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Apollo Tyres Limited
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Good day, everyone. This is Mitul Shah from DAM Capital. On behalf of DAM Capital, I welcome you all to the Q4 and year ended March '24 earnings call of Apollo Tyres Limited. From the management side, we have Vice Chairman and Managing Director, Neeraj Kanwar, CFO, Gaurav Kumar; and members of IR team. Without taking much time, I hand over the call to Neeraj, sir, for opening remarks, post which we can open the call for Q&A. Over to you, sir.
Thank you, and good afternoon, my friends, and thank you for joining us today. I welcome you all to this post results quarter call, and I'm pleased to provide an update on our company performance and outlook. As you may be aware, the Satish has decided to take early retirement and pursue his personal interests. It was an emotional moment for the organization here, but we understand and respect his decision. We wish Satish all the very best is well-deserved retirement. I would also like to congratulate Gaurav, our CFO, for joining the Board. The Board of Directors have approved his appointment as a holding Director, obviously subject to shareholders' approval. Gaurav's presence on the board will further strengthen our financial lens on strategic decision-making. Congratulations Gaurav. In terms of operating performance, despite several headwinds this quarter, the team has once again delivered a healthy performance with consolidated EBITDA margin of nearly 16.4%. Few years back, we came out with our vision of 2026 targets. I would also like to take this opportunity to highlight that despite less than favorable market conditions, the team has not only achieved but has exceeded targets in 3 out of 4 key financial targets, well ahead of the defined time line of 2026. Talking about these in terms of consolidated EBITDA margin against a target of 15%. We have achieved a target of 17.5% margin for FY '24. Please note that this is despite additional charge of INR 68 crores on account of EPR liability. Similarly, in terms of consol net debt EBITDA against a target of less than 2x, our FY '25 number stood at 0.6x. Consequently, FY '24 consolidated ROCE stood at 16% against our target range of 12% to 15%. Given the unwavering has been done around key pillars and our recent accomplishment, we are confident and excited for what lies ahead. I believe we are all well placed to leverage the upcoming opportunities and remain extremely bullish on a long- to medium-term prospects for the company. Before diving deeper into the quarter's performance, I would like to thank all our stakeholders for their strong and unrelenting support. Going forward, we will maintain a cautiously optimistic stance on market demand. We expect the demand in India to pick up post elections, we have already registered a double-digit growth in our commercial vehicle and passenger car volumes for the month of April 2024, while demand in the agri segment also seems to be coming back. Coming to Europe, we expect the demand momentum to be better in FY '25 compared to last year. In Europe, also markets registered a double-digit growth in volumes in the month of April 2024. We are extremely well placed to leverage improving demand momentum given our investments in our factories, in our infrastructure, in our product and marketing. As always, we are keeping a close watch on the markets and our cost. We aim to maintain strong operating performance through a mix of efficiency gains, superior sales mix and well time pricing actions. We'll continue to be judicious about CapEx, and we'll continue to focus on sustainable and profitable growth. With this, I conclude my opening remarks, and I hand over the call to Gaurav. Thank you. Gaurav, over to you.
