sachin in a new Avatar leading to improvement in our brand awareness. Furthermore, we were able to maintain our leadership position on social media during the festive season in quarter 3.
Coming to other key markets. Vredestein was the official tire partner of the 1,000 Miglia of vintage car race. We are also one of the official sponsors of the 2023 FIS Alpine World Ski Championship, being held in France. The Ski Championship is a flagship event in the global winter sports calendar, attracting millions of enthusiastic viewers worldwide.
Finally, last pillar of our strategy is our people. As we focus on D&I, we have rolled out revised HR policies supporting diversity, including domestic travel policy, maternity policy, et cetera. To drive employee engagement, we have launched Apollo recognition hub as our new brand on unified global rewards platform dedicated to celebrating the remarkable achievements of Apolloites worldwide. As always, we are keeping a close watch on the markets and our costs. We will continue to be judicious about CapEx, and we'll continue to focus on sustainable and profitable growth. With this, I'll conclude my opening remarks. Thank you for joining, and I'll hand over the call to Gaurav. Thank you.
Thank you, Neeraj, and good afternoon, ladies and gentlemen. Continuing from where Neeraj left, let me share further details of our operations for the last quarter. The consolidated revenue for the quarter stood at INR 66 billion, a growth of 3% over the same quarter last year. The consolidated EBITDA for the quarter stood at INR 12.1 billion, a margin of 18.3% compared to 14.2% in the same period last year and a slightly higher 18.5% in the last quarter.
In terms of our continued focus on profitability, our net profit was more than 1.8x and EBITDA more than 1.3x of the same quarter last year. Coming to the balance sheet. We continue to improve our leverage ratios given the focus on cash flows and profitability. The net debt-to-EBITDA for the consolidated operations is now at 0.7x versus 1.4x in March 2023.
We continue to deliver a healthy consolidated ROCE. Annualizing the current year performance, the ROCE would be in the range of 16.5%. In India, we witnessed Y-on-Y volume growth of mid-single digits, helped by growth in replacement and export channels. Replacement demand continues to show momentum. Operational efficiency and strict cost control led us to report a very healthy improvement in EBITDA margin of 519 bps Y-o-Y and a healthy free cash flow. In terms of outlook, while the volume growth may remain muted in near term, given our strong focus on business fundamentals, cost control and free cash flow generation, we expect the operating performance to continue to be strong.
Coming to Europe, the market is showing signs of recovery with PCT volume showing marginal growth. The All-Season segment registered double-digit Y-o-Y growth in Q3. We registered a 4% sequential improvement in top line and a very significant improvement in margins, 493 basis points Y-o-Y and a 624 basis points Q-on-Q. We have gained market share across all segments, passenger cars, truck and agri segments with a very healthy volume growth in the Vredestein brand passenger car sales.
Our UHP mix continues to remain very healthy. In terms of near-term outlook, we expect marginal growth in the passenger car segment and a very significant improvement in the second half of the year. We expect the operating performance to remain healthy, helped by the current RM scenario and the focus on cost optimization.
India operations, the revenue for the quarter was INR 43.3 billion, a growth of 2% over the same quarter last year. The EBITDA for the quarter stood at INR 7.8 billion, a margin of 18.1% compared to 12.9% in the same period last year and 19.1% for the last quarter.
Moving on to European operations. The revenue for the quarter was EUR 176 million, up 4% sequentially, as I mentioned. The EBITDA for the quarter stood at EUR 36 million with an EBITDA margin of 20.3% compared to 15.4% in the same quarter last year and a 14.1% in the September quarter. There is no change in our CapEx guidance for the current year, and we will continue to focus on profitability, free cash flow generation and improvement in our ROCE as we go ahead. With this, I will conclude my opening comments. Thank you. We would be happy to take your questions.
Thanks, team, for opening remarks. We'll now start the question-and-answer session. [Operator Instructions] We have our first question from Mr. State you to the line and ask a question.
