Apollo Tyres Q3FY18 Concall Summary

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Financial Highlights

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  • On a consolidated basis, the net sales were at Rs 40.2 billion
  • The net sales crossed the Rs 40 billion mark for the first time.It is a healthy growth of nearly 17% on a YoY basis and QoQ basis
  • This growth is majorly led by Indian Operations where the revenue growth was 21%
  • EBITDA (excluding other income) was at Rs 5 billion
  • EBITDA registered a margin of 12.3%, an increase of about 2% on a QoQ basis
  • The sequential growth in margin was on account of decrease in RM prices
  •  RM consumption prices in Q3 increased by about 7% on YoY basis

New manufacturing unit

  • In Q3FY18 the company has started work on its next manufacturing facility in India
  • The foundation stone was laid in Andhra Pradesh on January 9, 2018
  •  The company plans to invest about Rs 2,000 Crores in the first phase

Brand building activities

  • The company has partnered with the ongoing Indian Super League (ISL) for the current season
  • The company has also become the principal sponsor for the ISL team, Chennaiyin FC, and the title sponsor for I-league team, Minerva Punjab FC

India Operations

  •  There was a significant benefit on account of decline in TBR imports post the antidumping duty imposition
  • The sales for Q3 were Rs 26.3 billion, a growth of 21% on a YoY basis and nearly 9% on a QoQ basis
  • This was primarily led by growth in volumes,majorly in TBR segment
  • The volume growth was nearly 16% on a YoY basis and about 12% on a QoQ basis
  •  EBITDA stood at Rs 3.7 billion, a margin of 13.7% as compared to 14.6% last year
  • However, margins improved by about of 2% on a QoQbasis

Revenue segmentation

  •  90% of the revenues continue to come from the domestic operations and 10% through exports
  • Given the strong volume growth in the truck segment, the revenue from the truck category increased to 62%
  • This is about 2% higher than thenormal standards
  • The raw material basket came down by about 3% on a QoQ basis

European operations

  • The sales were at Rs 13.9 billion, a growth of 11% on a YoY basis
  • EBITDA was at Rs 1.2 billion at 8.3%
  • Capacity in place would already be in excess of 10,000 tyres per day
  • The number of SKUs that are industrialised and hence cleared for commercial production limits the utilization of capacity
  • The actual production today has already crossed 5,000 tyres per day and hence it is saleable production
  • Volume growth was almost flat
  • The growth in revenue was primarily due to product mix improvement with major sales being in UHP and winter tyres

Hungary plant

  • Hungary plant progress continues to be on track
  • The plant has currently reached a production of about 5,000 passenger car tyres per day
  • The company expects to close the year at about 7,000 car tyres per day production
  • The total capex spent on the plant is now close to 450 million and balance would be incurred in the first half of next year

Plan for Hungary plant

  • The Hungary plant would be producing 7,000 tyres per day by the end of current fiscal year
  •  It should start getting close to the plant capacity
  • It should start getting close to producing about 14,000 tyres per day
  • The Hungary plant, starting from mid next year, would start ramping up on the truck capacity
  • As of now there has been no thought process, on phase 2 of Hungary plant
  • Hungary plant produces a mix of Vredestein and Apollo brand
  •  80%- 85% of volume would be the Vredestein brand, and the balance would be Apollo brand

 Dutch manufacturing unit

  •  The revenue from Dutch Manufacturing Operations was €121 million, a marginal growth from €118 million on a YoY basis
  • There was a significant growth contributionfrom ReifenOperations,given the winter season
  • Revenue for Reifen for the quarter was €66 million
  • The EBITDA margin improved from 8.5% to 12%
  • Hungary continues to be at loss, with the peaking of losses in the current quarter at about €3 million
  • The company expects to improve the situation in the coming times
  • There was no additional volumes coming from the Indian Operations, given the strong demand in India
  • The company would target to reach a break-even situation by end of the current quarter

Growth in India

  • The overall volume growth in the truck segment was 22% with about 50% growth in TBR and a marginal growth in the TBBsegment
  • Passenger car segment was flat vis-à-vis last year
  • The company continues to make good grounds with about 90% growth in the 2 and 3-wheelers
  • Light commercial vehicles witnessed a volume growth of 10%

Increase in other expenses

  • The other expenses in India have increased to Rs 488 Crores- increase of about 14% on sequential basis
  • The increase would be on account of  higher production and volume as the freight charges, power fuel, etcgoes up
  • The brand spend has also gone up
  • EBITDA for the European Operation is € 15 million, which is 12%
  • Reifen EBITDA is about 5%

Landed cost of raw materials

  • Natural Rubber Rs 140/kg, Synthetic Rubber Rs 125/kg, Carbon Black Rs 65/kg and Dipped Fabric Rs265/kg

Tractor tyre growth for India

  • QoQ growth was a flat because of weakness in the domestic scenario on a sequential basis
  •  Contribution of TBR & TBB to the top line
  • TBR currently would be about 35% and TBB would be 28%

Reduction in margins in European operations

  • Three reasons are majorly responsible for the reduction
  1. The startup cost of Hungary
  2. The increase in RM not really followed up by the industry in terms of price increases
  3. Company’s own change of a much higher cost structure looking at OEM business, which still has not materialised in enough volumes

Future outlook

  • The company expects a slight increase in the raw material prices going forward
  • The Gross Debt on a consolidated basis stood at Rs 43.6 billion at the end of Q3
  •  This is a slight reduction on a QoQ basis on account of scheduled debt repayments
  • The Net Debt came down substantially from Rs 41.4 billion to Rs 23.4 billion, primarily on account of the proceeds from QIP that the company had closed in the beginning of Q4
  • The Net Debt to Equity at the end of last quarter stood at 0.25
  • Going forward, the situation of European operations would improve as capacity ramps up
  • The target internally is to achieve EBITDA break-even by the end of Q3
  • The company hopes that it will start contributing positively to the profitability next year onwards
  • The company expects slight increase in the RM basket in Q4
  • Some of the players in the industry have already announced price increases in few product segments
  • Given the strong demand situation, there is a possibility of price increases
  •  The exports have come down significantly especially to Europe
  • The company has been running flat out on capacity
  •  At present, everything that is being produced is being sold in domestic market
  •  There is also a de-bottlenecking exercise that is going on
  •  Till then, there would be a capacity constraint, which is limiting the volume growth
  • In Europe, TBR production will start in the next couple of quarters
  •  There is a lag of almost one year vis-à-vis the passenger car- it would follow a similar curve
  • The TBR capacity in FY2019 in Europe would be a very small one
  • It will be in a meaningful manner only from FY2020
  • Europe also would see a small increase in the next quarter on account of the recent crude inflation
  •  The pricing scenario, as of now, in the industry remains weak
  •  No player has announced price increases
  • The growth in the industry overall in 2017 has been positive
  •  Margins of European players have been fairly good
  •  There is no real pressure in a big way on profitability on the European players