Apollo Tyres Ltd
BSE:500877
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Apollo Tyres Ltd
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So good evening, everyone. My name is Ronak Mehta. I welcome you all on behalf of JM Financial to this 1Q FY '20 earnings call of Apollo Tyres Limited. We have with us today Mr. Neeraj Kanwar, Managing Director and Vice Chairman of Apollo Tyres; and we also have Mr. Gaurav Kumar, Chief Financial Officer; and the IR team. So as we do always, we will start the call with a brief opening remarks from the management and followed by Q&A session. So with that, Neeraj, over to you. Thank you.
Thank you. Good afternoon, everyone. A very warm welcome to the Apollo Tyres Quarter 1 earnings call. At the onset, let me thank all our stakeholders for helping us support another healthy quarter.
Over the last few years, the team has worked hard, and the results of all that hard work is getting visible now. Helped by work around key pillars, today our business model is far more resilient, diversified and future-ready than it had ever been. As I highlighted in the last quarter, the term to describe current quarter's performance would be resilience.
Despite adverse environment, we reported a sequential improvement in margins in the current quarter, while maintaining a healthy growth rate, highlighting our strong focus on profitable growth. The quarter was once again impacted by increase in RM prices. However, we were able to recover the same in India, thereby helping us report sequential improvement in operating margins.
In Europe, also despite strong headwinds in form of higher cost [indiscernible] , we were able to report healthy double-digit operating margins. We remain committed to reach our intended margin range and the same is future highlighted by continued sequential improvement in margins over last couple of quarters.
I will now focus on key pillars of our FY '26 vision and highlight some of the work done by the teams. Starting with R&D. We are working on new age technologies like RFID and home technology to support the upcoming automotive trends. We are also focusing a lot on electric vehicles and have recently launched a new range of tires for electric 2-wheelers and passenger vehicles in India.
Made with leveraging new age technology, advanced polymers, the tires help electric vehicles achieve better performance. We are working closely with key OEMs across geographies to support their EV journey and emerge as a preferred partner for electric vehicle tires means.
Moving to digitalization. We are leveraging new age digital tools to future optimize supply chain and use it to differentiate Apollo tires in the marketplace. We're also using digitalization, customer activities and using apps to deliver superior customer service which would allow us to collect valuable customer data, which would in turn become base for future improvements and enhancements.
As I highlighted in my last quarter interaction with you all, we are starting to extensively use IoT, machine learning and artificial intelligence to drive efficiency gains in our plants. Finally, we are also using cloud technologies to transform our business as we've come future ready.
Another key area of focus is sustainability. We are committed to a target of 25% renewable energy by '26. This is a testimony to the efforts and initiatives in the domain of accelerating renewable energy use. Furthermore, we are working on developing a decarbonization road map for the organization.
During the quarter, we completed our first external assurance of the company-wide water footprint by an independent third party. The results showed 38% use of recycled or reused water in the operations against total water withdrawn. As highlighted in my last call, business teams are working closely with R&D, suppliers and other stakeholders to increase usage of sustainable raw materials.
Talking about brands. We continue to invest in brands across our key geographies. We start with -- in India, during the quarter, we launched VIRAT, our latest offering in the farm segment in India. The launch attracted 1.8 million views across social media. During the quarter, we leveraged platforms to engage with relevant consumers. We also maximized engagement with interested audience using social media platforms.
On the OEM side, we gained fitment on 3 models of Mahindra: Maruti Suzuki, Toyota, VW and Škoda. These wins not only highlight our superior R&D and manufacturing capabilities but could also help us further in premiumizing in India.
Moving to Europe. We continue to register improvements in Google Trend Index indicating effectiveness of our digital and social media outreach programs. In addition, we also associated with events like [ Milliminia ] in 2022 and Paris 20 Kilomètres. Events like these will help us further engage with influencers and protection of customers.
Finally, last pillar of our strategy is people. To drive professional growth and career advancement, we are focusing on micro learning, and we now have month-wise team calendars. As an organization, we are committed to diversity and inclusion and have launched a variety of learning programs for the same. Going forward, we are extremely bullish about long-term prospects of industry and Apollo Tyres in particular.