Thank you, Niraj, and good afternoon, ladies and gentlemen. Continuing from where Neeraj left, let me share further details of our operations from last quarter. The consolidated revenue for the quarter stood at INR 62.6 billion, flattish compared to the same quarter last year. The consolidated EBITDA for the quarter at INR 10.3 billion was a margin of 16.4% compared to 16% in the same period last year. This included the EPR liability on the India operations, which Neeraj talked about. Excluding that, the consolidated EBITDA would have been at 17.8%. Coming to the balance sheet, we have been able to further improve our leverage ratio, given the focus on cash flow and profitability. The net debt-to-EBITDA for the consolidated operations was at 0.6x at March 24 versus 1.4x at the beginning of the year. Over the year, we have reduced our leveraging by a significant INR 18 billion. Helped by a healthy margin performance, strong CapEx control, our consolidated ROCE for FY '24 stood at 16%, an improvement of around 600 basis points compared to last year and significantly above our stated targets in the current [ vision ] period. Coming to India operations. While the overall volume growth was at 4%, we had good growth in the key segments of TBR replacement and PCR replacement at 7% and 10%, respectively, for the quarter. The replacement segment has also shown good growth for the full year. Exports are already showing encouraging signs of pickup. The revenue for this quarter was INR 43.9 billion, a small growth over the same quarter last year and a more than 1% growth over the sequential quarter. The EBITDA for the quarter stood at INR 6.8 billion, a margin of 15.6% compared to 15.9% in the same period last year. Again, if we exclude the EPR liability of INR 685 million, the margin for India operations would have been at 17.2%, just a little below previous quarter margin. We continue to maintain the market leadership on profitability. We will mitigate the margin impact of EPR regulation through price increases, which have been already announced in May. In terms of outlook, we expect the demand momentum to get better, and we are already seeing good signs already, which Neeraj talked about. In terms of raw material outlook, we expect the raw material costs to go up by mid-single digits in the current quarter. We will seek to negate that through price increases. Given our strong focus on business fundamentals, cost control, free cash flow generation, we expect the operating performance to continue to be strong. The net debt-to-EBITDA for India operations stood at 0.7x at the end of March '24, again, a debt reduction of INR 11 billion in the current year in India operations. Coming to Europe operations. The revenue for the quarter was EUR 182 million, up 3% Y-o-Y. This was against a subdued market scenario. While the market overall for the year declined from all the product segments, including PCLT TBR, we showed signs of recovery with our volumes in these segments showing growth. We have gained market share across all product categories, the EBITDA for the quarter stood at EUR 35 million with a robust EBITDA margin performance of 19.1% compared to 18.1% for the same period last year. This has been our best ever Q4 performance for the European operations. In terms of outlook, markets are expected to be better than last year. We are already seeing encouraging signs in April, as Neeraj talked about. We expect the operating performance to remain healthy, helped by our focus on product mix and enrichment, cost optimization. Our UHP proportion continues to improve. The actual CapEx cash flow for FY '24 was significantly lower than the guidance as we curtailed CapEx. Against a guidance of INR 1,100 crores, the [indiscernible] was only around INR 700 crores. And our CapEx guidance for the coming year, which is FY '25 is in the region of INR 1,000 crores. We will continue to focus on profitability, free cash flow generation and improvement in return ratios as we have continuously talked about. With this, I conclude my opening comments. Thank you. We'll be happy to take your questions.
[Operator Instructions] First question is coming from Raghunandan N. L.
So firstly, on the volume growth in Q4 for stand-alone, can you break down further into OEM replacement exports. Sir, good to hear the strong demand for April in terms of the expectations, can you talk about how you see the replacement growth for the overall industry in TBR and PCR for full year FY '25. Would it be reasonable to assume a mid-single-digit growth for TBR and maybe a better high single-digit growth for PCR? And also, on the export side, there is strong double-digit growth last few months. Can you talk of expectation for exports from India and also Europe growth for [indiscernible]
So Gaurav, do you want to take the first one?
Yes. So Raghu, the volume growth for Q4 replacement, I already talked about 4%. OEM was a negative and exports in the last quarter was a very strong growth of 30% plus.
Got it, sir. And what would be your expectations for FY '25 for the industry?
Yes. So like I said, April has had a double-digit growth in both PV and CV. I'm seeing a recovery happening even in agri now. We are seeing slowly the demand coming up. My expectations would be a high single-digit for CV and a double-digit for PCR. And I'm coming from the back of all the infrastructure spends that have been going on in India currently. And once the elections are over, there's going to be a lot of thrust into infrastructure and building roads and building ports. So we will see a lot of mileages on CV. And yes, consumer demand is up. So you will also see the passenger car cycle going up. And so you are right in saying our exports have grown in the last quarter of Q4. And we are -- we see Q1 also going in the same direction -- as long as things remain same, I'm also bullish about exports going out of India.
So if you can elaborate a little where you're seeing which categories, which regions are doing very well for you and what can further help that growth during the year?
Okay. So EMEA, Middle East and Africa is now coming back up, okay? And that had gone down. So we see certain areas like Saudi coming back up. We see certain areas of Africa coming back up. Also, our operations in America have started picking up, so there's exports happening to the U.S. from here. And I'm now talking generally about both CV and passenger car segment. So when you're entering a new market, it does take time to build the brand and to build the network. So things are going in the right direction and more headways are being made in these main markets that I'm looking. Obviously, Europe also, like I mentioned to you, has had a double-digit growth in the month of April. We are a little bit cautious on Europe, given the uncertainties in Europe. But [ Fredisign ] is making good headway specifically in the UHP UUHP segment, where already we are looking at above 45% of our pie is in that segment in the higher end of the segment.