Sir, my first question is on this outlook. First is basically for this quarter, can you indicate what will be the growth, volume growth on a Y-o-Y basis across the CV, PV segment in the replacement market. And second is, I mean, where do you see the most issue in terms of the recovery, what will drive that, which segment seems to be lagging according to you? And secondly, sir, on the export side also, we have now been looking at quite a modest number for past few quarters. When do you think this recovery will start playing out?
Go ahead Gaurav.
The truck volume growth was 3% and passenger car 7%. So even on the 2 main channels, the overall growth is still low to mid-single digits. Exports have started showing signs of pickup. For the first time, we had a sequential growth. So we expect things to improve. In fact, some of the exports were impacted by the disruptions in the Red Sea. Otherwise, our growth in exports would have been more.
Okay. And second is on the gross margin side. So we have seen a good improvement in the current quarter. We had earlier guided that we may see a 3% to 4% increase in the RM costs in the quarter given the commodity movements. So what has changed here and how to think about the numbers going ahead now?
So the RM did increase, the RM basket increased by about 2%, lower than what we had guided at the end of the last quarter, but it still did increase. The gross margin is a little bit of an inventory effect. The outlook is fairly flattish to similar levels of raw material continuing in near term and then maybe slightly inching up.
Okay. Okay. So this inventory...
Gaurav, also another point is the richer product mix which you missed out on. So like you know, I've been saying this for a long time that we are emphasizing on the product mix basket and trying to see how we can go to more profitable products, both in India and in Europe. As far as Europe is concerned, I'm happy to say that we have crossed the 45% mark in UHP and UUHP. So those are larger profit pools giving you better margins, healthier margins. Even in India, the product mix is becoming richer both in PCR and in commercial vehicles. So that's part of why the margins are also better.
Got it. Sir, lastly, on the CapEx side, I mean, I know we have maintained it at about INR 11 billion, but doing INR 6 billion now in the last quarter, do you think it is possible or why we are sort of sticking with the guidance and we are doing much lesser than the target. And if you are planning to spend so much, which areas do you plan to sort of invest?
Siddhartha, whole lot of CapExes are in the pipeline. So the approval process is there and some of the cash flows haven't happened. We may end up at a lower than by INR 1 billion, INR 1.5 billion. But fundamentally, in terms of it's not as if that suddenly a whole lot of new CapExes will come up in the last quarter.
Got it. Okay, sir. I'll come back in the queue.
You have our next question from Raghunandhan. Please unmute your line and ask your question.
Thank you, sir, for the opportunity and congratulations on strong margin and leverage performance. My first question to Neeraj Sir. Sir, you spoke about how the focus is there on improving product mix and especially in India, if you can elaborate a little on how things are shaping up in PCR and CV PCR, how the higher diameter tires or how the acceptance is there for the more premium brands? And also, if you can talk about your readiness especially to cater to the premium segment or luxury vehicles?
Okay. So as you mentioned about the diameter and Gaurav, you can give me the figure, 12 and 13 inch, which is not a profitable -- not so profitable like the 15-inch and above. Slowly, slowly, Apollo has been coming down in that area, okay? We used to be a very significant player 10 years ago, but over time, that pie has reduced. And more focus is there on the higher inch sizes and PCR. As far as premium is concerned, as you know, we have launched the Vredestein brand, I think, 2 years ago. That is playing in the higher luxury car segment, let's say, the Mercedes and BMW and the Audis, whereas Apollo plays in the medium-to-premium segment. Okay? And there is a very good demand coming for the Vredestein brand, which is another profit pool which is being added.
So Vredestein is really playing with the Bridgestones and the Pirellis, Michelins in India. And that's how we have priced it. It's much higher than Apollo, and that is the target audience that we are going after. Slowly, also you'll be seeing Vredestein retail stores that are coming up all across India, and that will add another profit to the margins.
And in terms of the pricing, when I compare Apollo medium to premium, how would you compare the pricing with that of peers? And Vredestein would be similar when you compare with that of the...
If Apollo is 100, just as an index, yes, then our Indian players are below 95. So some are even in the late 80s. And then the higher end would be, 110 would be Vredestein or 107 would be Vredestein; 110, 112 would be Bridgestone. Okay. So that's how we have priced it.