I believe we have a huge opportunity in front of us, and we are -- at Apollo Tyres are making every possible effort to leverage the same. In terms of near-term outlook, we're cautiously optimistic. We're keeping a very close eye on the markets and our costs. We'll continue to be judicious about CapEx, and we'll continue to focus on profitable growth and our free cash flows generation.
However, we will also be cognizant of long-term needs of our business and will undertake all efforts and costs, which will help us make our business more efficient and future ready. With this, thank you once again. I conclude my opening remarks and pass it on to Gaurav. Thank you. Gaurav, over to you.
Thank you, Neeraj, and good afternoon, ladies and gentlemen. In India, the demand during the quarter was somewhat impacted by inflation and steep price increases. However, despite the adverse environment, we reported volume growth year-on-year and even on sequential quarter basis. More importantly, we were able to pass on increase in commodity costs during the quarter, which helped us largely offset the impact of increase in raw material costs.
This, along with control over other costs, helped us report a small sequential improvement in margins despite a difficult operating environment. We took up to 8% price increase across categories in the replacement segment in Q1. And are taking further pricing actions in the current quarter as well.
The Europe operations reported another healthy quarter with revenue increase upwards of 30% and a healthy double-digit EBITDA margins. The operations took well-timed price increases of up to 10%, and the control over costs, together with that helped us largely negate the impact of higher raw material and energy costs.
In terms of outlook, we expect the demand in India to remain sluggish in near term, also impacted by seasonality. Monsoons always impact the Q2 demand and the prevailing inflation. We expect the demand momentum to remain healthy in Europe. We are cognizant of recession risks in Europe and are keeping a close tab on the markets as we move ahead.
In terms of operating performance, the margins are expected to remain under pressure in near term. However, we will continue to take well-timed price increases and maintain control over costs and CapEx.
Moving on to financial results. The consolidated revenue for the quarter stood at INR 59.4 billion, a growth of 30% over the same quarter last year and a 7% growth on a sequential basis. The consolidated EBITDA for the quarter stood at INR 6.9 billion, a margin of 11.6% compared to 12.4% for the same period last year but an improvement over 11.2%, which was the margin in the last quarter.
The raw material costs and the increases in that continue to weigh on the margins. Coming on to the balance sheet. We've been able to maintain our leverage ratios given the focus on cash flows. The net debt-to-EBITDA for the consolidated operations was at 1.9x. For India operations, the revenue for the quarter was at INR 44.4 billion, a very healthy growth of 38% over the same quarter last year and 11% on a sequential basis.
This was led by volume growth in excess of 20%. The EBITDA for the quarter stood at INR 4.3 billion, a margin of 9.7% as compared to 9.4% for the previous quarter. Currently, out of all these segments, the CV segment continues to be a laggard on a sequential basis.
Moving on to European operations. The revenue for the quarter was EUR 151 million, up 32% compared to the same period last year. We continue to make inroads into the market and grow. We have had market share gains across product segments, and we continue to focus on mix improvement.
The EBITDA for the quarter was EUR 22 million, a margin of 14.4%, lower than the 16.3% for the same period last year. Essentially, the impact of raw material and energy cost inflation in spite of the price increases stay. With this, I will conclude my opening comments. We would be happy to take your questions.
[Operator Instructions] We have first question from the line of Siddhartha Bera.
Congrats on a good set of results. Sir, my first question is on the replacement demand. First, if you can help us in the quarter, how much has been the volume growth across segments and on overall basis for the India business?
And second, on the outlook side, you said that it is likely [indiscernible] because of seasonality. So that would also be in the base. So if I look at the growth on a Y-o-Y basis for the second half of the year, should we still expect a single-digit on the replacement side? Yes, that would be the first 2 questions.
Gaurav, will you answer the Q1 volumes?
Sure. Siddhartha, overall, as I mentioned, the volumes grew 21%. For the replacement segment that you asked, the volume growth was 13%.
The outlook. Gaurav, outlook?
And on the outlook, Siddhartha, year-on-year, we would still have growth, but probably given the seasonality impact and the fact that we see some degree of slowdown in the CV segment, particularly on the OE side, we may have some decline in revenue from the current quarter.
Got it. And can you also break down the growth for the quarter for the TBR, TBB and TV segments as well?
