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Apollo Tyres Ltd
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Good afternoon, everyone. Thank you for joining in for Apollo Tyres 1Q FY '21 Results Conference Call. We thank Apollo Tyres management for giving GM Financial the opportunity to host the call today. We have with us the senior management team from the company represented by Mr. Neeraj Kanwar, Vice Chairman and Managing Director; Mr. Gaurav Kumar, Chief Financial Officer; Mr. Ravi Shingari, Group Head, Accounts and Tax, along with the IR team. We'll start with the opening comments from the management and then followed by a Q&A. I would like to hand over the floor to Mr. Neeraj Kanwar for his initial remarks. Over to you, sir.
Thank you. Good morning, good afternoon to everyone, and a very warm welcome to all of you for quarter 1 earnings call. First of all, best wishes for you and your family's health and safety. Last few months have been once again very difficult for all of us, and I would like to take this opportunity to thank each and every stakeholder of Apollo Tyres for their continued effort and support. On the positive side, we have witnessed a steady pickup in demand momentum in India from June onwards. And I do see light at the end of the tunnel in terms of vaccination and opening up of the Indian economy; however, let me reiterate that we continue to prioritize safety for all our stakeholders over everything else. Although we have limited medical expertise to comment on COVID pandemic, based on our interactions with market participants, we remain optimistic on industry outlook in the near, medium term and very bullish in the longer term. Moving to business, while the quarter results were impacted by COVID second wave in India and rising RM cost pressures, I'm pleased with the strong operation performance in Europe and healthy performance in India. At a broad level, I would want to highlight 3 things: Firstly, in quarter 1, strong operating performance in Europe helped partially negate the margin decline in Indian operations, which highlights our long-term strategy of diversification and derisking of business model from any one geography. Secondly, in India, despite COVID second wave and cost pressures, the pricing environment remained stable. And lastly, we continued to gain market share across 3 product segments in our major markets. The result of the strategic initiative taken in Europe is reflecting in the operating performance in terms of continued good profitability over the last few quarters you would have noticed. We aim to make our European operations a small fast-growing operation with which -- with high risk profitable levels. Over the past 15 months, we have taken initiatives across various fronts that have ensured that we emerge stronger through this pandemic crisis. These initiatives not only have helped us reduce and optimize costs but also has made ourselves more resilient and future-ready. Finally, despite the uncertainties and difficult economic environment, we have significantly strengthened our balance sheet in the last 15 months. In fact, in the last 15 months, I have been very impressed with the passion and commitment shown by all our stakeholders, and this has encouraged us to get even more bolder in current times. We recently unveiled our corporate identity and our vision for 2026. As part of our Vision 2026, we have laid down performance targets and also key enablers, which would help us to achieve our vision and our performance targets. Finally, in terms of outlook, we are optimistic about demand momentum in the near medium term, given continued demand recovery and stable pricing environment across our key markets. I would once again use this opportunity to reiterate our long-term focus area. We are committed to use every possible opportunity to emerge as a leaner and a much more efficient organization. We continue to see huge opportunity in our key markets over the medium, long term and are well placed to leverage the same given our investments in our capacity, in R&D, in our brand, distribution and cost optimization. With this, I would like to thank you again, and I'd like to conclude my opening remarks and hand over the call to Gaurav. Please stay safe. Thank you.
