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Apollo Tyres Ltd
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Hi. Good afternoon, everyone. On behalf of Equirus Securities, I welcome you all on the second quarter FY '21 earnings conference call of Apollo Tyres. From the management side, we have Mr. Neeraj Kanwar, Vice Chairman and Managing Director; Mr. Gaurav Kumar, Chief Financial Officer; and members of the IR team.We will have a brief opening remarks from the management side, followed by a question-and-answer session. Without further ado, I would hand over the call to Mr. Neeraj Kanwar for opening remarks. Over to you, sir.
Thank you, Ashutosh. Good evening, everyone, and a very warm welcome to Apollo Tyres' Quarter 2 Earnings Call. First of all, best wishes for you and your family's health and safety as we live in these challenging and unprecedent times. I would also like to take this opportunity to thank our employees, our dealers, our suppliers and all our stakeholders for their continued support. Coming now to quarter 2 results. The demand recovery has continued to be extremely positive. We have reported growth in India, and we're also able to maintain a flattish top line in our European operations, despite COVID-19 challenges. We also reported significant improvement in operating results on the back of increase in volumes in both replacement and the OE markets. Secondly, on reduced raw material cost; third, reduction in overall fixed costs; and lastly, reduction in overall manufacturing costs. During the last 6 months, we have consistently engaged with all our stakeholders, which has further helped in strengthening our relationship and our commitment. We, at Apollo Tyres, are committed and focused on converting the current crisis into an opportunity and emerge from COVID-19 as a company with more efficient and resilient business models. I'll take this opportunity to highlight a few initiatives undertaken by the teams to achieve the objectives I've just mentioned. There is an increased focus on digitization and on online collaboration, which would not only help us prepare for future but also help us in bringing down cost on a long-term sustainable basis. Similarly, we are also keeping very close stack on all the expenses with consistent efforts to bring down the cost across departments regions. Supply chain costs have been reduced through network redesign, thereby reducing inventories of both raw materials and finished goods to new benchmark norms, which has resulted in optimization of working capital and achieving positive free cash flows in both of our regions. As a result of some of these initiatives, we have reduced our fixed cost by a minimum 15% in H1 of FY '21. While some of these costs will come back as we re-ramp the activity levels, we expect to retain significant part of the benefit on a steady-state basis. While we are taking a close look at all the costs, we continue to focus and invest in our key fundamentals of our business, i.e., research and development, brand enhancing network distribution and enriching our product mix. Coming to regional performance. Firstly, in India, we are today clearly the #1 radial tire player in India. Despite COVID-19, we have gained new customers like Kia Motors and added more than 350 dealers in the first half of FY 2021. We are focusing on expanding our distribution footprint in our rural segment and have already tripled our touch points in first 6 months of this year. Held by all these initiatives in the first 5 months of FY '21, we have gained about 500 basis points in market share in passenger car radials and agri segment, and more than 350 basis points in our market share in our truck and bus segment, and this is as per our internal estimates. We have reported our best-ever volumes in truck bus replacement and our passenger car radial segment in September 2020, and I'm delighted to share that even in October, we are seeing a very strong demand momentum and expect the top line growth to continue in near to medium term. Finally, the recent government action to put tires on the restricted list has also been beneficial for the industry. And we believe policies, actions like these would go a long way in making automotive industry in India, Atmanirbhar. Similarly, in Europe, we have added more than 200 dealers in this year. We continue to focus on building blocks in Europe through adding new networks in various countries and introducing new products that have achieved podium position in some of the test magazines in Germany. Also, despite subdued sentiments, we have gained 12 basis points market share in our ultra-high performance and new UHP passenger car segments in Europe. We've also gained 23 basis points in our market share in TBR, which is truck bus radial segment and 25 basis market share in our farm products. The work with respect to specialization of our Dutch plant is on course. And we expect to see significant gains from this exercise from FY '22 onwards in terms of cost competitiveness. I'm happy to report that despite COVID-19, prices in the last few months, we have been able to significantly strengthen our balance sheet, both in terms of solvency and liquidity. Our net debt decreased from -- decreased to INR 46 billion from INR 60 billion in March 2020. The net debt-to-EBITDA for the consolidated operations came down from 3.2x to 2.4x. We're also very comfortable on the liquidity position, given the team's excellent effort in both sales, collection, our inventory management and the borrowings that we have done in the last few months, including the equity raise from one of the best known and marquee private equity investors. We are towards the end of our current CapEx cycle. Going forward, the focus would be on sweating the assets and deleveraging the balance sheet. We expect the CapEx intensity to come down in the next few years, which, coupled with recovery in demand, should help us generate positive free cash flows and further deleverage our balance sheet. We are cognizant of the fact that CapEx in the last few years and current demand softness have impacted our return ratios. We are focused on getting the return ratios back to a very healthy level and expect this to happen over the next few years. Finally, in terms of the outlook, while we have limited ability to forecast given the uncertainty around COVID-19, I want to really highlight 2 things: Firstly, we continue to see a healthy demand momentum on the ground; and secondly, given all the investments in capacity, in our R&D, in our brand building, in our distribution, specifically in the rural market in India with extremely well placed to leverage demand recovery as and when it happens. With this, I will conclude my opening remarks and I'd like to hand it over to Gaurav. Please stay safe. God bless. Thank you. Gaurav, over to you.