And congratulations on increasing that UHP share to 47%. Gaurav, just one clarification on this EPR, how is the CPR being calculated? EPR ratio stands at 0.8% of the domestic sales for Apollo, T-2 while one of your peers has indicated a EPR ratio range of 1.2% to 1.4%. Just trying to understand how the competition has happened. That's all from my side.
On the EPR as per the regulation on the commitment for 2 years prior, it was linked to 30% of production. And for the previous year, it was linked to 70%. And going forward, it will be linked to 100% of production of a prior year. So that is why you see a difference if, first of all, even within the same company's figure for different years. The second factor, which would make it different for different companies is relating to buying of certificates. And at what price the certificates relating to compliant with the EPR obligation are picked up that may vary across the company. So we would not be able to comment on another company's final financial liability that they have taken on the books because it is linked to both production and to the price of certificates that they have picked up.
Sir, my first question is on the volume side, again, I mean if we see on the OE side, probably for the full year also, we have seen a decline compared to growth in the industry. So first, your thoughts probably, I think one reason might be that we have focused more on profitability. And going ahead this year also, we do see OE industry sort of probably growing at single digits. So do you think our trend on the oil side will probably continue in the coming year also? Or do you expect here we will probably grow ahead of the industry. Some thoughts on the OE growth for this year?
Siddharth, the overall for the full year, the OE volumes were almost flat. We had strong growth in the passenger car segment, the area which pulled it and negated it down was a negative growth in the TBR OEM segment, particularly the large higher capacity trucks sold less and with the growth coming very strongly in the area of buses, where we have stayed away on profitability reasons. We expect with the kind of infrastructure spends that are happening. Volumes will come back on the cargo movement side of MHCV and that should provide us growth in this current year.
Okay. Got it. And second is, sir, on the replacement side in truck and bus segment, can you just indicate what will be our market share currently? And maybe last year similar quarter. Any trends there?
So right now, the market share numbers are broad estimates because we do not have the published industry figures. We expect our market share to be broadly in the high 20s closer to 30%. We've had volume gains even in the full year for TBR and for overall replacement. So we would have continued to maintain stroke gain share in TBR replacement with whatever market share loss is coming would be on TBR.
Okay. Got it. Second, sir, question on the pricing. So we have indicated a 2%, 3% price increase. Can you probably quantify on a blended level for us how much ASP increase can we expect or has happened probably in May? And given the cost increase now on the commodity side, which you have indicated how much more cost price increase we need to take to sort of offset this cost impact?
The broad indications with that, and we will still get to know the actual price cost. In May, we have taken about 3% that negates the entire EPR and maybe to a certain extent, raw material. We may need another small increase to completely cover the entire raw material and the EPR cost increase for Q1.
The next question is from Amyn Pirani.
Can you hear me now?
Yes.
Yes. My first question was actually on your CapEx. Last 2 years, you have been spending less than what the initial expectation was -- and even in FY '25, the number remains at INR 1,000 crores. So given that, I think at least on PCR, you are at high capacity utilizations. How should we think about what is your expectation of growth. How should we think about growth in this category? Because I think whenever you start a brownfield expansion, it will take 12 to 18 months. So just some thoughts there.
So Amyn you know our industry quite well. And one of the reasons in the last couple of years of CapEx being lower, we have significantly tightened up our control elements on CapEx. And since volumes have been behind the initial expectations or with general market conditions being quite tough, taxes have been pulled back. You are right that the passenger car tire capacity utilization is in the if the current expectations on demand hold up and we will be carefully watching that, maybe in the second half, we will start a small capacity expansion on passenger car. Nothing has been committed yet. But a small amount is budgeted in the numbers that I talked about, which will put rally foundation for a capacity that we need in FY'27. We are well covered for FY '25 and FY '26.