Thank you, Neeraj, and good afternoon, ladies and gentlemen. Continuing from where Neeraj left, let me start by reiterating that as a company, we are, first and foremost, focused on the safety and well-being of our employees and other stakeholders. In India, we continue to face a big challenge dealing with the pandemic which, together with the rising RM cost pressure, put additional challenges. Last quarter, we saw the India domestic sales coming down sequentially, especially the OE sales were significantly impacted. We are now witnessing a steady demand -- improvement in the demand momentum. The RM pressure continues which has impacted our operating margins in the first quarter of fiscal year '22. We have taken 3% to 4% price increase across product categories in Q1 and have already announced further price increases in the current quarter to offset this cost push. And while we may lag behind in the near term due to this RM cost push, we continue to target the mid-double-digit EBITDA margins on a steady state basis in the medium and long term. Europe, once again, following on from the last quarter reported a strong operating performance in Q1 on the profitability front. And it reaffirms the business potential of Europe as a market, along with the benefits of diversification and derisking of our business model. The European operations, post the strategic initiative of last year, is now showing clear signs of returning to consistently higher profitability, similar to the scenario of 5 to 6 years back. While the business environment is improving, these are still uncertain times. However, on the basis of the various strategic measures that we have taken through the last 15 months in both India and Europe operations, we are far better placed and in a stronger financial position to face the current situation. Moving on to financial results, the consolidated revenue for the quarter stood at INR 46 billion a growth of nearly 60% over the same quarter last year though a decline of 9% on a sequential basis. The big growth year-on-year basis is on account of the fact that first quarter of last year had a massive impact of COVID first wave. In terms of demand outlook, based on our discussions with market participants, we expect healthy demand momentum in both our key geographies, India and Europe. The consolidated EBITDA for the quarter stood at INR 5.7 billion, a margin of 12.4%, significantly up compared to 8.5% in the same period last year. This margin improvement has been helped by growth in top line, cost control and healthy profits of the European operations. We witnessed a drop in margins on a sequential basis, primarily on account of RM inflation. Coming to the balance sheet, we have been able to strengthen our balance sheet over the last several quarters with cost control measures, control over CapEx and the timely equity raise. The net debt-to-EBITDA for the consolidated operation remains at 1.6x. Moving on to India operations, the revenue for the quarter was INR 32 billion, a growth of 80% plus over the same period last year, but a decline of 11% on the sequential basis. The EBITDA for the quarter at INR 3.3 billion was at 10.4%, a slight decline compared to the 10.8% for the same period last year. The sequential margins came down significantly once again, as mentioned earlier, impacted by the RM cost push. Price increases have been taken and already announced to negate this. In terms of the demand environment, we saw maximum impact of COVID second wave and the lockdowns in the month of May and have witnessed a steady demand recovery since then. We also put a greater thrust on exports to counter the reduced domestic demand and this resulted in our highest ever export turnover last quarter. At the end of last quarter, the net debt in India operations stood at INR 39 billion and the net debt to EBITDA at 1.8x. Moving on to Europe, the revenues for the quarter were EUR 114 million, an increase of 25% compared to the same period last year. The EBITDA for the quarter was at EUR 19 million, a 16.3% margin compared to a mere 2.2% for the first quarter last year. Apart from the strategic move, our continuous focus on improving the sales mix also adds into this healthy margins. Our UHP, the ultra-high performance, proportion of tires in the passenger car categories has gone up to 38%. The strategic move regarding specialization of Enschede plant is now complete. We continue to gain market share in the TBR and the Farm segment. The European operations, the market is showing signs of good growth, and we look to in fact significantly up our volumes going forward. Thank you. We would be happy to take your questions.
Thank you, Gaurav. We'll now begin with the question-and-answer session. You may please press the raise hand option to ask a question. We wait for a while till the question queue assembles. The first question is from the line of Ashutosh Tiwari. Ashutosh? Ashutosh, your line is unmuted, you may please speak now. We cannot hear you. Yes, we can hear you, Ashutosh.
Sorry. Sorry, there's some issue. So firstly, Gaurav, what was the growth on a quarter-on-quarter basis, a decline on a quarter-on-quarter basis in India in volume terms?
Gaurav, you are on mute.
Ashutosh, the decline in volumes was about 11% in India operations sequentially.
So I mean, there was some price increase, right? I mean stand-alone sales are down 11% quarter-on-quarter. The entire thing can't be due to volumes, right?
More or less, it's the mix also comes into play, Ashutosh. So in terms of our tonnage, there's an 11% decline.
Okay. Okay. And secondly, we have done very well in the export side. Can you throw some light what really happened in the quarter? And is this sustainable kind of export sales that we can see going ahead?
Yes, it's definitely sustainable. It's not just a one quarter happening, Ashutosh. We've been building towards these overseas markets that we have always talked to you people about not being dependent on one geography. Europe operations also now have a reasonable dependence on India for volumes coming in, but apart from that, we have developed our markets in North America, South America, the ASEAN, Middle East region. And that was the fundamental strategy of saying that we should have these other markets to derisk ourselves and not being dependent on just one market alone. There's a lot of R&D work, brand building that has gone-in in these geographies. And in such times as last quarter, we upped the volumes there. To the second part of your questions, these volumes or the kind of level that we have done in the last quarter, are very much sustainable.