Thank you, Neeraj, and good evening, ladies and gentlemen. While we are seeing the healthy demand momentum, we remain cognizant of the risks in the current times and continue to prioritize safety of all our employees and stakeholders. We have taken all necessary measures to ensure the safety of the team even as we ramp up the activity levels in our plants and other locations. Moving on to the financial results. The consolidated net sales for the quarter stood at INR 42 billion, a growth of 8% over same quarter last year and 50% on a sequential basis. Both the operations are performing at much higher levels than what was estimated at the beginning of the year and in light of the tough environment. The Indian operations, in fact, registered a healthy growth on a year-on-year basis, which is above the pre-COVID levels. The top line in Europe was at same level as last year in the same quarter. The consolidated EBITDA for the quarter stood at INR 6.9 billion, a healthy margin above 16% compared to a 10.8% margin in the same period last year and almost double of the margin in the preceding quarter. This was helped by the operating leverage by a significant recovery in top line, the subdued raw material costs, and as Neeraj mentioned, control over fixed costs. The balance sheet continues to be strengthened further with healthy profit, cost control measures and the fundraise. The net debt continues to come down. Neeraj mentioned the INR 60 billion as of March, which had already reduced to INR 52 billion as of June and further reduced to INR 46 billion. Moving on to India operations. The sales for the quarter was INR 29 billion, as mentioned, a growth of 5% over the same period last year, and a significant 66% growth on a sequential basis. The top line for the quarter was driven by volume growth in the replacement segment. But also, we saw the recovery in OEM demand towards end of the quarter. And in the month of September, the sales for this year was higher than the month of September last year. Almost all product categories posted a double-digit growth on a year-on-year basis in the replacement segment. And even in OEM, as I mentioned, we saw growth in September 2020. Our internal estimates indicate that we have had market share gains across product categories. For the Indian operations, the EBITDA for the quarter stood at INR 5.5 billion, a margin just under 19% as compared to 11.7% for the same period last year and below 11% in the preceding quarter. The net debt even in Indian operations continues to decrease with a net debt-to-EBITDA in Indian operations at 2.6x. Looking ahead, we expect the demand momentum to remain strong, both in replacement and the OEM segment. Given this, we are making sure that while we remain within the guidelines, our plants are able to produce enough tires and supply chain is able to deliver the tires across the country to serve the various customers. Moving on to the European operations. The sales for the quarter were EUR 129 million at similar levels as the same period last year, but a 43% growth on a sequential basis. While the business was impacted by COVID-19, we have gained market share in the key segments of the higher-end passenger car tires, UHP and new UHP and TBR. The EBITDA for the quarter stood at EUR 12 million, a margin of 9% as compared to 6.7%. And for the margin recovery, again, is supported by the top line recovery, lower raw material cost and cost containment measures. Even in Europe, we were able to attain significant improvements in terms of collections, reduction in inventories, resulting in a very healthy liquidity situation. We've made significant progress on our intended specialization of the Dutch operations. The broad and by the last quarter of this year, we would see 500 people reduction from the levels that we had at the beginning of the year. As mentioned earlier, in numerous interactions, this would go a long way in improving the cost competitiveness of the European operations and showing a path to recovering the profitability levels. Europe is facing a second wave of COVID and hence faces a certain uncertainty. Our wallet order continues to be strong, and we expect the operations to continue to post recovery to healthy levels. Thank you. We would be happy to take your questions now.
[Operator Instructions]. First, we have Raghunandhan.
The first question was to Mr. Kanwar. Sir, over FY '05 to FY '15, company had a very strong ROE of 20%. So this has come down to single digits. How do you see a trajectory or ROE to recover back to those 20% levels? Would you expect it to be led by better margins, controlled CapEx? Your directional thoughts will be very helpful.
Okay. Thank you, Raghu, for your question. Yes, you are very valid in between '10 and 2015, the ROCE levels of the company were very healthy. They were at double digit. Investments have been made ever since both, as you know, in Hungary and recently in our Andhra plant. Now as I mentioned, the CapEx cycle, the intensity of the CapEx cycle is over. Now really, the focus of the company, which I've been telling to the team has been to try and sweat the assets and run the plants at above 90% to 95% utilization. Already, if we were to annualize quarter 2 for the year, India's ROE should be at around 11% to 12%. And if we were to take out the new green field, then this would be even much higher. So there is the entire focus in the company to try and see the intensity of the CapEx comes down, which we've already seen in H1, where CapEx is down to only INR 600 crores. And we believe going forward in the next 2 to 3 years, given what we are doing in all the plants, we're trying to spread the assets and try and see that we get ROCE levels to double digits as soon as possible. So really, the main focus of the entire organization is to see at one level we sweat the assets. And at second level, we keep on keeping our price leadership in the marketplace.
That is helpful. And all the best, just my second and last question before I fall back to the queue. Can you also speak on the near-term focus areas in terms of supply chain redesign, which you alluded to in your inventory and other cost reduction efforts? And what are your expectation on sustainability of base benefits on the margins?
One minute. Let me just write it down. Fixed cost you mentioned, and supply chain. Okay. So the redesign of supply chain really is twofold. One is really when we went into COVID, we saw digitization becoming a priority for our organization. Recently, we've just hired a new senior person at a chief level reporting to me in the U.K. He comes as a CDO, as a Chief Digital Officer. He comes with a vast experience of 20 to 25 years in courts internationally, who has digitized the whole process in courts. He's just joined us a month ago. Already what we are looking at is in the first half, in India, we have already redesigned our supply chain, i.e., looked at redispatch centers across India, try to close some of the RDCs in India and try to move goods direct to the dealer shops, direct to our district offices, and we've seen a huge cost reduction of supply chain over there. Now what's going to happen is it has to sit on a digital app, which will really move goods from point A to point B, and that is what the innovation that supply chain today currently is trying to do.The second thing you discuss about fixed costs. So fixed costs in the first half, we have seen, as I mentioned, are down by 15%. Some of them are sustainable, but some of them, obviously, when we run at 100% capacity, they will kick in. But ideas like rental agreements have been renegotiated and rental prices have come down. E&P spends have come down. We have renegotiated some of our contracts in various E&P suppliers where Apollo has been advertising. So these are some of the costs that are going to be staying. Obviously, travel is a big cost, which given COVID, there are travel restrictions. So I don't know when that will open up. The other cost that we have really saved on is, and seen the benefit of our reach is, through digital launches of our new products. In India, we've had digital launches of our new products in MCR and motorcycle radios, in SUV tires, where we've been able to get many more customers as against having a physical launch. And in physical launch, we were -- you could get a population of only 300 to 400 customers, whereas we've seen in a digital launch, we've gone as high as 3,000 to 4,000 customers. So the outreach to the customers is far more advantage and far more beneficial to the company. Similarly, we've done digital launches in Europe and in the U.S. In fact, just to give you an example, the U.S. budget for a launch, pre-COVID was around $700,000. With COVID coming in and doing a digital launch, we only spend over $120,000. So you can see the benefit that we've had through this digital launches in the company. And these are costs that have really saved and are sustainable in the future because now one has lived with the digital launches, and we see a lot of benefits and advantages and therefore, I'd say these are there to stay in long term also. Ashutosh, over to you.
Basudeb, please go ahead.
