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Apollo Tyres Ltd
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Good morning, everyone. On behalf of Elara Securities, we welcome you all to the Q4 FY '19 Earnings Conference Call of Apollo Tyres. From the management side, we have with us Mr. Gaurav Kumar, CFO, Apollo Tyres and other senior management. I would now like to hand over the call to Mr. Gaurav for his opening remarks. Over to you, sir.
Morning. Thanks, [ Jeff ]. Good morning, everyone. To begin, on a consolidated basis, the net sales for the quarter was at INR 41.8 billion, a growth of 5% on a year-on-year basis. However, a decline of 10% on a sequential basis. The sequential decline was both in India and Europe operations. Europe, a seasonal factor and also on account of tough market conditions in both our markets. The EBITDA for the quarter stood at INR 4.2 billion, a margin of just under 10%, a drop of close to 3%, vis-à-vis same period last year. The large impact coming through essentially on account of the sequential decline in revenue. In terms of raw materials, they stood at INR 130 per Kg. They were down 4% vis-à-vis last quarter even though on a year-on-year basis they were up 8%. The gross debt continued to go up marginally compared to INR 47 billion last quarter, was at INR 49 billion.Moving on to Indian operations. The sales for the quarter was at INR 29.6 billion, a growth of 6% over the same period last year, but a decline of 3% on a sequential basis. While the growth vis-à-vis the same period last year was mostly on price and mix, volumes were flattish. On a sequential basis, the decline was essentially on account of volumes. This was largely OE driven. We had slowdown in the passenger car tires and the truck-bus bias market, which led to the revenue slowdown. The EBITDA for the quarter stood at INR 3.5 billion, a margin of 11.5%, which was up vis-à-vis the last quarter at 11%.As we had mentioned previously, as the raw materials came down, the margin trough, which was there in Q3, margin started going up. The gross debt or the net debt also went up marginally from previous quarter on account of CapEx and et cetera that are being incurred. For the full year in Indian operations, we registered a growth of 19%, which was driven by growth across segments of OE replacement and exports. It's the eighth consecutive quarter of growth on a year-on-year basis, though, after a long trend of also sequential growth, this was a quarter where sequentially we did not grow. Based on the results announced by some of our peers in India, we've had a significantly higher growth. We've had market share gains across categories, including continued wins in the OE segments across product categories and several recognitions by the OEMs.We also completely wrote-off our investment in IL&FS. We had taken a write-off, a provision of INR 100 crores in the previous 2 quarters. The balance INR 100 crores was also written-off to have the complete write-off in this. Supporting the top line expansion, we continued to go through significant network expansion both for CVs and PVs, which continue to drive our top line growth and position us very well for future gains also. Looking ahead, the OEM slowdown as of now continues. However, the replacement market is very buoyant and we are seeing good signs of growth of the top line in the current quarter. The raw material situation continues to be benign, and hence even on the margin outlook, the situation is stable. Moving on to the European operations, which is our sales and manufacturing operations with Netherlands and Hungary. We had a tough quarter. The sales for the quarter was at EUR 128 million, a decline of 4%-plus over the same period last year, which was largely driven by volume degrowth. One of the main reasons was that as raw material declined, there was pricing pressure, and this time, we stood firm on the pricing discipline to not fall into the easy option available of taking price cuts, which we have seen that in the past -- while it may give you temporary volumes, they have an adverse impact on margins and longer term also do not win you volumes if you are taking price cuts beyond competition. So while the Q4 was tough and below our expectations, for the full year in the European sales and manufacturing operations, we had a 7% growth, which is above the European market, which was just under 1% growth. We continue to make improvement and top line growth. We have had some very recent good test results where our products have in fact been declared winners, have been on the podium positions. The Hungary operations have reached a fairly stable state on the passenger car category. This quarter, while the operation had the capability to produce in excess of 10,000 tires, the production levels were lower, which were largely constrained by sales. The Hungary operations continue to become more cost competitive and even in the current quarter, which is still in the early stages, we are seeing good signs of growth.Our European distribution operations reifen continues to grow and improve on profitability. Overall, as we've always told you, it's a 1% to 2% EBITDA margin business. We had a top line growth of 3% and the margin again improved marginally.So overall for the European operations, while the current quarter was a disappointment, both on top line and then -- in an economy like Europe, the moment revenue goes down, the margins suffer even more. The -- all the supporting blocks are in place. We see good growth coming through at the beginning of this year and continued improvement on margins as we go ahead.That's all from our side. We would be happy to take your questions.
[Operator Instructions] We take the first question from the line of Basudeb Banerjee from AMBIT Capital.
Few questions. One, as of now, say in Q4 and full year last fiscal, what is the mix of Hungary and Netherlands for European operations?
