Apollo Tyres Q2FY18 Concall Summary

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 Financial Highlights 

  • Net sales on a consolidated basis were Rs 34 billion
  • This is a growth of 11.5% on a YoY basis and 5% on QoQ basis
  • This growth was essentially led by India Operations, which registered revenue growth of nearly 18% on a YoY basis
  • Reifen sales were €27 million with negative EBITDA margin

Operational Updates

  • Overall volume growth across product categories on standalone basis was around 10%
  • Overall truck segment grew by 12% led by TBR OE which almost doubled on YoY basis
  • OE segment grew by about 12%, and exports saw sharp decline
  • In terms of revenue segmentation, radial is now about 55%
  • The industry radialisation level is somewhere between 45-50%
  • On a YOY basis, the OEM & replacement mix has changed in favour of OE
  • The mix was 60% Replacement and OE 31%, balance being exports
  • Last year it was 64% Replacement, 25% OE and 11% exports
  • On QoQ basis, the mix has moved in favour of OE with shift of 6% in Q2

Europe Operations 

  •  In the Europe Operations, the company faced a decline in revenue
  •  EBITDA excluding other income was Rs3.6 billion
  • EBITDA registered a margin of 10.7%- a decline of about 3.5% on a YoY basis, but an improvement of 2.2%on a QoQ basis
  • This was primarily due to raw materials price moving upwards-nearly 12% on a YoY basis,however it fell by9% on a sequential basis
  • The net debt on a consolidated basis was at Rs 41.4 billion, an increase of about Rs 7 billion on a QoQbasis
  • This was essentially on account of funding of capex
  • The company has concluded a QIP issue at the beginning of Q3
  • Going forward, the company expects the debt would not increase, as some capex would be funded through internal accruals and the equity raised
  • The volume decline in Europe is about 5%

India Operations

  • Sales were Rs 24.2 billion, a growth of 18% on YoY basis
  • This was on account of a nearly double digit volume growth and a price and mix growth of about 8%
  • On QoQ basis,growth of about 6% was primarily led by the volume growth, which came in from growth across product categories, except farm, which seasonally was weaker in Q2FY18
  • EBITDA excluding other income was Rs 2.8 billion, a margin of 11.8% compared to 16% last year, however, EBITDA increased by 3.3% on a sequential basis
  • The net debt in the Indian operation was at Rs 21.2 billion vis-à-vis Rs 17.7 billion as of the end of Q1
  • The company expects to see strong volume pickup in future in the India

Dutch and Hungarian operations

  •  The company’s Dutch and the Hungarian Operations reported sales of€107 million
  • This is a de-growth of 5% on a YoY basis, which was primarily on account of volume decline
  • The company’s decline was more than that of the market
  • This resulted in pressure on the margins, given the operating leverage
  • The EBITDA was€9 million at 8.5%, which takes into account start up losses of Hungary
  • The German distribution company also had a negative revenue growth and reported EBITDA loss

New plant at Hungary

  • The European operations would continue to go through some difficult time till Hungary reaches a certain scale
  • The company expects to see Hungary contributing into the results from next year and the full impact of the scaled up operations coming into play in FY2020
  • The company expects the Hungarian Operations to turn positive from Q4
  • Initial supplies are to replacement and that would be the case for any new tyre plant around the world
  • The current supplies to European OEMs have started out of the Dutch plant
  • The earliest OE supplies from Hungary plant would be in FY2020

OEM and Replacement segments

  • The growth in truck replacement segment was about mid single digit
  • The OE pickup, particularly was a big factor in the truck segment which led to about 12% overall volume growth
  • The truck OEMs went through a significant decline in the Q1 on account of the BS-III to BS-IV switch
  • On the truck radial side,it was much stronger growth
  • The truck cross-ply continues to decline
  • Almost double digit growth in PCROE segment was negated by a decline in exports,resulting in an overall flat growth in the segment
  • The light commercial vehicle had a marginal volume growth
  •  Farm grew by almost 15% on a YoY basis

PV Replacement segment

  • PV replacement segment saw light growth
  • The company is currentlyfacing acapacity constraint
  • Flat overall growth implies a growth in the domestic market, but given the capacity constraints,the company had to cut supplies in some instances,to the export market
  • The company feels a need to expand the PCR capacity
  • The company is not thinking of any price cuts in the near term

Capex plans

  • Capex planned for FY18 across geographies is Rs 2400 Crores
  • This includes expansion capex, maintenance capex and capex for other projects
  • Chennai capex out of Rs 2400 crores would be close to Rs 1000 Crores
  • For FY2019 based on current estimates,capex should be about Rs 2100 Crores
  • This includes completion of Hungary, some spill over of Chennai capex and primarily capex for passenger car tyre capacity in Andhra Pradesh