Congrats, sir and Gaurav for a great set of results in this environment. A few questions to start with, in India operations, one can see bulk of the EBITDA margin improvement being through the gross margin route. Definitely RM market would have been favorable. So just wanted to know a couple of things. One is how much has been the SKUs for replacement mix this quarter? As you said that OEM shot up only in September. So overall for the quarter, how much was the replacement mix shift compared to general levels? And second thing is if you can see the typical commodity prices, as you say, every quarter.
Yes, I'll try and answer, and then I'll ask Gaurav to come in with the exact numbers. Like I mentioned in my opening remarks, quarter 2 has -- in terms of volume in India has been very -- extremely record-breaking in each and every product category for Apollo. So truck bus tires, both buyers and radial have hit high numbers, highest ever in Apollo in the replacement market. So has passenger car radials, just to give you an estimate, we are -- like I mentioned, according to our estimates, we gained 500 basis points of market share, clearly becoming the leaders in the replacement market in passenger car radial. We also launched MCR in this quarter, which is motorcycle radial, which is again showing very, very positive signs in the marketplace and is a highly profitable business of about 25% margins. Then we also launched our light truck radial tires in the market. Again, huge demand coming for those with, again, a very healthy EBITDA margin. So the mix, according to me, is still 75% replacement and 15% approximately is OEM and 10% is approximately exports. So the mix is continuing this way because even in passenger car OEMs, we saw them coming back to pre-COVID numbers. CV is now slowly picking up. And I believe going into quarter 3 and quarter 4, we'll see a resurgence of CV in the OEMs. Gaurav, do you want to add anything to that?
Sure. Thanks, Basudeb, and the numbers are fairly accurate. If you look at September quarter of last year, the breakup was 67% exports, 20% OEM and 13% replacement. The same quarter this year...
Gaurav, you've gone the wrong way. 67% replacement.
Sorry, 67% replacement, 20% OEM and 13% exports. The swing on replacement, given the OE situation, is 7%. So 74% replacement, 16% OEM and 10% exports. But still, there is a significant pickup on the OE side of almost 10 percentage points vis-a-vis last quarter. And to your second question, which is about the raw material prices, natural rubber was at INR 137 a kg. Synthetic rubber at INR 90 a kg, carbon black at INR 58 a kg in the current quarter.
Gaurav, as market share in PCR has been so sticky for many, many years as typically we discuss it for you is to be, I suppose, 18%, 19%.
Yes.
So 500 bps sudden swing is a huge number. So if you can explain us the mechanism of this scale and how much it is sustainable and structural in nature because 6 months, 500 bps gain if you can explain us?
Okay. So 3 things, Basudeb, here. Firstly, you have to understand all our plants now are commissioned and are running at nearly 85% to 90%. I'm talking only passenger car radial. What we have been able to do is there has been a very clear focus in building our brand, and building the technology that is going behind these tires. If some of the brand tracks that we track on a regular basis have shown that our brand today is, in fact, the #1 brand in various magazines, various test results from brand tracking, where we are #1 as far as the tire competition is concerned in India.Also, what we've been able to do is we have enriched our product mix. So first 12 and 13 inch was nearly, I think, 50% or 60% of our basket, which is now slowly coming down to 40% to 45%. Also, what has helped us is the import restriction that has come in through the government. And primarily, this will help Apollo even in the long term. Because a lot of imports were coming in the higher end of the product mix and higher end of the tire market, which is, i.e., Michelin, Bridgestones of the world and the other Asian players we're bringing in high-end tires. Apollo is well set to take over this market because of my experience that we have and we've been having for the past 11 years in selling high-end tires in Europe. So we did not have to reinvent the technology. We just had to get the molds into our plants in India and reposition ourselves and start supplying those tires into the market. So just to give you some numbers, we used to be below 400,000 on a monthly average when you're talking about a 16%, 17% replacement market. And currently, we are looking above 400,000 tires, which takes us to a level in our estimates, takes us to a level of 22% to 23% market share. So definitely, there is clearly sustainability. On top of this, India has also added 350 dealers to the network in India. On top of it, the rural focus has come in. So where we used to be mere 2,000 touch points today, we are at close to 4,000 rural network dealerships that we have created. So I believe that this is sustainable going forward in the long term.
So that's at year-end, that will be positive for margin mix also on a sustainable basis. And last small question for Gaurav, the fixed cost cutting initiatives in Europe like manpower reduction, which, initially you said, will be now reflected in the December quarter. So ideally, 9%, will it be right to assume that no benefit of fixed cost management initiative will be reflected?
Yes, Basudeb. The current quarter results do not reflect any of the benefits that would come in on account of that specialization project. It does reflect certain benefits on account of cost control measures, whether it's digital launches or looking at every small costs. But the benefit from the specialization of the Dutch plant will only start coming in from FY '22 that people reduction will happen in the January to March quarter.
Next, we have Sonal Gupta.
Yes. So just continuing with the question on the Dutch plant. I mean you've sort of indicated that it could lead to a savings of EUR 40 million to EUR 50 million on an ongoing basis. I mean given your top line for the European operations, that is a fairly substantial number. So should we expect that whole EUR 40 million would sort of slow down to EBITDA level over a period of time? Or are there other costs which will sort of eat our way part of that?
Gaurav, will you answer that, please?
Sure. So Sonal, the numbers are getting finalized as exactly individuals are identified and there's a package as per law. The cost estimates are same as we -- what we mentioned earlier, in the range of EUR 50 million. The savings would be slightly lower than the number that you are mentioning of EUR 40 million. But yes, they would be significant, and we expect a large chunk of that to flow to the profitability. And that is the confidence with which we say that the payback on this entire exercise for European operations would be less than 2 years. And we are very confident of recovering the European operations back to healthy profit levels.
So I mean like so then European operations should come back to at least early teen margins, right? I mean something or that's what should happen.
Yes. That's the target we are working towards.
Okay. Great. And my second question is on just the India -- I mean, like what are the CapEx plan now for this year and next year? And how is the -- I mean, like under capacity, I mean, given that you are seeing a good demand now. So are you bringing forward some of the capacity online? I mean what's the ramp-up plan there?
Gaurav, do you want to answer that or...