Basudeb, that mix is not so relevant because it's like tires coming from 2 plants. And, hence, I can go deep in the system and get that, but I think the way all of you look at us, you have to stop thinking of how much is Hungary plant contributing into the revenue and how much Netherlands plant because that same question you don't ask for the Indian plant.
Basically, I'm coming from the aspect, where we were discussing earlier that cost competitiveness of Hungary is far more than Netherlands and you will be substituting the mix from Hungary down the line, taking down production from Netherlands. So how that is progressing? And despite that, if this kind of state of margin, so how should we look at European margins for next 2, 3, 4 years?
Sure. That question is fair enough. So in this year, Netherlands plant would have produced and let's talk of passenger car category, since that's the main one that you're talking about. The Netherlands car produced about 4.5 million passenger car tires and the Hungary plant was on budget to produce 2.1 million tires. Going forward, for the current year, we expect that number to be around a little under 4 million for Netherlands and about 3.5 million for Hungary. So to your question, the mix, which is 2/3-1/3 Netherlands to Hungary will start becoming almost close to 50-50. In terms of, of course, it will be governed largely from a market sales perspective, but the Netherlands plant would be under 4 million of capacity, whereas the Hungary plant, based on the machinery and equipment that is put in, would be at 4.5 million of passenger car tire capacity.
Sure. Second thing is in India as you said volume remained flat year-on-year, so what was the growth in CVs replacement and passenger vehicle replacement? I mean CVs within the TBR and TBB, if you can segregate?
This is for Q4?
Yes, sir.
So Q4 year-on-year the replacement growth for trucks was 7%, whereas for passenger car it was 8%.
And within trucks, bias and radial?
So the growth was largely driven by radials, bias was slight negative as I said in my opening comments. The revenue decline happened largely on the back of slowdown in the passenger car segment and the big hit was on passenger car OEM segment. And truck bias which was down largely slightly on the replacement side, the volumes on the OE side are very small. Both in passenger car replacement, in truck replacement, we had good growth.
And last question, sir. As you mentioned every quarter, the raw mat landed price details.
Sure. Natural rubber was at INR 130 a Kg; synthetic rubber at INR 125; fabric at around INR 300 a Kg; steel cord, INR 145 a Kg; carbon black, INR 95.
So fabric was the major increase, rest more or less on the lower side?
Increase, vis-à-vis?
Sequentially.
Sequentially, fabric was not an increase; sequentially all of the materials came down. That is why there was a decline of 4% on the raw material basket.
We take the next question from the line of Ashutosh Tiwari from Equirus Securities.
Sir, in the domestic India operations, in the PCR, what would be your OEM and replacement mix for this?
Broadly about 55% OEM, 45% replacement.
Okay. Secondly, on European side I mean market for that last quarter, but if it remains bad through FY '20 as well, what would be your strategy to visibly grow market share? Because with Hungary, operations at this cost [ there in -- others have in ] the cost [ will be a little bit ] on the higher side, so we have to get volumes to basically show decent margin over there. So what is the strategy to gain share in the European market?
Sure. Valid question. And one thing as I mentioned from Basudeb's question earlier, our cost competitiveness continues to increase as the proportion of Hungary volumes increase in the overall mix. So A, we are continuously becoming more cost competitive. B, we are taking the steps, the R&D podium positions, the winner position on some of the products will drive -- and that's a very important component of sales being driven in the European market. Similarly, recently, we have won some OE business, including with now the premium OE manufacturers like Audi, et cetera, which would drive up the brand image even further. So we are seeing volume gains even at the beginning of the year.But yes, within the context of a market, which grows at 1-odd percent, volume gains at high single-digit itself is a fairly aggressive growth. Unlike India, where you can say that we've had the volume gains close to 20-odd percent across some of the product categories, that kind of volume gain is difficult in European markets. It also continues to service some of the export geographies. So it's a mix of factors which will drive the margin improvement, which is the proportion of Hungary increasing, market share and the volumes increasing and also looking at various elements of cost to tighten it up even further.
And with [indiscernible] this lower production plant production in the Netherlands plant, so the fixed cost at that operation can also come down? Or that will remain because the employees and all probably will remain there -- or what's the plan? Can we know that also?
Even that is being looked at. And just to correct, it is not as if the production is being lowered in Netherlands plant, the production also is being fine-tuned in line taking into account that there are 2 plants. Some of the machinery, which has become old and hence not at a level to produce the tires for the European market got taken out. And that was not reinvested because we had modern machinery put in the Hungary plant. So it is not as if that machinery is lying idle there. And yes, the fixed costs are also being brought down in line with the capacity that would be there at the [ SKD ] plant.
And sir lastly, you didn't mention the European margins for the quarter. Also, reifen sales number for FY '19 and fourth quarter?