So broadly, the 2 big growth segments, passenger car volumes were up 35% overall. Similarly, TBR growth was nearly 30%. Those were the 2 big growth drivers for the volume growth.
Got it. And sir, lastly, on the export side, we continue to see a very good traction even on a quarter-on-quarter basis with revenues going up and the revenue share also going up. Any sort of guidance or target, if you can help us understand how to think about export growth in the next couple of years?
Siddhartha, the export growth will continue to be driven even in this current quarter in terms of volumes, they were the leader in terms of volume growth. How much further, there is no internal target saying that exports should be a certain percentage of the overall mix.
It's an optimizing decision that is taken across geographies, across product categories, and it's something that is looked at on a monthly, quarterly basis. And it would be driven by demand and profitability decisions across the globe.
We have Mr. Nishit Jalan as next.
Can you hear me?
Yes, we can.
Yes. So my first question is on Europe. There are significant increases on the cost side on the power and fuel. I think in one of the quarters you did mention that you would do some hedging from a near-term perspective. So just wanted to understand, has all the cost increases are already reflected in the P&L, or we had seen some beliefs so far because of hedges? And how do we expect these cost increases to behave going ahead? That will be my first question.
And second question is on India business. How do you see cost increases going ahead on the RM side given that in crude derivatives, we may see a lag of [ 1 to 2 ] quarter? And what kind of price hikes you have taken for that? And thirdly, on the capacity utilization, I just wanted to understand, especially the 2 big segments, TBR and PCR, in India and in Europe, where are we in terms of capacity utilization in this quarter or for the full year, whatever numbers you have in front of you.
Gaurav, speak about the hedging of power.
So Nishit, we took timely action on the [indiscernible] power cost. And we have hedged about 80% of our requirements for FY '23. So largely, for the balance 20%, that inflation is baked in whether it could go up further or not is anybody's guess. But broadly, we are largely covered for FY '23 with a very high quantity of hedge. And your second question -- sorry.
Oh I said okay.
Then your other question was around capacity utilization in India, both for PCR, TBR was around 85% in Q1 in India. And in Europe, the capacity utilization was close to 90%. You had one more question relating to raw material. We still expect a small increase in the raw material cost in Q2 over Q1, low single digit. But the expectation is that the raw material basket should be peaking out in the next quarter and then flattening out and slowly starting to reduce.
Just one follow-up. Since in India, we are already at 85% utilization. And in Europe, we are at above 90%. So how do we look at capacity expansion from here on because -- correct me if I'm wrong, sustaining a 90% -- more than 90% utilization level for a longer period of time could not -- is not something that is sustainable.
So are we looking at a brownfield kind of a capacity expansion either in India or in Europe. If not now, then in FY '24, definitely, we'll have to look at it because growth is pretty strong. That's how we look at it.
Yes. So we are looking at how we can optimize already the CapEx that is put in. In my opening remarks, I spoke about digitalization, where we are doing a lot of artificial intelligence and machine learning. With that, we believe that we'll be able to get 10% to 15% increase in productivity. That will look after the growth in India and in Europe. We're still in a planning phase, whether it is FY '24 or '25, we don't know because the markets are very volatile. Right now, we're going to go CapEx light and only look at debottlenecking of all our parts.
Neeraj -- yes, you answered if I missed one number, my line was a little back. What was the percentage of increase in productivity that you talked about? I think you...
Yes, we are looking at 10% to 15% through machine learning and artificial intelligence.
We have next question from Mr. Amyn Pirani.
Can you hear me?
Yes, Amyn.
First of all, it's very encouraging to see that price hikes and that to proactive price hikes have become a consistent part of the action as well as the commentary, which is different from how the industry used to be in the past.
My question is on the replacement demand, both in India and Europe. So starting with Europe. Obviously, there are concerns around inflation and possible recession. But generally, replacement demand historically has been pretty stable, but we're not seeing this kind of inflation also in that geography for more than a decade.
So what is the sense that you're getting on the replacement demand? Can it continue to be stable? Or is there a concern arising because of the price hikes and general inflation that we are seeing in those geographies, especially in Germany, which I think is your biggest market within Europe as well.
Gaurav, I'll answer this one. So there is a respite also with the Ukraine war, while inflation is there. There were close to 8 million to 10 million passenger car tires coming in from Russia into main Central Europe. That because of the war has stopped coming in from Russia. So that opens up a huge opportunity.