Yes. So Sonal, right. The CapEx plan for this year remains more or less the same. But you are right with the strong demand coming back on PCR or overall. And within that, our own product market share gains have placed a very tight demand versus capacity situation. We are looking at opportunities to accelerate the ramp-up of the Andhra Pradesh plant.It may mean a slight increase in CapEx in the current year, but not significant. So the current year CapEx would remain. And that, even if it slightly accelerated, would be from FY '22. With this demand situation, it's still a few months old. We don't want to rush into any quick decisions. As Neeraj mentioned, with the Andhra plant capacity, we have enough capacity and the CapEx intensity will come down. It's a continuous exercise to keep assessing the demand versus capacity. But no significant change as of now in the FY '21 and '22 CapEx combined.
Okay. Sorry, so could you repeat the numbers, absolute numbers for FY '21 and '22? If you could just remind us of that.
Sure. So the numbers that we gave for India earlier was INR 1,050 crores CapEx in FY '21. And if I remember correctly, INR 1,600 crores CapEx in FY '22.
And this will include replacement as well -- I mean, sorry, the maintenance CapEx?
This includes the maintenance. This may go up marginally, but no change from this as a combined 2-year figure.
Okay. And just lastly, European CapEx should be around EUR 25 million to EUR 30 million a year?
That's correct.
Next, we have Kaushik Poddar. Kaushik, go ahead with your question.
Yes. See, the Indian rubber price was somewhere around INR 130 or INR 132 in the last quarter and which has moved in the range of around INR 155 or INR 157 something of that sort with such an increase in rubber price, do you see your margin under pressure?
Yes, you are right. Rubber has gone up to INR 155 currently. When you go out in the market, it's not even available. So it is just a fictitious price that has gone up. Certainly, it will affect margins. But currently, we are holding rubber close to 45 to 60 days of inventory at lower costs. So that's point number one. Point number two, what we've done is we've been proactive in taking decisions as far as raw material recipes are concerned. We quickly noticed that the commodity prices, both on oil side and on other natural rubber was going up. And therefore, our technology, along with manufacturing, are looking at various alternatives to try and see what we can do to circumvent these costs that are coming into the company. So we are getting geared up to see how we can reduce the contribution of natural rubber on a dial, so look at synthetic rubber versus natural rubber. This is an ongoing challenge that we'll keep on looking at as we go along. But yes, there will be a challenge on margins going forward, but we will try and see how we can circumvent that through, like I said, through technology. Also, looking at our own overhead costs and looking at a richer product mix that will improve our contribution margin on a realization basis.
Next, we have Siddhartha Bera.
Sir, on just pertaining the last question, when you indicated that the rubber prices, availability is low. So does that mean that we will look more to the export markets for procuring rubber because I think in the jump in export rubber prices are much higher than what we are seeing in India. So If you can also share generally what will be your export -- sorry, import share of rubber going on a normal basis?
Okay. So import share of rubber will be consistent, as we have been doing. When I'm saying the availability of rubber, the dealers are holding back the rubber supply because the price is fictitious currently. So even INR 155, if you go into the market, it is there, but it is -- they are not selling it. So it's basically trying to see where this market goes to. As far as imports are concerned, you are right, they're at a very, very high price. We do import a natural rubber for our truck bus radial, and that will continue. So there is the mix of import versus export on natural rubber will still remain the same. And as I mentioned, we are still holding inventory at less prices between 45 to 60 days in India currently.
Okay, sir. Got it. And second is on the -- sir, numbers, sir, if you can share in general about how much once the replacement demand growth in the quarter and segment-wise, how it has been? And what is the trend in terms of has it gone up further in the third quarter or not? That would be really helpful.
Okay. Gaurav, you can give the specific replacement growth of truck PCR of product categories in replacement, and then I can see toward quarter 3. You're on mute, Gaurav.
Sure. So this quarter on the truck side, year-on-year, our volume growth has been 3%. Whereas on the passenger car side, the volume growth has been 11%. That's on a year-on-year basis. The numbers, of course, on a sequential basis would be very high.
This is for the replacement, sir?
Oh, you want only replacement?
Yes, sir.
Okay. Just a minute. So for replacement, the truck volume growth was 18% and on passenger car, 11%.
Got it, sir.
So Siddhartha, when we are looking at quarter 3 already, October is over. Compared to September, again, October has been very, very bullish for us. Again, we have hit record numbers in all category of tires, including farm and motorcycle radial, passenger car tires and truck and bus. So all in all, I believe in India, at least during this festive season of Diwali, it will play out in the same direction of growth. The trend line is positive. In fact, the -- at least in December, it's such a dynamic situation, we can't tell where it will go in the month of January. But we are very bullish also on quarter 4. Given that the network that we have created and given that the new product launches that we've had, I believe that we are on a very strong foot to garner more market share. Currently, if I look at my factories, then we all are running at between 85% and 90% utilization. In fact, COVID has put pressure on getting manufacturing up to steam because there are cases coming in most of our plants. We are trying to manage it. It's very difficult to stay safe, but at the same time produce because there are populations of 2,000, 3,000 entering of the plants. And we just have to see how we treat that very carefully. And currently, the way I see things, we are having shortages in a lot of our product categories. If you see our finished goods inventory, in quarter 2, has come down from 31 days to 21 days. And that is one clear sign of sales moving very much faster than what we are producing in the current scenario.
Got it, sir. If I can ask last question on the Europe business. So we have been -- so if I see over a slightly longer period, say till FY '14, '15, we had the Netherlands plants of, say, about INR 4,500 crores, and we were doing INR 4,500 crores, similar type of revenue from that plant now. What we are doing is that we are scaling back that flood and wrapping up in Hungary. So while I see that our gross block has nearly doubled because of the investments in the plants, our revenues are largely in that range. So just wanted to understand what will drive the ROE improvement in the Europe plant over a period, if you can just help me.