Okay. And lastly, if I may ask in terms of European operations, obviously, we saw 15% decline quarter-on-quarter. But how do you expect the sales to trend in this quarter? Will it normalize to -- generally to EUR 130 million, EUR 135 million sales in Europe, will that normalize to that level in 2Q?
Yes, it would normalize. You should also take into account the fact that in the first quarter, we had just closed the specialization of the Enschede plant. It's a fairly big strategic move and we were going through the transition phase. And in our case, for the manufacturing industry, it's not just a simple move that you pick up 1 tire which is being produced in Plant A, and from the next day start producing it in Plant B. There's a fair bit of work of industrialization, SKU by SKU, which goes along. So there was a quarter of transition that we went through. And keep in mind that some of the challenges or some of the drop in sales that you see is due to the current significant problems on container and freight that is getting worldwide, not just our industry. So yes, to your question, you too should see European operations at a normalized level of the past.
We have the next question from the line of Jinesh Gandhi.
Am I audible?
Yes, you are audible.
Gaurav, my question pertains to, firstly, in the India business, what kind of RM cost inflation do we expect in second quarter? And what's the price increase which you have taken? And the second question pertains to European operations. It seems we haven't yet seen impact of commodity inflation considering gross margin expansion on a Q-o-Q basis. So what are your thoughts on that? And thirdly, have you started seeing benefit of employee cost reduction in Europe, again, not reflected on a Q-o-Q basis, so do we expect in coming quarters?
So the RM cost increase that we expect in Q2, Jinesh, over Q1 is about 5%. We are looking to take a price increase of a 3% plus in Q2, 3% to 4%, which would negate this completely. And in fact, with the rolling across of price increases taken in the past, even look to cover up something. On the European side, also the gross margin improvement that you're talking about is despite the cost push, the RM cost push is there to a lesser degree, about 6% to 7% in Europe compared to a much larger figure in India. So in spite of that, the gross margin expansion is a reflection of richer product. And from this quarter onwards, that is the June quarter, the benefits of lower salary are already beginning to flow into the P&L.
We have the next question from Raghunandhan.
I hope, I'm audible?
Yes, you are audible.
My first question was on the demand conditions across segments in India, how is the demand coming back? Which are the segments where the demand is coming back more quickly than others? And secondly, Gaurav, I would request you to share the commodity-wise prices, which you generally do. And thirdly, can you remind us, please, of FY '22 CapEx and any thoughts on FY '23 plans?
Raghunandhan, the demand is coming back strongly across categories. Probably the only laggard to some extent, would be the truck OEM, which may take another quarter for the demand to pick up. In the replacement segment, across categories, we are seeing good demand momentum and, in fact, starting from June onwards. OE also the PCR and the Farm category are good. It's only in the truck OEM that there is some amount of lag. On your prices, just a minute, natural rubber for the quarter was at INR 170; synthetic rubber at INR 155; carbon black at INR 90; and steel cord at INR 155. What was your third question, Raghu?
Yes. On the CapEx side, for FY '22 and '23?
For FY '22, we remain at the CapEx guidance of earlier, which is around the INR 1,800 crore mark. And we continue to closely look at the situation to say if we see demand faltering and whatever. If we need small amounts of deferment, we may do that, but not a big deviation from this figure that we had guided towards. FY '23 is still on the drawing board. We -- given this uncertain times, we are, as of now, not committed to any large CapEx for FY '23 in India. And in Europe, that number is more or less a steady maintenance CapEx. There is no big growth CapEx as of now.
The next question is from the line of Siddharth Bera.
Sir, my first question is again a clarification on the first quarter number. You highlighted that the volumes were down 11%, so I mean -- and we have taken a 3% to 4% price hike. Also, if I compare the RM per tonne, it is like up only 7% while we have highlighted that it is about 10% Q-o-Q. So I mean, is it a reason that exports have gone up and that is why the mix is slightly different and that is why the ASPs and RM costs are not comparable?
Siddharth, I can only give figures at the aggregate level for reasons of confidentiality. The overall volumes or the tonnage is down 11%. There's a fair bit of mix change between replacement, OE and exports, and even within product categories, which would play into the mix. And the 3% to 4% price increase that I talked about is in the replacement segment. In some of the OEMs, it is larger. It's also taken in the middle of the quarter. So it does not -- it's not there right through the quarter. So you would find it difficult if you were to do all the maths with 5, 6 product categories, 3 channels, but I would not be in a position to share details segment by segment.