Got it. That's very helpful. And Gaurav, would you have that breakup between inches 12, 13 inch and above 15 inch?
We can come back with exact numbers. But 10 years back, 12 inch was the largest selling size about 30%. It then moved to 13 inch. Currently within our portfolio, 14 inch is the largest selling by diameter and the 12, 13 inch, which used to be almost 50% would now be lower than 25% as a broad indicator.
Got it. That's very helpful. And on the CV side also, you said that the product mix is improving, would that be because the entire CV industry is seeing a shift towards higher tonnage vehicles?
Yes, partly. And also, what we are doing is we are redeveloping the products because now we've got a good 20 years of experience. So we are re-looking at weights, we are looking at compounds and trying to see how we can make these tires much more profitable.
Got it. And in terms of -- again, continuing on the product mix side, with your readiness on the electric vehicle tires, is the journey started in terms of getting the product readiness and how these tires would be costlier compared to the ICE tires?
Not readiness, we've already launched EV -- tires for electric vehicles. It's been, I think, over 6 to 8 months where we've already launched in Europe and in India. So the difference in an electric vehicle tire is really the rolling resistance and the noise because now it's only battery, so you can't even hear the engine. So noise becomes a very big attribute in the product. And we've been doing this now for several years because the OEs have been demanding this also for normal cars. And so there's nothing new. But nevertheless, we have come out with a range of EV tires for India and for Europe.
And any thoughts on how the content per vehicle increases, how the pricing increases, EV versus ICE tires?
Laura, you want to comment here?
Raghu, right now, we don't have a very like-to-like comparison because the SKUs are not similar. So we'll have to really go back to technology people and Himanshu can come back with that later.
Just a last question. Any impact you're seeing due to the Red Sea issues that any temporary impact on delay of dispatches or increase in the freight cost?
So basically, the freight costs have gone up by around 30% to 40%, but that's short term. And the transit time has gone up to coming to Europe, not to America because America goes a different route. But to Europe, it's taking around 14 to 15 extra days.
Got it. I will come back in the queue.
We have our next question from Amyn. Please unmute your line and ask your question.
My first question is just to continue on that Red Sea issue which you talked about. So given that a material part of our Europe business is also serviced from production from India, if I understand correctly. Does this mean that we should be prepared for, say, a softer 4Q? Or you think that, that is not going to be a problem because the transit times have increased and freight cost has also increased. So how should we think about that?
Well, I don't think we are looking at a softer Q4. Obviously, this issue has been going on since November. So inventory planning has already happened. And if the cost -- if this continues, then generally, the distributor, the dealer in Europe takes on the cost. Like we saw during COVID times, the cost had nearly increased by 3 or 4x. We were then -- we were able to pass on the cost to the distributors.
And just as a follow-up, the production that you do within Europe, are there any supply chains which come through Asia in terms of raw material, which impacts it, because Michelin said something about shutting down plants in some areas. So just wanted to...
Yes, even we've seen that, but we're not having any disruptions as far as RM is concerned.
Okay. And just one last question on India. Gaurav, you mentioned that truck volume growth was 3%, PV was 7. Was this specifically for a replacement because your overall revenue growth is much lower. And if volume was low to mid-single digits. And I mean, what is going on there? Just wanted some clarification.
No, this was overall, Amyn. There are also segments and this is for the quarter. So see the farm, et cetera, would be possibly lower growth.
Okay. Okay. So just to stick to that, revenue growth has been quite weakish, not just for you, for the industry. And obviously, now OEM volumes are kind of starting to moderate. So how should we think of volume growth as well as revenue growth going forward? Because while you have seen a lot of benefits on the gross margin side, I'm assuming that, that is not going to be a further driver of EBITDA growth. In fact, in this quarter, I think other expenditure also rose quite sharply. So how should we think of volume growth because I think that will be a more important driver of margins going forward than the raw material benefits?