Okay. So, there are 2 or 3 things that we have corrected as we go along. When we were only in one plant in Enskede, we were making profits. And yes, you are right, we were sweating the asset, and we had touched around EUR 450 million or EUR 480 million in the month of -- in the year '14, '15 as a revenue. The markets went -- dived down as far as prices are concerned, and we are not the leaders as far as price is concerned in Europe. The leaders are Michelin and Conti, and we have to just follow them.The whole market crashed and the prices did come down and that put a lot of pressure on our cost competitiveness in running our Dutch plant. And one of the reasons for setting up Hungary was to circumvent this cost impact that was coming by going towards East European country to set up this. Just to give you an idea, currently, Enskede, the Netherlands plant operates at around EUR 2.6 per kilo is the cost of manufacturing, whereas Hungary, recently, in the month of September of this year, has already come down below EUR 1 per kilo. So that is the difference that you are seeing in cost of manufacturing. After we do the specialization of this plant in Netherlands, obviously, the capacity to look after the sales volume in Europe is being shifted partly to Hungary and partly to India. Hungary will reach a state where 90% to 95% utilization of Hungary plant will happen, thereby ROCs should start coming up. We will be also looking at expanding, like I mentioned, 250 dealers have been added. Market share has been added in not only truck, but also in passenger car. Product enrichment is happening. So richer product mix is happening from the low-end tires going up to UHP and UUHP, which are better, higher contribution margin tires. So there is a 360-degree approach on how to see that we are able to achieve double-digit EBITDA margins in our European operations by way of mix of all of these things that I mentioned. And thereby eventually increasing the ROCE from where we are to a double-digit figure in the near future. Gaurav, anything you would like to add to that or I covered?
That's fine.
Next, we have Jay Kale.
Congrats on a great set of results. My first question was regarding the replacement demand. You've mentioned that Q2 was quite strong and our trucks being, I think, higher than the passenger car replacement. How do you see this going forward given that, of course, truck utilization, fleet utilization has improved, but maybe still are not at the earlier level? So how do you see assess this pent-up versus the actual sustainable demand? And while PCR might sustain, do you think that the truck segment replacement demand could kind of soften from Q4, Q1 once the pent-up demand is kind of behind us? Or do you see it sustained?
Okay. Jay, it's a good question. I think, truck, as we've seen pre-COVID and all of FY '20, truck was very subdued because there was a confusion between BS-IV and BS-VI. Also last year, the government came up with the Axle load, which also caused a lot of confusion in the marketplace. All these 2 big things are now put aside. BS-VI is coming, Axle load has become part of the whole process. There has been a pent-up demand, I would say, in partly quarter 1 and in the beginning of quarter. And now that pent-up demand is over. Now what is happening is, one -- number one, is freight rates have gone up. There is much more movement of industrial goods happening. As you can see, manufacturing index is up and goods are moving on the roads. And given the freight rates gone up, there is a lot of truck movement happening, which we are seeing on the ground. The second thing is the mining industry has opened up. And that is also giving a lot of growth to the CV segment. And the third thing is that the government is putting a lot of emphasis on road building and infrastructure building. So this has also given a lot of growth to the CV segment. So we are seeing replacement demand is very upbeat. Obviously, people will hold back as normally they change their tires after every 3 to 4 years. So now the fleets are coming and changing their tires. Plus, you see a lot of activity vehicles driven -- kilometers driven on the road much more than what we were seeing even pre-COVID times. So my own belief is that, yes, there is -- it is here to stay. As far as passenger car is concerned -- sorry, even on truck, if and when the scrappage policy also comes, then that will again give a boost to the CV segment in the replacement market. And we are hopeful we've been hearing the government saying for the past 2 years, scrappage policy is on the anwil then I hope they will take out this scrappage policy soon. Coming to passenger car, passenger car is sustainable, given the import restriction that the Indian government has done under ATMA, that is really helping the passenger car industry. And already, we have seen, given COVID, a lot of people are going into -- from public transport are moving into cars. And that in itself is going to give a push to India. Now the other bigger factor is that we have seen the buoyancy in the rural market. And that is where Apollo is really focusing on. Rural market is on the upbeat. And it's not only in 2-wheeler, but it is also in the farm category. It is also in the passenger car segment, whether they are SUVs, whether they have Jeeps. So all in all, I believe both vehicles, both product categories of truck and PCR at least for Q3, Q4 sustainable.
Sure. Just one more question. If you can comment on sort of on the pricing environment. I mean we've seen the worst of demand and pricing was relatively stable in the India replacement market. Would Q2 also be a function of -- because of capacity constraints, the incentive structures would have gone down and hence, that would have also helped your margins which could reverse going forward? So one is on your incentive structures to the dealer as well as the pricing environment. Is it that -- is it the worst is behind us and now pricing environment should be stable given that in such a weak demand scenario also, it has remained stable? And also, if you could comment on the pricing in the European market since you had mentioned that earlier in 2015 times where the pricing environment really collapsed. But how are you seeing it now with demand response in that.
Okay. So on India, I think, firstly, the industry has matured as far as pricing is concerned over time. We are looking -- within Apollo, we are looking at more on enriching our product mix, coming out with more specific high-end radial technology tires. That's why I said in my opening speech that today, Apollo is clearly the #1 player as far as all radial products are concerned. So introduction of LTR, which is a light truck radial introduction of a motorcycle radial is all contributing to high end and expansion of our EBITDA margin.You are right, incentives were not too many in the market given the demand and supply situation. I think that maturity of the Indian competition is there. And therefore, you saw EBITDA margin expansion in most of our competitive P&L. So that is there. And I believe that maturity is coming, and I believe that even going forward, incentives in the market space should be at bare minimum. So your point, about worst is over, is correct. But again, I just want to put a word of caution, given the input prices going up, somewhere along the line, one would have to look at correcting prices. Whether it's quarter 3, quarter 4, we still not decided because we are sitting on some RM inventory at low cost. So that's point number one on India. On Europe, like I mentioned, they have already bottomed out. We don't see prices going down. In fact, Europe is a much more mature market than India as far as competitive environment is concerned. Also, you would see that there is antidumping policies that have come into Europe against Chinese products. So that maturity comes in and we are then able to sustain our prices. And given the input prices, we have already seen in the U.S. market, slight increases in product. So already competition in the U.S. has started increasing prices. So that should, in a way, come into Europe in the second wave and say that, okay, there will be some correction of product pricing in Europe in the near future.
Next, we have Shyam Sriram.
This is Shyam Sundar Sriram from Sundaram Mutual Fund. My first question is you did mention that market share gains in the PCR segment was led by multiple factors. One is on the import restrictions. I mean also supported by good demand underlying demand picking up per se, I'm talking on the PCR side. We also hear that one of the largest players faced production challenges therein. So will we see some market share once the production challenges of the competition are addressed and they come back to normalized production levels? That is the first question. And secondly, related to this, are you seeing more importers gaining licenses, getting licenses to import PCR? So this share gains maybe in the low over a period of 1 or 2 years may vanish, per se. So is there -- are you seeing such a threat there? So these are the 2 questions, sir.