Okay, sir, understood. And the price hike of about 5%, which we have taken from July, so that -- sorry, 3% plus probably, will that be sufficient to achieve the mid-double-digit margins of our target? Or do you think there will be more price increases required if suppose the commodity prices remain stable where they are?
Gaurav, let me answer this.
Yes.
So we are seeing raw material prices now. Some softness is coming in China. As recent as 2 days ago, we've seen some softness in the Chinese economy because there's a wave of COVID coming in there. When that happens, commodity prices should start softening. But in quarter 2, the company has already announced price hikes. We've already taken one in July, and we will be taking on in August. So in all likelihood it should balance out as we go along.
Understood. Sir, last question is on the Europe side. I mean, if I see the industry, it is like, I mean, stable Q-on-Q in the first quarter, and the outlook remains quite good. And in the 18-plus tire segment, I think there's a good healthy double-digit growth there as well Q-on-Q. So in that backdrop, I mean our Europe revenues are down sequentially. So I mean any particular reason why? Have we lost some market share or what has happened there?
So like Gaurav mentioned because we are in this phase of transition where you have seen the specialization project just finished in the month of March end and, therefore, molds movement to India, mold movements to Hungary has taken time plus you need to product -- industrialize some of the products in the new plants in Andhra, in Chennai and in Hungary. And therefore, it's taking time. And therefore, there is a loss in sale because of loss of production. So it's really an internal factor has -- this quarter, you will see that we'll be back to normal.
We have the next question from the line of Joseph George.
Am I audible?
Yes.
So I had 3 questions. The first question is with respect to the EU sales. So you mentioned that because of the restructuring effort that was being put in Dutch operations, this quarter's revenues were impacted. I wanted to understand whether this production disruption short term, of course, has resulted in significant fall in the inventory that is available with your dealers? Because I'm guessing that end demand would have continued at the same rate, but if it's your production disruption that has resulted in lower revenues.
Yes. In some cases and specifically in Germany, yes, it has happened. But it's only a quarter. So we will be back in terms of volumes and sales, as I mentioned. You have to see on the positive side, it has given us a healthier P&L. EBITDA margins are above 15% quarter-on-quarter. While even volume went down, EBITDA was still higher than 15%. So that's a very positive sign. As soon as we get to normalize sales, there will be expansion on EBITDA margin.
Sure. Understood. The second question that I had was with respect to the exports that are happening from India into Europe. So when you reported EUR 114 million as the revenue for the European manufacturing operations, does it include the revenues generated by exporting tires from India into Europe? Just wanted to understand this accounting there.
Yes, it's on a transfer prices basis. But Gaurav you may want to answer that correctly.
So Joseph, yes, the Indian operations account for that in their sales with the transfer pricing allowed markup. The European operations accounting-wise would treat it as bought-out. And then they have to add their selling and distribution costs and other administrative costs to make a margin over and above that. So the margin to that extent is shared between the geographies dictated by the transfer pricing regulation, which is an international practice. And in the consolidated, the sales of India operations to Europe get eliminated, and only the sales to the third-party actual customer counts.
Understood. That's clear. And Gaurav, the last question that I had was in relation to the employee cost. I think a previous question touched about it -- touched upon it. The simple exercise that I'm doing here is taking -- I mean, deducting the stand-alone employee costs from the consolidated employee cost and looking at the trend. And what I noticed is that the fall that we are seeing is not very sharp. So did you mention that June quarter results completely reflect the benefit of the headcount reduction, et cetera, and there isn't any further benefit that is going to come in the September quarter? It will just be a continuation of the existing benefit?
That's correct. There may have been small increases in some of the other geographies as we grow in the Americas, et cetera. So when you do the consol minus stand-alone, you need to take into account that there are other operations. And as they grow, there are small additions in manpower. Hungary also, as it ramps up the volume, may have taken on some additional manpower. But to your fundamental point, in the Netherlands company, there is no carrying manpower cost, which is related to the restructuring or the specialization. That was all closed as of end March.