Sure. So the European EBITDA margin for the Dutch and the Hungarian operations was 6%.
6%?
6%. Yes. Again, 10.5% for the same quarter last year and that was the part, which really hurt the overall results and the European results. The reifen sales for the quarter was at EUR 26 million and for the full year was just short of EUR 160 million.
Next question is from the line of Pravin Yeolekar from CGS-CIMB.
Gaurav, this is Pramod here. A couple of questions. If I'm -- for the year ended FY '19, what was your market share in European passenger cars? And how it has changed over last 1 year, or recent quarters?
So the market share in the European replacement market alone, OE, we are still very small, was flat at 3%. It did not change over the last year from FY '18. While we had market share gains for the first 3 quarters, they more or less got erased with the volume decline in the fourth quarter. So we've ended FY '19 (sic) '18 with a flat market share because the volume growth was in line with the market growth for passenger car tires.
And if I have to read through from the volume breakout, which you gave for Netherlands and Hungary to move from almost around 6.5 million to 7.5 million, that looks like a steep rise in the context of last couple of months slowdown in Europe, almost like a 13%, 14% jump. Isn't it too optimistic to look at?
Fair question, Pramod. A, the number for this year are closer to 6.7 million and the number that you are looking at for next year includes a jump in exports and OE volumes. So the growth that we are looking at to target in the replacement market is high single digits. It is not that it's a given, so instead of 13%, to % if it's 8%, 9%, that's an easy target. It would still be a target which is challenging in the market context. But to just put it in perspective, it is not an unreasonable growth target that is being taken. And also some of the things that have been put as building blocks whether some of the product results on the R&D side, whether the Hungary plant now being at a higher level, we are positioned far better to go at those volumes.
Okay. And the last question concerning this recent strategy of not to go aggressively on price cuts. Does it in any way change your breakeven points? Or the time when you want to achieve a breakeven in that Hungary plant? Does it get delayed in any sense? Or how do you look at it?
It does not get further delayed from our original estimates and what we had talked to all of you. Yes. The volumes are lower. This strategy of holding firm on the pricing and hence the price positioning that we have in the European market does not delay things. It ensures that we do not go after very short-term gains on volume for a quarter, which impacts us not even long-term, but in medium term.
We take the next question -- next question is from the line of Sumit Mangal from Goldman Sachs.
Gaurav, Sumit here. Just -- so I'll take a one. The clarification I wanted to -- I wanted one small clarification. See, MRF, like, they've actually reclassified their export income to other income because of this their EBITDA margins get impacted by 90 to 100 bps. Have you also made some accounting standard adjustment, which is affecting your EBITDA margin?
No, nothing like that, Sumit. I'm not sure about MRF and I will have to ask some of my accounts team to look at it in detail, but we have not classified our exports as other income, et cetera. And I would be -- I'm a little surprised to hear that, but the accounts teams will look at it in detail, but we have not done any of those reclassifications.
Next question is from the line of Raghunandhan from Emkay Global.
Sir, in the domestic market, I wanted to understand the price correction, which was taken in the last few months. And also, how do you see the impact of recent increase in [ growth ] prices on margins ahead?
Yes. Raghu, in Q4, which is the last quarter, we did not make any price changes. We held onto the prices and there was no factor which was warranting a price increase given that raw materials had come down. We withstood the pressure on the price correction side because already the margins had come down in Q3, which is what we had said that we would like to see that as a trough on the margin front. As I mentioned earlier, the raw material situation continues to be fairly stable to benign even in Q1. So there is no case for raw material driven price change. Given where crude is, et cetera, we see some pricing pressure coming through the year, but in a very gradual manner. As of now, there is no case for alarm on the raw material side as we see it.
And also, how do you see the India revenues to pan out? Last quarter, you had indicated that a double-digit growth is what you'd be looking at. And one more point on the CapEx side, like, last quarter, you had indicated INR 25 million to INR 30 million CapEx for FY '20 on mainly towards Andhra plant. Just wanted to understand that plan still stays, any delays in that?
So on both those, the outlook and the plan remains the same. We would be looking and targeting a double-digit growth. Yes, while the OE side of the things does not look as promising as it was looking 6 months back. But we've seen very strong signs from the replacement market. And even from the OE front, the expectations is that situation would improve as this year progresses. So our target of growth remains in double digits and the CapEx plans also remains on track of the numbers that you mentioned, which is the INR 25 million to INR 30 million, which is largely AP, small other CapEx is maintenance CapEx, et cetera.
And any thoughts on the FY '21 CapEx, sir?
A little far out, but based on existing plan, one would talk about INR 16 billion or INR 1,600 crore CapEx for the Indian operations.
We take the next question from the line of Ronak Sarda from Systematix Group.