And Gaurav, we've been mentioning to the -- in the same forum about AI and machine learning and the enhancement we are doing through these tools on productivity increases in all our PCR plants. And we believe that if we could look at it close to 10% to 15% increase in productivity from the current equipments that are already in the plants through AI and machine learning. And that's our target that we are taking. So any growth that is coming first, we will look at a CapEx-light model, which is investments in technology and in digital and then only go for these small expansions that Gaurav has spoken about.
Great. That's good to know. My second question is you -- like you mentioned at the beginning of the call, you have exceeded on your leverage target. So the corollary to that, something which you have not guided for, but which would be interesting to know is, how should we think of dividends? Because if you are actually throwing up significant amounts of cash flow, balance sheet is stronger and CapEx looks like near term is not going to be that high. How should we think of dividend going forward?
Amyn, we have a very clearly listed dividend policy, which has been cleared by the Board, which is to say that the payout has to be between 20% to 35%. You also have to look at future spends as we go along. And therefore, the Board yesterday only has declared a INR 6 dividend, which is an all-time high. So we keep balancing it out, looking at market conditions and looking at our own CapEx outlay that we have in mind and looking at also the environment and the economy. And so very clearly, we have been within the 20% to 35% range depending on markets. Gaurav [indiscernible] say anything.
And Amyn this policy has been firmed up looking at the benchmark of the global tire industry, auto component industry. And in fact, the attempt has been to be at the higher end. So even if you look at the last few years, the dividend payout has been above what tire industry or typically more what auto component has been.
No, I appreciate that. I think the question is just that while your FY '26 target was to remain below 2x net debt-to-EBITDA. Clearly, obviously, nobody knows what's happened in the future. If unless there is something really going wrong, hopefully, you will be net cash at some point of time in the next 12 to 18 months. And as a net cash company, then how should we think of dividends? What's the directional question that I was trying to ask.
Boards will be better placed, but highly unlikely that we would borrow to go up on dividend that we borrow cash because there is not enough debt on the balance sheet just to distribute out. But in a scenario like you have painted I mean, pretty much all the excess cash generated would then possibly be paid out to the shareholders.
Next, we have a question from Arjun Khanna.
My first question is regarding to EPR. If you could help us understand. So these provisions have actually been -- these are just provisions? Or have we actually purchased the certificates as required under the regulations. Secondly, are there enough certificates available for the volume of production that we would have probably what we would have done 2 years back to purchase this year with the entire industry domestic sales; and three, have we registered as just a manufacturer? Or are we registered also as recycle under the act.
So Arjun, we are in the process of purchasing the certificates. We have not purchase the entire lot because as you yourself rightly said, right now, the quantum of certificates available is in shortfall vis-a-vis the overall requirement. But the provision has been made based on the current purchases for the entire amount of certificates. The availability of certificates also is improving as we go along. It was -- it is significantly better today than it was a quarter back. And that is why we've been able to meet a certain amount of requirements as actually buying the certificates. We will have to check. But from what I recall, we are listed as a registered as a manufacturer, not as a recycler, but we can check and get back to you.
Sure. Sir, this was only in the limited context of certificates not being available would do you see a scenario where we would also have to go into recycling?
If that is the case, it will be examined as a separate business proposal, Arjun. We will not get into recycling because of a certificate need because even from a government perspective, they are clear that the necessary infrastructure, the necessary requirements from the recyclers in terms of making certificates available has to evolve. A manufacturer would not be forced to get into recycling to meet this compliance.
Sure. Very helpful. Sir, the second question is if one looks at our top line, one does see a slower growth on the domestic side with respect to our peers, essentially indicating you probably would have lost some market share. At what point in time do we take corrective measures or we are on the margin, okay, losing market share? Just your thoughts, please?
As I mentioned always that -- going forward, the new mantra for Apollo's profitable growth. And in that profitable growth, we have given up on some sizes that we believe are not profitable, specifically to do with smaller sizes and also looking at different channels. So yes, in -- let's say, in truck, we would have lost a little bit market share. but the growth has actually come in the bus segment, which is really not a profitable segment, which is a people movement. That is where we are seeing growth. And on purpose, Apolo is not entering that segment. As I said, it's not a profitable segment. But obviously, we will continue to gain our leadership in both truck and passenger car. And we will -- I mean it's a very clear balance will be profitable growth looking at market shares.
Next question is from [ Mumukhs Mandlesha ].