So to answer the latter part of your question, I mean, yes, other expenses increased. That was due to increased spend on advertising and promotion. That's a discretionary, which could come quarter-to-quarter. In the near term, we definitely see the volume growth still being subdued, let's say, about a mid-single digit, the current kind of a scenario at best. The expectation is that it will pick up. Exports, which has been one of the big laggards is showing signs of picking up. But in near term, it is still the mid-single-digit kind of volume growth.
We have a next question from Jinesh. Please unmute your line and ask the question.
Am I audible?
Yes, Jinesh.
Yes. Quickly on the India business first. So how has been our market share trend in both in PBR and PCR? I mean if I compare with the last year, are we trending up, trending down, or it has been stable?
Jinesh, there is no official data from the association. Our broad indication is that we would have maintained market share in the passenger car segment. We may have lost some decimals in the truck segment.
Okay. So nothing sizable in terms of loss. Secondly, in terms of utilization, you would be, what, about 80%, 85% in both India and Europe? Or is...
Still in the 70s, mid- to high 70s. So a lot of capacity still there for growth.
Europe is also mid-70s?
Yes.
Okay. And lastly, more from medium- to long-term perspective, given where we are in terms of our balance sheet improvement journey, which we have come a long way. Now do we need to have more balanced approach towards balance sheet discipline and growth?
Yes. So that's a good point. I think going forward, like I've been saying, over the next 2 years, we are going CapEx light. With digitalization, we are seeing a lot of improvements in productivity happening in all our plants. So my emphasis into the organization is to put more focus on AI and machine learning and try and ease up capacity. Currently, capacities are running at 80%, 85%. But even if the markets were to grow much more aggressively, I think we are ready to take on that demand from the current capacities. So we'll continue to have a look and do the balancing, but we do not have any major growth plans coming ahead.
We have our next question from Arvind. Please unmute your line and ask.
Sir, the question is more on the pricing. Since you said there has been a slight escalation in raw material basket or is going to be a usual pricing environment? If you could just share any price hikes taken in third quarter or any planned over the next 3 to 6 months?
So Arvind, no price hikes have been taken. While, yes, raw material did go up marginally, and that's reflected in a slight reduction in the margins, profit margins. Currently, the raw material scenario is still fairly benign. So there is no price increase planned. We will see as to how things are and then take a call.
And Gaurav, if I may just add on to it, given where the margins are right now and you say it is sustainable, do you see that there could be some pricing actions to improve market share? Or do you think these margins and market share both are sustainable at the current state?
Seven, we do not give margin guidance. These kind of raw material scenario has been prevailing for some time, a little bit movement up or down. There's been no significant pricing action by any of the players to grab market share, small bit of discounting schemes have happened, which is usual for the industry. As of now, for the past few quarters, we haven't seen any major pricing action, still difficult to predict the future.
The next question is from Mumuksh.
Congratulation on the solid margins. Is it possible to -- can you share how the growth in the replacement market and also subsegments in the replacement market?
Replacement market, the growth in the current quarter for truck, in fact, was 8% volume growth. And for passenger car, it was 4%.
Okay, sir. And sir, in the OEM segment, this quarter, PV and CV OEM production was in positive growth in Q3, but we had a flat volume performance. What could be reasons for the site's underperformance?
On the truck side, one of the reasons was that where we have a certain amount of higher market share, which is multi-axle vehicles, there the growth was lower and which reflected in how it played out in our volumes.
We have our next question from Nishit.
I have 2 questions, right? First one, we have enough land in Andhra, I think, to go brownfield. So just wanted to understand if at all we have to do CapEx or double up our capacity in trucks and PCR, what kind of CapEx would that entail? Last time, if I remember correctly, to set up, I think about 15,000, 16,000 car tires and 3,000 truck tires per day, you incurred about, I think, around INR 4,000 crores kind of a CapEx.
And number two, Neeraj, you have talked about digitization, AI and machine learning. Can you give you us few examples as to what -- how that has led to capacity increase or productivity increase? And if you can share any broad numbers, let's say, if you had 50,000, 52,000 tire capacity in PVs, how has that increased because of these initiatives?