Okay. According to me, I don't think the government is approving any import licenses. Gaurav, am I correct on that, right?
Yes. There may be some small ones at a very higher end, but it's very, very negligible.
Okay. So generally, import licenses are not being allowed and the government is very, very hard on this. Secondly, what you have mentioned, I'm not even aware which of the competition plants had a shut down, but it would have been a mere shutdown. I'm not going on that direction. We are looking at our own -- building our own foundation in the Indian PCR market. And that's why we are confident that what numbers we are selling today. We are very, very confident of sustaining those numbers, not only sustaining but growing those numbers. And here, I mean, really, the justification is on the dealer network that we have created in H1 on passenger car radials is to the tune of 200, 300 dealers, plus there is the concept of what do we call it, the Apollo zones which today, which are exclusive zones for Apollo passenger car dealers, which today, we are clearly the leaders in the market space. So I don't -- I totally believe that going forward, these numbers are sustainable. Like I mentioned, not only sustainable, we will want to see market share gains from here and growth coming in, in quarter 3 and quarter 4.
Sure, sir. That was very helpful. And just one other question on on the pricing, this was already asked. But just some clarification there. Gaurav, so generally, looking into Q4, how much increase in RM basket are you seeing approximately if you can give some estimates there? And secondly, given the strong demand that we see in the replacement market, we seem to be in a very sweet spot to take up prices, per se. So from that perspective, are you seeing some initial signs of market prices slightly going upwards with an afford bias therein? That is -- that was my question from a pricing on the RM market.
Sure. So Shyam, we have indications. As per our estimates, the RM basket is looking to be up by about 5% in Q3. Given the current uncertain environment, Q4 is a little away. We would not want to take a call on that because while there are indications of material prices going up, we are also seeing a resurgence of COVID cases in certain geographies. And these are big consumption geographies as far as tire market is concerned. And there is a certain softness coming in, for example, in crude. So Q4, where the raw material prices could head vis-a-vis Q3 is a little uncertain. As of now, no pricing action has been taken even as the look at some cost pressures. There would be an attempt to absorb them through even greater operating leverage because we are seeing demand even stronger than the previous quarter. We will continue to look at fixed cost and R&D efforts to counter this. Price increases, if needed, could be then considered as we go along, nothing that is being considered by us internally today.
Understood, Gaurav. And does RM basket increasing by 5%, this is on a per kg basis and sequential year Q-on-Q?
That's correct. That's our current estimate.
Next, we have [ Lakshmi Narayan ].
Sir, two questions. First is that what is the mix of OE to replacement in PCR for you in terms of number of units?
Gaurav?
Just 1 minute. Should be roughly 50-50, we can get back to you with exact data. But for us in India, it would be roughly 50-50.
Okay. Because I think for the industry, it's 67%, 33%, right? Or am I off the mark?
In India, it would be not 67%, in developed geographies, typically replacement volumes are about 70% and OE 30%. In India, in fact, traditionally, OE volumes used to be more. And now with market maturing, replacement would have moved slightly ahead of OE volumes.
Correct. Because my understanding is that PCR total number of tires sold is around 41 million tires. And I was just working out in terms of the number of vehicles sold and product produced multiplied by 4, et cetera. So you mentioned that you sell almost something like 4.8 million replacement PCR tires, am I right? You mentioned that number?
Currently, last year, our average that Neeraj had mentioned was below 400,000 tires a month and that number is above 400,000, and that was more in the replacement segment that he was talking about.
Got it. That's around 4.8 million tires. Okay. Okay.
But that's in one segment.
As in, can you say one segment?
Replacement that he was talking about.
Got it. Now because if you look at India sales around 40.7 million tires in PCR, how much would have been the import restriction there so that, that is actually giving a flip to the Indian tire manufacturer? What is the rough proportion of replacement market that is being vacated by these import restrictions?
Lakshmi, traditionally, over the last few years, imports have had about a 15% market share in the passenger car tire segment. So that's the quantum that is broadly coming to the domestic players.
So sir, on 41 million tires sold in domestic. So of which 15% would be -- around 6 million tires would be imports. Is that a way to interpret it?
That's correct.
Next, we have Bhaskar.
One question on the industry trends between TBR and TBB. So the understanding was that TBR was continuously growing and this number had reached close to 55% versus TBB of 45%. So just wanted to understand, is that trend towards radialization in truck are still very short? What is the current number? And how do you see the market? Because as I understand that you are fairly strong in the TBR market compared to the competitors, and therefore, this trend really helps you in terms of well positioned towards that part of the segment?
Gaurav, would you give those numbers?
Sure. So Bhaskar, yes, the radialization trend is continuing. But in this year, it sort of come to a little bit of a hold TBB growth has been very good. So the number of -- around the radialization level has remained stable at about the 50% mark or slightly more than 50% because the growth in TBB segment has also been very sharp. And even for Apollo vis-a-vis last year, we've actually had a higher growth in the TBB segment. Broadly, the radialization trend will continue. And we stand to benefit tremendously from that, given our brand equity and the product strength in the TBR section, but we've also made substantial gains in our market share on TBB.
Okay. Okay. And so this year, like you said, TBB has done well, would you be able to give some understanding as to why that has happened? And second, on the similar lines, just wanted to understand, is it that the large fleet operators will typically use TBR versus TBB and the smaller ones or the single tune would typically use TBB because they are more cost effective for them? Is that understanding right?
Listen, TBB has gone up primarily because it's a very price-sensitive market. And given COVID, given operations, peoples, obviously, wallet size has gone down during COVID times. And therefore, going for a cheaper product in that sense. Fleets will -- large fleets, the 18 tunnels, 18 healers, will not go back to once they started using radials, they will not go back because of the benefits in fuel savings and in mileage. So that's really what has happened. Today, that shift has happened.
Okay. Okay. Got it. Got it. And one question on the ROCE of the industry in general [Technical Difficulty].
[Foreign Language]
Next, we have Amit Pirani.
Congratulations on a good quarter. And also, I just wanted to appreciate the fact that you put out a detailed presentation on the quarterly performance that's quite informative. Most of my questions have been answered. But just one point on what's the initial trends on the winter tire demand in Europe because that's a very high-margin segment for us?