Gaurav, sir, to you. On the blended price hike, which was taken at end of April, it's a 3% on a blended, right, sir?
That's correct, [ Mumukhs ].
And how would be the segment-wise, sir, TBR and PCR if you can indicate?
I won't have that number immediately, [ Mumukhs ], the Investor Relations team can get back to you.
Sure. And one of the major peers is dealing the price hike. How would you see that would make it more difficult to take price increases ahead.
That's the fine balance note, we always have to see and then balance out. We can't go way out of the industry or the pricing ladder. We have always taken the lead on price increases, and we will balance that looking at the overall industry scenario and our own profitability targets internally whether we will take another price increase based on competitor action, et cetera, we'll have to see the overall scenario and take a poll.
Got it, sir. And on the Europe side, margins have grown well despite flat revenues. So what are driving margins? Is the price increase is better mix, sir?
The large part of driving in the last quarter was a bettermix -- as Neeraj talked about, the UHP proportion was significantly higher at 47% against our more steady state average of 43%. And that's the constant endeavor of that operations to continue to enrich the product mix, which is a significant boost to profitability.
Any price hike, sir, in Europe?
Not yet. Now with the raw material scenario, they would be looking at price hikes.
Got it. Just lastly, on the other expenses in the stand-alone business, has grown by 7%, excluding the EPR expenses on a flat revenue Q-on-Q. So what has led to the increase? And what should be the run rate going ahead?
Apart from the EPR, the Other increases are fairly standard, some higher spend in advertising, brand promotion, et cetera. There could be one-off spikes, I would say, in a quarter or so. Apart from the EPR, it will come back to a steady state.
[Operator Instructions] Next question is from Siddhartha Bera.
Just some data on the [ reifencom ] business, if you can share the revenue margins for the quarter?
Sure, Siddharth. So for the quarter, the [ rifencom ] revenues were INR 35 million, with a breakeven EBITDA. And for the full year, they grew by a small percentage. We are closer to INR 210 million revenue with a 4% EBITDA.
Got it. Sir, second question is on this tax rate. Should we expect it will come back to the 25% tax regime? Or do you think the stand-alone tax rates, what is the range you probably are budgeting for the next year?
Ravi, you want to answer this?
Sure, Garurav. So the tax rate, we are yet to -- we have MAT credit with us. So we'll continue with the old regime. On the lower rate as per our projections, we are still some time to get to the new regime. So you will see -- our cash tax payout is below -- is about 15% to 16%. But on the PMA tax rate because of the deferred tax calculation, it comes at an effective rate, which is higher. So we will switch to the new regime once we have exhausted our MAT credit.
Next question is from Amyn Pirani.
The other question is on Europe. You've seen your margins come back to 17%, 18% after weak 1H. As we move into FY '25, you're saying that price hikes have not yet been thought of. So how should we think whether this margin on a full year basis can continue at this level? Or will there be some headwinds because demand also right now, while it's good on a low base, you didn't sound very confident as to how the year would progress. So how should we think of Europe going forward?
So on a full year basis, Amyn, if you look at it, the second half, as you rightly said, was very strong. We were at 20%, 19% plus vis-a-vis what we did in the first half. But on a full year, we are just a little short of a 17% EBITDA and which we believe is something we can deliver in a steady state. There may be variations from a quarter-to-quarter but a 16% to 17% EBITDA margin for our European operations with their current mix profile is something we are looking to deliver on a consistent basis. And at times when the market situation is favorable, we deliver a much higher performance.
In addition to this, we are also planning, Amyn, to take a price increase of around 1% to 2% in quarter 2, given the cost push that we are having. So we will be taking. We planned it, and let's see how it goes. We will keep on correcting our pricing depending on input costs.
Understood. And secondly, just on your interest cost as a whole for stand-alone as well as consol, while the deleveraging of debt has been quite sharp over the last 2 years, interest cost on a relative basis is still pretty sticky, like -- for example, even in India, 1H you had a quarterly interest cost of around INR 105 crores, INR 110 crores. In 4Q also, we are still at INR 88 crores. So is there some element that is not being captured by the debt? Is there some interest rates, which have gone up? And how should we think of the interest cost itself coming down in the P&L?