Also Vredestein in Europe is a premium brand, and the premium segment is doing good. So if you've seen, we will continue to have growth. So there is 2-sided of the point where one is inflation, yes, I totally agree. But then there is a growth opportunity also. Also in TBR, if you see, we are increasing our growth, our sales. We've just started 18 months ago. So we are now close to 30,000, 35,000 tires per month. So we are getting good traction even on truck/bus radial in Europe.
Okay. Great. That's good to know. And on the India side, obviously, right now, we are in a seasonally weak quarter for CVs, but in general, are you seeing an uptick in replacement demand going forward because we've seen a very sharp recovery in OEM already.
And even if OEM sustains at this level, I mean, ideally, we should start to see some uptick in replacement also if the activity level on the ground continues to be strong. So what is the sense that you're getting on the replacement demand, not just for this quarter but over the next, say, 2 to 3 quarters?
Well definitely, CV cycle is at a low, but we believe that this quarter, it is going to be low. But going forward, with the infrastructure funds that have come in and the growth that's taking place in India, I'm pretty optimistic that CV is going to come back in a big way. We are already seeing some traction coming in September, October with the OE orders coming up.
And what would be your TBB and TBR ratio right now?
Gaurav?
Just a minute, Amyn. So for us, I mean now it's almost 2/3 TBR, 1/3 TBB.
We have the next question from [ Nidhi ].
Just help me to -- or correct me if my understanding is wrong. So if the replacement demand is every 4, 5 years, so the peak quarter volumes were in 2019. And from '20, the demand started to take a [ load ] on. So if my 2020 volumes will give me replacement cycle into FY '24 or '25, let's say, don't you think that our replacement volumes will have a degrowth on a Y-o-Y basis, we'll start to have a degrowth?
Gaurav, you want to answer?
Maybe broadly, yes, the car tires are replaced in 3 to 4 years. But that correlation that we have seen, and if you run it across years is not that strong. There is a whole bit of other demand cycles that come through. These are significant factor, but with e-commerce, with the kind of mobility of shared vehicles, et cetera, that is going along, the replacement cycles for passenger vehicles put very significantly.
And it's been a fairly steady sector. Very rarely have we seen a drop in replacement demand in the passenger car segment across the years. So do we expect a reversing of the demand growth? No. Maybe there could be slight slowdown, et cetera, but not a reversing.
Okay. Okay. So with this, then we can assume that in this year and next year, our replacement demand should give us a decent amount of volume growth, which at least for Q1 FY '23 run rate? Is that fair to assume?
It will be the kind of growth that we've had in Q1. Even for our full year, we had mentioned that we expect our growth to be about close to 20%. So we expect the demand momentum to continue.
And I believe, [ Nidhi ] , that with the government spends on infrastructure, CV cycle is bound to go up. And Apollo is already do as leaders in the CV market and already to go as soon as the market [indiscernible] .
Thank you. So Gaurav, I think it's about time it was the last question for the day. So I would like to thank all the participants and the management of Apollo Tyres -- so we have questions -- we have a follow-up question from Siddhartha.
Yes, yes. Sir, can you sort of highlight basically some -- in the quarter, if I look at depreciation cost and all, they have also actually come off slightly from the last quarter. So should we consider this as a normalized rate? Or do you think there is -- there are somethings one-off in the quarter?
So this could be considered as a normalized rate, Siddhartha.
Okay. Okay. And can you highlight what was the amount of price increases we have taken in the current quarter?
Sure. So in the current quarter, our TBR price increase was up to 8%, whereas on some of the other categories, it was 3% to 4% in India. In Europe, we took a price increase in passenger car segment of up to 9%.
Okay. Okay. So despite such a high price increase in Europe, you don't expect any meaningful impact on the demand or the volumes side given the issues you highlighted from supplies from [indiscernible] ?
No. The demand continues to be strong to even connect up with an earlier question, the market itself in Europe on passenger car grew by about 5% which is higher than what is usual for a mature market. So right now, given all that is happening, we are watching the market carefully. But as of now, all indications are for a very strong demand.
Got it. And sir, last question on the network side. So we have seen that it has gone up slightly in the [ month ], although the cost has remained stable. So can you just throw some color why was it? Was it because of high working capital requirement or because of higher tickets?