Very good question. So winter is slow, and we are seeing a very slow demand picking up in winter tires. Also, given the lockdowns that are going on in Europe, i.e., in Italy, France, Spain, Germany semi lockdown, Netherlands is locked down. There is a slow demand as far as winter is concerned. But this we -- I mean, this has been a problem in the mid, I would say, in the 2015, 2016 types. We have been emphasizing more on all-season tires. And today, if Freddestin is clearly the #1 player of all-season tires in Europe. So when the shift does happen and there is no winter, then people do tend to go to all-season, and that's where we are ready to take on the market. If the winter was not that great this winter, we have already seen a delay, but it's a bit early to say how this pans out in the next few months to come.
Okay. And second question was on the rural distribution that you've expanded quite significantly in the first 6 months of this year. So is it for specific segments or is it across segments? Like is it only for 2-wheelers or trucks, passenger vehicles, everything, this rural distribution expansion?
Yes. So basically, it's for everything. Rural market today is, like I mentioned in my speech, not only 2-wheeler. There are cars, there are farm and even light truck and truck. So it's an entire product category, mostly on the dealers are multiproduct dealers in these rural markets. So what has helped us with the introduction of 2-wheelers that we did 2 or 3 years ago, we've been able to get into the networks, we've been able to create new distributions, create new entrepreneurs in these markets, in these villages where we've started businesses for them and started selling the entire range of products from the Apollo mask.
Next, we have Hitesh Goel.
I want to congratulate the management for a good quarter. Just wanted to check on your market share assumptions for this quarter, actually, CEAT has reported a 30% kind of volume growth in replacement market. And you guys broadly on my numbers, backward calculation, there is around 14% kind of growth in replacement volumes. So then are you suggesting that the replacement industry in this quarter has grown in low single digits because other players would have lost substantial market share, right? I mean just wanted to get a sense here. And how do we see the trend of this replacement playing out going forward? Because first quarter was a very big decline in replacement segment. And the catch-up should happen, right? Ideally, people don't wait too much in terms of replacing their tires. So if you can give some direction for 2H on replacement.
Thank you, Hitesh. I think like I'm going on mentioning to all of you, Apollo has made huge headways in all product categories in quarter 2. Starting after the lull that came in April, May, starting from June onwards, the trend line of all product -- all products, I'm talking buyers and radial have been going up. And that's on a very strong distribution network that one has created. We have seen a lot of deposit base come into Apollo from new dealers and from existing dealers also. So for my view, the first half has seen a minus -- I think, minus 20% revenue drop Y-on-Y. And our target for the whole year is to try and see how we can negate this minus and come out for the year in a single positive digit as far as revenue growth is concerned. And that's what my target is. And the way we're going to do it, obviously, is by again, going more after replacement market. We believe the OEM segment has already started moving in the positive direction. So given these 2 things, we believe that we'll be able to end the year with a single-digit positive growth in the marketplace.
That is quite encouraging actually. It means that replacement segment will remain quite strong in the 2H as well, right? I mean double-digit growth.
Yes, I mean, just a word of caution, unless COVID comes in a big way, the second wave comes in India, and there is a lockdown. Obviously, I can't say about that. But currently, the way things are, we are pretty bullish and we believe that the whole year will end up at a positive growth.
Okay. And my second question, if I may. On the European operations, I understand Indian market is quite price sensitive to the raw material cost increases. But how does the European market behave in the -- because generally, I think pricing discipline is quite good in European market. if you can allude to that factor, sir.
Yes. So Hitesh, I just mentioned that U.S., we've already seen some price corrections upwards because of the RM input prices going up. So generally, Europe will follow as and when U.S. does increase. So we're just waiting and watching because we are not the leader as far as price is concerned in Europe. We have to follow the leads, which are really Michelin and Conti. So one is just waiting and watching. As soon as those prices get corrected, obviously, Freddestin will get corrected, too.
Next, we have Arvind Sharma.
First off on European operations. You shared the manufacturing revenues. Will it possible to share total revenues, including reifen? My reason was that the reported EBIT is still negative included reifen, I believe. So a, the revenues in reifen; and b, what's the company doing to have a positive EBIT, including reifen because European operations include both manufacturing and license. That was the first question.
Gaurav?
Sure. So Arvind, the reifen operations also are doing very well. In the current quarter, reifen operations have grown 16%. The reason that you see on the EBIT that you mentioned is that the heavy depreciation charge that is still coming from the Hungary plant. So while the operations are now significantly positive on the cash profit or free cash flow generation, the heavy depreciation charge pulled down the EBIT. That situation will get corrected both on account of the significant profitability improvement as we go through the Dutch specialization, as I mentioned, from next year onwards. That EBIT also would turn positive.
Gaurav, just one more question on the cost relation finance file for harping on that. But you said 15% cost ratio in fixed cost and some of it will come back. Given that raw material cost pressures are rising, between the 2 raw material cost pressures rising and the construction efforts and obviously, third quarter should be good for the European operations. Historically, it has been. I don't know how it would be this quarter. But on a console basis, do we see a bigger impact, which is negative on the margins? Or do we believe this cost ratio initiatives would be able to offset on a console basis, than total raw material expansion?
Arvind, as you know, we would not give out specific margin guidance. You are right that Q3 seasonally is a good quarter for European operations and it's dependent a little bit on the winter tires, but it would still be a better revenue and a better profitability quarter, which it has seasonally been.Overall, with the impact of better operating leverage, higher RM control over cost, where the margin would come, we would not want to give out specific guidance.
But the cost reduction would be a more sticky thing. So that should idly in the long-run help.
That's correct. Yes. Some of those cost reductions we will continue with initiatives taken on digital aspects, et cetera, will continue.
Next, we have Pramod Amthe.
Congrats on good set of numbers. And it's amazing to see the execution on the India PV business. This question is specific to Neeraj. Considering that such supply disruptions are where to come through in the business cycles, and you have executed well in the short term. How do you see to make it sticky, considering that these are coming from a very premium brands which were earlier imported? So do you see a need to launch some premium brands at your end or to even introduce more branding expenses so that this leadership can be sustained in the PV business?