Okay. So you asked a lot of questions. Let me try and answer. Yes, Andhra, we can actually the land, we can go at least 3x of what is already installed. But the initial capacity, the initial investment to create this capacity is much more and then comes in phases and in steps.
So you are right, to set up the 16,000 and 3,000 TBR, we spend around 4,000. But going forward, that 16,000 won't be 16,000, it will go in incremental. So it will go 8,000 of PCR. That's one block, and then TBR goes up by, I think, 1,200 or 1,500. That's another block. That kind of investment you are looking at half of what is the initial investment because the initial investment has also been put up for the infrastructure around the plant, which includes utilities, roads, canteen, office, blah, blah, blah. So you don't need to invest in that any -- so that's your first question.
The second one, I can cite you an example of -- so today, what's happening is there are 7 plants in Apollo, right? All the data now is on the cloud. And we are getting real-time data and the data scientists sitting in the U.K. and in Andhra, we have these 2 data hubs, innovation hubs, where the sites are sitting and analyzing the data. When you look at, let's say, mixing, today, we have around 45 mixers across the organization. To mix the same compound, some are running at different speeds, some are running at different speeds.
So what happens is we are trying to standardize that so that all speeds of the same compound are similar. What happens then is that the productivity increase that we have seen is around 10% to 12% on the mixing capacity. And if you -- just to give you another data point to put up a mixer, it costs you anyways from INR 25 million to INR 30 million. So that's what you are really saving on.
And then you also mentioned about the capacity enhancement. So we are already looking at increases. Gaurav, what was our PCR capacity, total 68,000 per day, right?
Across the various plants, it was 68,000. We are looking to get into next year at 73,000.
And that 68,000 going to 73,000; that 5,000 has come pure because of AI, machine learning, corporate engineering, manufacturing technology. There's a whole team that's working towards this.
Wow. That's very good I think. That will save you a lot of CapEx as well.
Yes. I just gave you the CapEx figures. It's a huge -- and if you are able to do more, which we will, we will keep on emphasizing on this point. So I'm more open to putting money behind digital, rather than to put behind equipment, which is much cheaper -- I mean, to go digital way is much cheaper.
Correct. Correct. And just one more question. Some of our plants in Kerala are kind of old. We would not need to replace those plants or incur a replacement CapEx anytime in the next couple of years, I assume? Or we will need to do something of that sort?
Gaurav, do you want to answer that?
Nishit, the Kerala plants are fundamentally biased. And there's a certain amount of equipment replacement, which is part of the maintenance CapEx, which happens; refurbishment, replacement of any particular CapExes. In a very summary, is there any major CapEx requirement in the Kerala plants or the older plants in the next few years, no. It will be the usual maintenance figure, which has been there for the last few years.
And I don't know if you share -- can you share the consol and stand-alone net debt numbers, maybe I missed it if you shared.
Just a minute. So the stand-alone net debt number is INR 2,600 crores. And the consol net debt number is INR 3,000 crores.
Ok. Thank you. Just one more question, slightly more industry-specific and structural, not quarterly linked, right? So we have seen the pricing power in the industry improving, obviously, for you and for other players also, right? What according to you has driven this in the last couple of years? Is it purely because of imports being restricted and that not impacting the market? Or do you think -- because there have been instances when a market leader has tried to cut prices or become aggressive, but they have not been able to do much, right? So just wanted your thoughts on the industry. Is import the only factor which has played such a big part or there are other factors also, which has helped improvement in pricing power in the industry.
Nishit, it's a difficult one to answer because each player goes through their own thinking. Imports being restricted is definitely a helpful factor, but Keep in mind that the import share was still a small one, ranging from about 10% to 15% across truck and car categories. The domestic players, including some of the multinationals still were having the larger market share and a benign raw material scenario and some bit of rationality has obviously hit in the last few quarters.
And some sort of maturity also I would add to that.
Yes, I hope that majority continues. Thank you. All the best.
As there are no further questions, I hand over the call to the management for the closing remarks. Over to you, sir.
We'd like to thank all of you for joining us and hope to see you in the next quarter. All the best. Keep safe. Thank you.