It was largely working capital as the demand went towards fluctuations, our inventory slightly went up, which resulted in working capital borrowings in India. And also in Europe, traditionally, seasonally, this is a quarter when we stock up on the winter tires. And then the winter tire sales happen from August to November. So in Europe, it's a very usual seasonal phenomenon. And in India, there was because of demand fluctuations, a little upping of the working capital from vis-a-vis normal levels.
Got it. So this will normalize probably going ahead in the coming quarters.
That's correct, Siddhartha.
And CapEx spend will be how much in the quarter?
CapEx spend in the current quarter in India would be about INR 125 crores.
So we have next question from Sandeep Sagarwal.
Yes. So from the historical trend there that continues to be very heavy on capital expenditure, I think you have said that you are going to go slow on capital expansion focus on brownfield, et cetera. So are there any targets of total debt on the balance sheet, which you have over the next 2, 3 years, how do you see that reducing?
So something rather than debt, as we've stated in our vision and Neeraj has mentioned a number of times, we intend to keep our net debt to EBITDA below 2. And that is what is the driving factor because there would be some amount of CapEx needed. And in the last 2 years, we've been keeping a watch on that, given the uncertain times. I don't have a number of an absolute debt amount, but our intention would be to keep our net debt to EBITDA below 2 [ months ].
So alternatively, is there any CapEx guidance you have for this year and next year?
For the current year, for India, the CapEx was slightly below INR 900 crores. And in Europe was about EUR 40 million, if I remember correctly. As mentioned earlier by Neeraj, we have not firmed up our CapEx for the future years. We are taking a fairly cautious approach and we'll take that decision as we go along in the year.
And lastly, despite the substantial price increases that you mentioned, 8% in domestic markets, 4%, et cetera, in Europe. Why do you think that your margins will still be under pressure going forward?
The current margins, and while there are some deeper sequential improvement from the last quarter, they are still not margins which are in line with our long-term guidance or ambitions. We definitely need to improve our margins further. As I mentioned, the next quarter will again see an increase in raw material prices, though it's beginning to taper down. So in near term, that's why I mentioned that the pressure will continue.
So essentially, the pressure which you're saying is relative to what your targets long term are around reaching around 15% margins, not in the context of margins actually coming under pressure from where they were right now.
That's correct.
So we have next question from Jinesh.
Am I audible?
Yes, Jinesh.
So just to clarify this on the price side, what you talked about 8% in TBR and 3% to 4% in other categories as for first quarter, right, not for the current quarter, second quarter?
That's for the first quarter.
And any indication on what kind of price increases being -- took in 2Q so far?
We announced another price increase in July. I think the quantum was again around a 3% mark. So I don't have the exact numbers Jinesh.
Okay. 3% across categories. Got it. And in the 1Q, in terms of RM cost inflation was in line at what you had already guided for 3% to 4%? Or was it higher than that?
No, The RM inflation was higher than that. It was actually around 7% to 8%.
Okay. Okay. So that is the reason margins are under pressure. Got it. And when you look at our capacity expansion scope from where we are today. So as Mr. Kanwar talk about productivity led improvement of 10% to 15%. Is there also scope of brownfield at our existing locations in India?
Like I said, right now, there's nothing that we are planning. First is to see how we can really sweat our assets, bring our ROCE to our -- what guidance we've been giving you above 12%. And then we will see any brownfield. Right now, there is nothing in the plans.
Sure, sure. I understand, I mean we are not focused on brownfield. But my question was, I mean, can we do a brownfield if required?
Yes, yes, definitely. We can do a brownfield when required in Andhra and in Hungary also. There is excess land if that's what you're asking. There is excess land and infrastructure, which has been created to take on brownfields -- so the incremental CapEx for a brownfield will be much lesser than the initial greenfield.
Yes, exactly. And when we say 85% utilization in India. So this is based on the ramp-up of -- where we are at [ Appland ], There'll be further addition, smaller additions at [ Appland ] as well right?
Yes.
Got it. Lastly, Gaurav can you share the revenues and EBITDA of [indiscernible] ?
Sure. So [indiscernible] did INR 48 million in revenues with an EBITDA of 5%.