Pramod, I think, very good question. Like I said in my opening remarks, Apollo is in forefront of this because of an 11 years' experience that we've had in Europe with selling high-end passenger car tires in Europe. However, tires, not only in the Indian made ones, but also in the European made ones, are tested on our German test tracks for now 11 years. We've been having podium positions of these in our test results. Equipments already are there in India to manufacture the high-end tires. So the -- when I talk about high-end tires, I'm talking about 17-inch up to 24-inch which is what the Michelins and the Bridgestones were importing from their plants from France or from Japan. Now in order for them, it will be very easy for them also to bring it, but they need to put in CapEx because the equipments that are here are of older generation tires. So I believe it will take them time to bring it in. Secondly, what we are doing is we have also seen the opportunity of launching our European brand, the Freddestin brand. We've been talking about it. We did try it 4, 5 years ago, and we basically made our own mistakes over there. So in the month of January is when the Indian marketing team is looking at launching Freddestin into the Indian replacement market because that higher segment of the market also has a mentality of having a foreign brand on their car. So whether it's a Honda Accord or a Mercedes or a BMW, they want imported brand put in their car. So Freddestin made in India in our plants will see or will get into that market. The other thing on branding, as far as Apollo branding is concerned, as you know, we have invested in Sachin Tendulkar in -- now for the past 2 or 3 years. We'll continue to do that. We've also invested in Man United, which we are continuing to do. That's where we'll be spending our money, and I don't see money is expanding too much. Like I again mentioned, the Freddestin launch is going to be digital. So brand spends will be much less than what we would do in a normal environment.
We'll take last question now. Next question is from Nishit Jalan.
So my question is on first, on booking capital. If we have seen almost INR 1,000 crores kind of a cash flow because of reduction in working capital in the first half of this year. And a large part of it has come to inventory reduction and some liability reduction, just wanted to understand, is it temporary in nature because of the demand ramp-up, we have seen inventory kind of a running short, we are mentioning the finished good side. Do you think that these kind of inventory levels you can sustain or a part of this working capital cash flow that we have seen will likely reverse in the next -- in the second half?
Gaurav, do you want to answer that?
Nishit, as the demand goes up, some of it will reverse. As Neeraj mentioned earlier, the current inventory levels are a big challenge for the business, and it is in light of production sort of having to always catch up. But we believe also that this tough environment has shown us a way that we can actually operate at much lower inventory levels. And hence, the going up should not be back to what we used to earlier consider as normal levels. A large part of these working capital gains is what we are looking to sustain.
Okay. Okay. That's good. Secondly, on CapEx side, you have talked about INR 1,050 crores CapEx in India in '21 and INR 1,600 crores in '22. If I remember correctly, last quarter, you mentioned that your maintenance CapEx in India, annually, is about INR 250 crores to INR 300 crores. And the CapEx which is left to be done in Andhra is about, I think, CapEx about INR 2,000 crores rather than INR 26 crores or INR 27 crores. What am I missing here?
There was a bit of dropping Nishit in the middle. But yes, the India regular CapEx is of the order of INR 250 crores to INR 300 crores. So out of this INR 2,650 crore, let's take INR 550 crore is the regular maintenance CapEx. That leaves about INR 2,100 crore. Andhra number may be slightly off based on what had already been done by March '20. Apart from Andhra, there is really very other small growth CapEx. But I missed some of the part of your question in middle.
Well, that was the question. Are there CapEx left is about INR 1,500 crores or it's higher after FY '20?
After FY '20, I'll have to check the exact number, but should be about INR 1,600-odd crores.
Okay. Just last one small question on -clarification basically. You mentioned that your PCR replacement volumes grew by 11% this quarter, and you have gained about 500 bps market share. Does that mean that PCR replacement industry volumes was down on a Y-o-Y basis?
See, when we are mentioning the market share figure gains, just to clarify because we need the industry data and that industry data today is available from April to August. So it does take into account the strip reductions that the industry went through and even we would have gone through in the first quarter. So the market share gains is for the April to August period for which we have the industry data.
Next and last question is from the line of Shashank Kanodia.
Yes, sir. Sir, I was coming to the same -- the CapEx part. You talked about in the initial remarks that the CapEx intensity will reduce. But for FY '22, again you have marked INR 1,600 crores of CapEx. What would we be on account of Andhra Pradesh plant and rest others, if you can specify?
Gaurav?
So the INR 1,600 crores figure was already announced. The number, if we go back in time, actually, if I remember correctly, were closer to INR 1,500 crores in FY '21 and lower in FY '22. We switched it around because of the COVID situation, we wanted the current year to be tighter on cash. Things were looking quite bleak as we began the year. And hence, you would see in some of our earlier interactions with the market. We pulled back on CapEx by about INR 400-plus crores in the current year. And that CapEx got shifted to FY '22.
Okay. So [Technical Difficulty]
Shashank, we couldn't get the question.
So for Andhra Pradesh plant, what is the total intended CapEx that we are supposed to spend? It was INR 3,800 crores?
INR 3,800 crores. That's right. INR 3,800 crores, INR 3,900 crores. That figure remains.
Okay. And what will be the payback period for this? Any revenue potential figures or anything that you can help us?
Our typical payback periods are about 7 years. I would not have all the figures right here on the revenue generation, et cetera. But typical payback period for -- are about 7 years.
And sir, one last question to Mr. Kanwar. So in the initial remarks, you talked about being ROCE-conscience and return to highly durable digit, return to for metrics. So can you put a number to -- sir, by FY '23, something can be returned to double-digit kind of a trajectory or even it's much farther than that?
Shashank, our endeavor is to try and see how quickly we can reach to a double-digit figure of ROCE. And like I also mentioned, if we were to annualize quarter 2 or this year, we would be looking at 11% ROCE with Andhra in there. I don't like to put a number there or a date, but my total focus for me and for my top team today is to see that we are able to generate ROCE or what we used to do in 2015, also to try and see that we do generate free cash flows for the organization. That's our -- really our aim and to see our net debt to EBITDA remains at figures which we've been always used to. So these are 2 or 3 things that the management [indiscernible] and from a high level, down the line, at least, at my senior level team by C-suite is now focusing on and trying to see how we can really sweat our assets and make the best out of it.
Thank you everyone for joining the call, and thanks to management for giving us opportunity to host the call. I think we'll call off the...
Thank you, Ashutosh. Thank you, everyone for listening to us patiently. And all the very best. Please stay safe. God bless, and we will see you next quarter. Thank you.
Thank you.