Yes, and just 1 more point Gaurav, to add on to stand-alone employee costs might go up in India because we are into a phase of long-term settlements in Kerala. Also, AP is ramping up, so more employees are coming into AP. And so you might see slight fixed overheads going up, employee costs going up in this.
Our next question is from Pramod Amthe.
First question is with regard to exports. Considering that you have achieved almost like INR 5 billion export versus last...
You've gone mute.
Sorry, this is with regard to exports, the exports have gone up to almost like INR 5 billion, it seems from India. Would you be able to give a color how much of this is going to Europe and how much is going to the rest of the markets?
Gaurav, do you have that breakup.
Pramod, I don't have this readily, but we can come back to you and give you the broad breakup of Europe and rest of the world.
And the second question is, with regard to the consol net debt, this is the second quarter, second consecutive quarter where it has moved up from almost like INR 38 billion to INR 48 billion. Do you see it as a cause of concern, considering that you still have a decent CapEx to make? And where you expect it to peak out in the coming quarters?
Sure. So Pramod, it's not a cause of concern. There are, a, the leveraging ratio is well under control. But even besides that, a couple of factors which have contributed into this increase, even if we hold the same level of inventory in terms of number of days, the value of that has gone up because the costs have gone up. And secondly, given the second wave of COVID in India, the operations went through a little bit of a start stop. So we've actually had an inventory increase, which would not have happened if it was normal operations. So if we take out these 2 factors, there is a marginal increase in net debt still given the operating performance, but we do not see it as a cause of concern at all. Our leveraging levels, our balance sheet should -- will be well under control.
Our next question is from the line of Sonal Gupta.
Just a couple of questions. One, could you break out the other operating income for this quarter in India?
Sure. Sonal, the biggest component of the other operating income is the investment promotion subsidy that we get based on our investment in Chennai. And there is also a similar component, which is the unwinding of the deferred income relating to the EPCG as we fulfill the obligations. These 2 components pretty much comprise all of it, which is almost as much as 80%, 85%. The rest is small, which is sale of scrap, et cetera.
So what would be the total number?
That number is about INR 875 million.
INR 875 million. And just on the exports, I mean, I know you may or may not be able to break it out for this quarter, but I mean, just on a directional basis, could you help us understand like, say, I think roughly, we used to be at around 10% of exports. So how is this number looking to change that now with the industrialization at Enschede? Where could this be in this end of -- by the end of this year and next year?
We would expect this number to be in a 15% plus range. The India business will still continue to depend primarily on the domestic business because that's also showing healthy growth. But the 10% will probably move up to a 15% range.
Right. And just lastly, I mean, just carrying on from Joseph's question. On -- so when these sales are recognized in Europe, so this -- when you're giving us INR 114 million, this includes all the full sales in Europe other than the Reifen, or does this -- I mean, like just trying to understand that as the mix shifts more towards Indian imports, will that mean that the margins particularly sort of come down a little bit?
Sure. So to your first part, it excludes Reifen. We have always stopped off our European numbers and shared with you what the market wanted, which is the European manufacturing and sales operation, and Reifen is separate in our -- this commentary. To the second part of your question, the way the manufacturing optimization has been done depending on which SKUs come from where, unless something goes very much off on either freight rates or exchange rate, the business which is sourced from India do not pull down the European margins.
In fact, Sonal, it will only get more margin expansion happening because India will be selling sizes, which are smaller and profit expansion will happen.
Right. So I mean like you're making, let's say, whatever, somewhere around a double-digit margin in India plus the European margins, right? So you're saying that at both entity levels, you're not going to see any dilution in margin because of this?
No, that is why the specialization of the ancillary plant has been down, whereby removing the loss-making sizes because ancillary cost for manufacturing is very high to Eastern Europe and to India. And therefore, margin expansions will happen in both the regions.
Our next question is from the line of Sonal Gupta.
Sorry, I just did. Thank you.
Hello, he just finished.
Yes. Our next question is from line of Nishit Jalan.
So my first question is in Europe, after this restructuring exercise, what is the revenue potential that we have from the European manufacturing operations that we can do in terms of EUR 1 million, if you can help me with that please.
So near-term, Nishit, we would expect to see depending on the market conditions are high single digits.
Gaurav, not near term, I'm just asking with the capacity available in both Netherlands and Hungary, after this restructuring, if you operate at whatever, 100% utilization, what is the peak revenue potential from those operations?