We have the next question from Ashutosh.
So firstly, on this price increase, I remember that we have taken price increase in the June month, around 4%. So that will not fully factor in this quarter. So that should also get into this quarter increase and then also we had announced 3% [indiscernible] in this month. [indiscernible] So will [indiscernible] 5% to 6% increase in the pricing in this quarter versus Q1?
Broadly, yes, Ashutosh. I don't remember the exact timing in Q1, but we took 2 price increases in Q1.
Because I remember that we had mentioned a plan in June that we've taken from this month it effectively from, I think, second half of June. So that's one. And in increase in this, like, say, [indiscernible] side, will there be 2%, 3% or like a 4% , 5% cost increase? So I'm asking that in this Q2 in RM cost, will there be like 2%, 3% maybe like say, 4%, 5% increase in RM cost on a quarter-on-quarter basis.
The line was quite bad. I got some last part of the question, which is RM increase, but before that, I couldn't ...
No, I'm asking that RM increase, will there be like say 2%, 3% increase quarter-on-quarter or more like 5% increase in the second quarter.
We are expecting about a 3% increase in RM.
And lastly, on the TBB side, was there a decline in this quarter volumes versus last year?
TBB?
Yes.
Yes. No. We still had a growth vis-a-vis last year.
We have the next question from [ Veraj Shah ]. So we have the next question from Mr. Mayur Malik.
So since you mentioned that capacity utilizations are almost 85% in India and about 90% in Europe. So does it mean that even with the 10%, 15% internal inefficiencies really coming into play, you're looking at overall top line of about INR 255 billion, INR 260 billion in a year's time?
On the current capacity?
Yes.
I was not sure about the inefficiencies that you mentioned, but from the current capacities, yes, we have spoke to further go up in revenues to the extent of 15%. I didn't get your point about inefficiencies?
No, no. When I said inefficiency I'm trying to say that since Neeraj mentioned that there's a scope of 10% to 15% improvement from what we're doing now from the current bottlenecks. And we intend to make sure that before doing the next turn of CapEx, we can first spec the current assets.
So I'm saying the whole potential of striking the current asset would take us to a revenue of about INR 255 billion, INR 260 billion?
Yes, Yes. It will [indiscernible] balance sheet.
Yes. So just to clarify, Mayur, that inefficiency. It is -- we are now learning through IoT and through AI and machine learning, how we can improve the equipment that we put in and increase our productivity. So many speeds of equipments will go up and you can get more production out of them. That's what we are doing now.
All right. So just to understand, looking at the industry at this point, even if the industry were to grow at a 8% to 10% kind of CAGR, you will right be there and fully sweating out your [indiscernible] set. So why are we not really looking at the next round of CapEx when we know that, that kind of number can really come up?
No. Right now, our focus is on improving our earnings, and specifically in ROCE. So we believe, first, we have had a very intensive capital CapEx in the past 10 years. So right now, we just are in a phase of consolidating internally and trying to push all the plants to produce more. And then we will come up with a next CapEx cycle.
All right. But so your current ROCE are in the range [indiscernible]
Our current -- your line is bad. But our current ROCE is sub 10%...
[indiscernible] kind of month. [Audio Gap]
Your line is bad.
Am I audible now?
Yes.
I was asking that our current number is anywhere between 7% and 8% on the ROCE. So you expect that with full sweating, we could actually touch 12% or you think it is a 2-year, 3-year target that we're trying to say when we say 12% ROCE?
That's our target that we've taken to go beyond 12%.
It will also need, Mayur, a little bit of improvement from the current industry dynamics of raw material prices where they are at. And we need to improve our margins. So there is sweating of assets and there is also a fundamental improvement of margins along with mix improvement that we need to do.
All right. So [ same ] I missed the year CapEx that you guided for. So you're saying that for this year, Q1, we spent about INR 125 crores. And for FY '23, what are your total CapEx that we're looking at combined India and Europe?
Combined India and Europe would be about somewhere between INR 1,100 crores to INR 1,200 crores.
So Gaurav, I think it's about time, and I think that was the last question. So I would like to thank all the participants and the management of Apollo Tyres for giving this opportunity and wish you all a great evening. Thanks a lot. Take care. Bye.
Thank you.
Thank you everyone, for joining.