Landed cost of raw materials

  • Natural Rubber Rs 160/kg, Synthetic Rubber Rs 130/kg, Fabric Rs 260/kg, Carbon Black Rs 65/kg

Effects of Anti-Dumping duty and Demonetisation

  • The Chinese imports from the highs of pre-demonetisation of 1,50,000 tyres a month were down somewhere at 80,000- 90,000
  • They are trending further down- currently they are at about 70,000
  •  The company expects them to settle further at a lower level

Loss of market share in European operations

  • It emanates from the strong growth in India market
  • The company had to curtail supplies to export markets because of the very strong growth in domestic market
  • This included curtailing supplies to the European market also
  • While the company had the Hungary plant coming on-stream,but just having the equipment is not enough to produce all the sizes
  • There is long cycle of product industrialisation where each of the SKUs need to be produced,stabilised,etc.
  • The company will be able to produce each SKU in the Hungary plant in a year time
  • The Indian operation supplies both brands (Apollo and Vredestein ), largely Apollo tyres

2-wheeler segment

  • The run rates are up nearly 50%, as compared to the previous year
  • The company is still a very small player in the overall segment
  • The company plans to continue pursuing the market through outsourcing strategy
  • The company is looking to supplement this strategy with setting up of a pilot capacity on the higher end of the 2-wheeler segment, which is a very small niche market
  • The company is satisfied with the growth
  • The company does not plan for any in-house manufacturing capacity in near term
  • The company will,as part of the conversion of truck cross-ply,set up a small capacity of two wheeler tyres, which will serve this higher end of the market
  • OEs would beat lower price point and initially the company would not make any money when they supply from the Dutch plant
  • The company considers itthe price of entry into anOE
  • These are ons pecific models at a particular point of time
  • For a year, the company will have to supply out of the Dutch plant with a higher cost structure

Company outlook

  • The raw material scenario for Q3 is expected to be stable
  • It will go up marginally during the quarter, however, the average for the quarter would be at same level as Q2
  • The company expects a slight increase in RM prices in the Q4 of this fiscal year
  • India demand continues to be strong on the passenger side; so the capacity constraint will not ease up
  • The situation in Europe will continue to improve every month as the capacity of Hungary keeps going up including the product industrialisation issue
  • Depending on how the winter is or how the recovery is, the company would continue to have some constraints, but that situation is constantly improving

Company strategy

  • The company continues to ramp up its truck radial capacity in Chennai- current capacity being in excess of 8000 tyres per day
  • 8000 tyres per day is the current production level; capacity is ramping up and currently in excess of 9000 tyres per day.
  • This capacity is coming in at the right time as company expects a strong demand pickup in this segment
  • In Hungary, the Operations continues to ramp up
  • The company has already crossed levels of 2000 car tyres a day and expects to be crossing level of 5000 tyres per day average for Q4 of this fiscal year
  • If the raw material basket goes up, the company would look to take a price increase
  • Efforts are being made to debottleneck capacities, but again they would be barely sufficient to serve the growing India market itself
  • De-bottlenecking options will increase capacity by about 10%.
  • Given the brand equity for the Apollo brand, and the demand, there is pressure on the plan to ramp up the capacity quickly
  • The second brand would remain as a very limited offering in a couple of markets
  • The situation is constantly evolving and would be evaluated by the Indian Operations team
  • If a change is necessary, then they would take it
  • As of today, the focus continues on the main brand
  • Some of the prices are fairly standardised across operations
  • The company may have the opportunity to develop another supplier or a particular grade, which is lower cost
  • Mix of materials that will deliver the required performance, but could come at a lower cost
  • That is a work that purchase and R&D work together very closely
  • Other things in control is tracking the other cost elements- the manufacturing costs, the selling general and administrative costs

Price changes in domestic truck tyres

  • The higher end has not seen much change
  • At the lower end where the Chinese,and the lower end second brands were being offered, there is a
  • price increase of about 3% in the market

Europe price hikes

  • Given that the raw materials’ prices increased through few quarters and just around the time when the price increases were announced, raw material came down
  • Now the short-term outlook is stable to minor inching up; there has not been much of pricing action
  • In some cases,small 1% price increases have been implemented
  • However, the higher price increases, which were announced at the end of first quarter for winter tyres were not implemented

Drop in Inventory days in H1

  • Given the strong sales scenario, the inventory has come down,including finished goods
  • GST implementation also led to a certain stocking up
  • The cost element of excise post-GST has gone out
  • The decline in PCR replacement market has to be seen in light of the overall European market,which itself has had negative growth
  • In longer term, it still ends up at around that 1.5%-2% volume growth
  • The company does not expect the cheaper brand to cannibalise the main brand
  • The company has launched in a very limited manner, looking at the experience of other players
  • The thinking is not to extend it across different markets-both from the risk perspective; and also from a perspective of the demand for the main brand