Nishit, the only issue is that we have taken into account a large number of sizes that will come from India. So to say, what is the European operations potential? Just looking at the European capacity is not looking at it the right way because there's a fundamental decision taken that X percentage of the SKUs for European business would come from India.
Yes. So you have to keep in mind, you have to also keep in mind we do buy a lot of outsourced products from BKT from other manufacturers. And so that's how the sales operations takes place in Europe. It's not alone. Only the 2 plants that's you're talking about.
Okay, so to state that number is difficult to share, that's what you're saying. We understand that exports happen, but just wanted to understand if Hungary and -- let's say that Hungary approached at 100% utilization, what kind of revenues can we do? I'm asking from the perspective that if both those plants are fully operational and obviously, certain SKUs you will export from India, when do you'll feel the need to expand capacity in Europe, et cetera?
Yes, Gaurav. Answer that.
Sure. So Nishit, we will look at the demand. We will also assess, let's say, the next expansion should come somewhere in FY '24 maybe and whether that should happen in India or in Europe, it will be a mix of demand across geographies and not just the European demand on which the decision would be based. Too early to say when and where that expansion would be needed, but yes, over our 5-year horizon, clearly, we would need a PCR expansion for our European operations and for our Indian operations.
Okay. Just one follow-up on this, as the next question. Exports from India to geographies like North America and all would be done from India or you will do it from Europe? And when we look at export piece of business in the Indian entity standalone business, will this be a higher-margin business compared to the domestic operations or it will be at par?
Sure. So even exports to North America, U.S., that you mentioned is a mix. It goes from both India and the European plant. And again, it's dependent either on the product line. Even within the passenger car categories, there could be a development of a passenger line for the Indian plants and a passenger car tire line in the European plants. And so it's not just from one geography. And what was your second question?
Whether export is more profitable than the domestic operations? Or will it be at par?
Exports is not as profitable as the domestic business, also because of the fact that the margin is shared between geographies. India operations has to charge what transfer pricing norms allow us to charge. The domestic replacement is the most profitable segment. And then OE versus exports would vary depending on across product categories or across where raw material cycle is.
We have our next question from the line of Sanjeev Goswami.
So my first question is with regards to your investment promotion subsidy that we have. I understand that we have from Tamil Nadu and Andhra Pradesh government. And it has 2 components. The Phase 1 is more bulky kind of one, which is linked to the milestone that we achieved and we get onetime subsidy. And the second is a 12-year or 15-year trail that we have. It's a bit difficult to actually model it in line with the CapEx and the gross work addition that we do. So can you give us some kind of guidance how we should look at this number over next 2, 3 years because these are committed CapEx from which it is coming?
Yes. Sanjeev, the CapEx in Chennai has been completed. You could more or less look at the current year number as a fairly stable number. There are no one-offs in the current quarter other operating income.
Okay. The reason I asked is, because in financial year 2021, you had INR 161 crores as a Phase 1 subsidy, which is against INR 8 crores, which happened in FY '20. So there was a very huge jump, which happened in 1 financial year. So do you think it will continue?
No, Sanjeev, last year, 1 big jump was because post switching from VAT regime to GST regime, and I'm not the big expert on taxation matters, there was a period in between where there was a lack of clarity on how the subsidy that was offered for investment would be changed over because the VAT regime changed to GST. Once that was clarified, there was a backlog of a couple of years, which came in, in one go. And that's why you saw one-off. The current quarter is a normalized scenario when that regime of the investment promotion subsidy is established, which is why I said that the current quarter number is a fairly stable one that you could model for your purposes as continued.
Fair enough. And we had almost INR 260 crores sitting as receivable of this investment subsidiary, have we received this part?
There is no [indiscernible] overdue. It keeps coming in. So if there is a INR 260 crores, I think a large part of it has been received. Ravi, anything more on that?
No, Gaurav, that's a fair understanding, a large part of it has come in this quarter.
We have our next question from the line of [ Hitesh Kiran. ]
Yes. Am I audible?
Yes, you are audible now.
So if I look at the profitability of your Netherlands manufacturing operations, I have the FY '18, '19 and '20 number, where FY '18, we had an EBITDA of close to 10%. FY '19 was about 5%. And FY '20 was barely breaking even. So after the specialization that you carried out, what is the level of profitability that you expect out of that particular plant?