So Amyn, the interest cost will keep coming down with the debt. There is a certain element of higher interest rates even on a working capital borrowing currently. So on a like-to-like basis, if there is any short-term borrowing during the year. It is happening at a higher rate vis-a-vis the past. Thankfully, at such times, there's been no long-term borrowing. Even in Europe, the interest rates have gone up since they are linked to a benchmark rate vis-a-vis a couple of years back. So that is why you are not seeing a similar quantum of interest reduction as the debt reduction. But going forward, the interest cost will keep coming down as the market situations are also moving to somewhat normal scenario.
And are you seeing based on your current short-term debt rates, are you seeing any of the spikes in India or Europe? Or are you seeing now stability compared to last few months?
There are no further spikes. I'll have to specifically check on at scenario vis-a-vis if we have started seeing reductions, but there is no further spikes.
Next question is from Raghunandhan N.L.
Sir, to Neeraj, sir. Sir one of the area of focus has been on premiumization where you've been focusing on higher diameter tires, you introduced Vredestein in India and also getting products ready for EV. Can you talk about how this has been progressing in terms of product mix improvement benefits on realization margins? And also do you see that leading to better brand positioning, market share gains?
Well, firstly, yes, that progress is going very well in the positive direction. So let me talk about Europe, like I mentioned in my opening remarks, the UHP has gone to 47% of our total [ buy ]. And therefore, you are seeing a better, healthier profit margins in Europe also. Secondly, we did launch the Vredestein brand in India, where we are seeing a good customer demand for the brand. Slowly, gradually, there is growth in volumes in the Vredestein brand. There's a lot of marketing brand-building activities happening at India level. And these are good margin products that we are selling in the market. And you would see that as far as polis concerned with its Indian peers, we are as far as profitability, EBITDA margins are concerned, we are at the leading position. And one of the main reasons is because of the richer product mix that has been introduced in both the markets, specifically Europe and India. So we will continue to put in money behind technology behind brand building in these certain segments of the market where the profit pools are far better than the smaller diameter markets.
Just a follow-up. In terms of the luxury segment for PCR, would there be white spaces? Or would we be covering majority of the market as of now?
Are you talking in India?
In India, sir?
Yes. We are covering all the -- we would be covering nearly 70% to 80% of the market to the both brands through Apollo and Vredestein.
To Gaurav, sir. Sir, can you share the commodity-wise price for Q4? And also between Q3 to Q4, was RMB flattish. And between Q4 to Q1, what is the kind of increase you expect?
So Raghu, between Q3 and Q4, the RMB was flattish. Natural rubber was at around [ 163 ] synthetic rubber at around [ 155 ] carbon black, about [ 120 ]. In terms of going forward, our expectation for Q1 is a movement up of maybe somewhere between 4% to 5% raw material prices going up.
Got it, sir. And in utilization is around 75% in India. Within that, how would it be for TBR and PCR.
PCR would be up in the 80s and TBR would be in the early 70s, broadly. TBR is not very far from the average. There was also the farm segment the buyer segment, which was pulling down the utilizations. But PCR was up in the 80s.
Got it. Lastly, sir, other income was on the higher side this quarter. Anything to call out there?
I think the other income was higher due to ForEx fluctuation gains.
Got it, sir. And how much would be the ForEx gain.
Just one minute. For the last quarter, they would be of the order of INR 40 crores.
Next question is from Nirav Sakseria.
Yes. I'm audible, now.
Yes
So sir, you're seeing a 4% to 5% increase in RM basket. So it's primarily increase in natural rubber or carbon black, which commodity do you see the major increase in prices?
Natural rubber our prices have clearly gone up. And I think -- but the impact would be coming from both crude linked material prices and natural rubber.
Okay. And sir, on a Q-on-Q basis, natural rubber prices have increased. So have you seen a deflationary pressure in any other raw material?
Yes, we have seen a reduction in Q4 on carbon black and steel [indiscernible]
Okay. And what kind of price increase would we need to take to mitigate the effect of the increase in raw material basket. since we have already taken. Is there an additional amount needed? .
Nirav, we would need about 2%, 2.5% price increase.
More.
More.
It was a last question. We'll close the call now. I'll hand over to the management for closing remarks. Over to you, sir.
I'd like to thank you, and hope to see you in the next Call. Thank you. All the best.
Thank you.