So again, Hitesh, we have repeatedly said that looking at the profitability of a plant is not the appropriate way to look at the profitability of operations. In India just because they are simply plants and not legal entities, we do not track for external purposes. We would have that internally. But we would not look into it plant by plant. And similarly, for European operations, you've got to look at the profitability of the entire European operations rather than say what is Dutch profitability and what is Hungary profitability.
No, I understand that there would be some [ corporate ] -- overheads would be higher than the Netherlands entity, but still, just to broadly understand the kind of benefit that we would have from this suite, how should we look at it? If you can just quantify the kind of benefit that can come in from the specialization that need to be carried out over there?
As we mentioned earlier, there is a saving of about EUR 30 million in the employee costs as a result of this going forward. Other than that, we would not be at liberty to share individual operations profitability in Europe. But to the first part of your question, there is an employee cost saving of about EUR 30 million.
No, that is pretty straightforward. But as Neeraj also mentioned that there are some product lines which you have moved to India, which were the low margin or probably were making losses and the ones that you have retained. So at least on the gross margin side, if you have to look at the annual numbers and see the kind of expansion that can come on the gross margins, at least where will you be able to probably share some color there?
Unfortunately, not Hitesh. We would not share details.
Gaurav, I had a broader thing. Hitesh, keep one thing in mind, what we have mentioned from the beginning that these profitability of Europe is sustainable going forward. You will see some more margin expansion happening as products get streamlined, production gets streamlined. Let's not look at a factory lease. Let's look at the entire Europe entity because there are various product groups, there are various SKUs coming from various places in the world. The focus is now to increase our share of ultra high-performance tires and UUHP tires, which will give you much better profit margin expansion. So going forward, this EBITDA margin is sustainable and will only expand from here on, so that's a broader guideline that I'm giving you.
Our next question is from the line of Basudeb Banerjee.
A question for Gaurav, just to understand as in the initial comments, you said that 5% further increase in raw mat basket for next quarter and broadly trickling effect of Q1 price hikes and incremental price hikes in July, August, will take care of that. So just wanted to understand that, that is about mitigating the future pressure on gross margin and about the 450 bps impact, which we saw this quarter, so when do -- how to expect going back to the 15%, 16% India business margin levels? By when you have the confidence of getting back to those levels, assuming operating leverage is back at normal level.
Sure. So Basudeb, as we've said earlier, we will not be in a position to give out margin guidance. Going back to mid-teens kind of margin will not happen in 1 quarter. There is operating leverage, which will also start coming in from the September quarter itself because of the kind of demand that we are seeing. And there are various steps being taken, whether on the cost side, whether on the mix side, which will start pushing up the margins.
Second thing, like what's the progress of Andhra Phase 2 as such?
Andhra Phase 2 is already being installed. The machineries were all ordered. They are now coming in. That's the large part of the FY '22 CapEx. So more or less, the Phase 2, which is taking up the PCR capacity to [ 15,000 ] tires per day and TBR to 3,000 tires per day. All of the CapEx would get incurred in FY '22, and there would be a very small part in FY '23. And much of that capacity would be available from FY '23.
So 3,000 tires per day is similar to what TPG for TBR, including Phase 2 overall?
So 3,000 TBR is about 190 tonnes per day.
So that is the incremental from Phase 2.
No, the Phase 1 is about 160 odd and a similar number would get added on to Phase 2. So in Andhra 320, 330 tonnes per day.
And Chennai was roughly 550?
Chennai today is close to 900 tonnes per day.
Oh, sorry, 900. So total will be 1,200 plus.
That's in excess of 1,200, yes.
And the last question, if I missed out, including maintenance and projects and everything, Europe, India, what's the consol CapEx for this year as of now you were saying?
So for this year, INR 1,800 crores CapEx in India and about INR 200 crores CapEx in Europe. So INR 2,000 crores.
So it includes everything.
Includes everything.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Well, I'd like to thank everyone who has participated today. Hopefully, we have been able to answer all your questions. And if you do have any more questions, please feel free to write into the IR team, and we'll get back to you. Thank you so much, really appreciate. Stay safe. All the very best.
Thank you.
Thank you.
Thank you. On behalf of JM Financial, that concludes this conference. Thank you for joining us, and you may disconnect your lines now.