Sir, first question is on your cash flow generation for this year. If you can split it out between India operations and Europe, so what would be the OCF generation? And apologies, if I missed the CapEx number for this year.
Ronak, I wouldn't have the export numbers readily, you could probably interact with the Investor Relations team and they can get you the number because it's not just a simple net profit plus depreciation number, there would be other factors. The CapEx number that I mentioned earlier would be the 2,500 to 3,000 crore for the Indian operations in the current year. And to the question of what is the likely number for next year? That's 1,600 crores.
Okay. So for FY '19, have you -- what was the CapEx number for FY '19, India and Europe?
About 2,000 crores for Indian operations.
And Europe would be?
Sorry, consolidated.
Consolidated? okay. Okay. And sir, my second question was I mean the way the industry is seeing an increase in the TBR capacity, how do you see the net impact of increase in your TBR capacity versus lower utilization at TBB level? Is it a net-net positive thing? Or do you see the competitive intensity eating into the profits in TBR as well?
So A, again, as we have talked about it a number of times, Ronak, from the plans which are announced to actual capacity coming onstream can be a very different story. So yes, there have been lot of announcement for the truck radial capacity by various players, but a lot of them also have been deferring some of those plans because suddenly the pace of growth, which was there from towards the end of FY '18 and the first half of FY '19 is a different one, that is the current reality. Also, the TBR product continues to be technically a far more complex product, whether it's vis-à-vis the passenger car or the truck bias. And not everybody gets that product right. Overall, to your question, the pace of radialization, while it may change from year-to-year continues to grow, so the truck radial proportion continues to grow. If our overall truck mix within our overall Indian revenue is 65-odd percent, the number which few years back was 50-50 on truck bias and truck radials would now start getting to a 60%-plus on truck radial and the balance on truck bias, so it continues to shift towards truck radial, which on an operating profit wise is a good thing. It does mean that you have to continue to invest in capacities, but on a pure operating margin basis, it's something which is favorable for the industry and for us.
Sure. So when you say it's favorable, you take into account the negative impact of operating leverage on TBB? Because assuming the growth is in that 6% to 8% range, your TBB would see some decline as well?
True. But also they factor into the fact that any of these capacities, while one aspect is growth CapEx, there is also a significant amount of maintenance, refurbishment CapEx, which has to go on in plant and machinery. And over years, even without sort of saying that we are decreasing our TBB capacities, that capacity has continued to come down slightly.
Next question is from the line of Chirag Shah from Edelweiss.
My first question is on replacement demand. So how do you read the trends over last -- if you look at last 3, 4 quarters, would it be right sequence of pace of growth that slowed down on the replacement side across categories?
It slowed down a little towards end of the year, Chirag. Clearly, the first half of the year was extremely bullish, but the growth was being led by OEMs. The big number in the first half was OE led with replacement supporting it. In the second half, you had replacement leading the growth, while OE was not even a laggard, but a drag because it was in the negative territory. And yet, we've ended the year, if you look at year-on-year basis, in a growth mode for every quarter. If I see the numbers for the 1 odd month of this year, again replacement continues to be very strong. So we are looking at a top line growth even in Q1, while OE continues to be a drag.
What I'm trying to understand is would it be a right statement that pace of growth has slowed down for replacements or not? Is there a slowdown in that activity or that demand cycle? If it was growing at X number, is it X minus something or the pace has been maintained?
The pace of growth in the replacement is still maintained
It is still maintained. And the outlook remains same going ahead also?
Outlook remains same, yes. Unless there is something dramatic in the economy, the outlook remains that the second half of the year and factoring into the changeover to BS-VI norms from 1st April 2020, there should be a second half, which is in fact far more buoyant than what we are seeing currently.
So that would be from the OEM perspective, primary scenario?
That would be from the OEM perspective, which will then continue to ride on replacement. Today there are no signs that replacement should slowdown.
And that's true even for passenger vehicles?
That's true even for passenger vehicles. As I mentioned, for full year also, we've had passenger car replacement, which has continued to grow. And even in Q4, the growth of passenger car volumes for us in the replacement is similar to what is there for the full year, which is why I say that we have not seen the replacement growth pace slowdown.
Sir, and the second question was on the Europe side. What is the capacity at Hungary? You indicated 4.5 million, but without any major CapEx, how much it can be expanded further?
With a small CapEx, it can be expanded to somewhere around 5.2 million. Beyond that, it would need a significant CapEx. So the 4.5 million can be increased by about 15-odd percent.
Okay. And given your approach towards holding on pricing, what is the key driver for that. Is that the product feedback are very good, that is making you to take this stance that we'll not go for the price cuts? Or is that the profitability is getting affected significantly given that you are relatively smaller player in the system? How should -- and what is the key driver for this change? Because this is a big change as far as Europe business is concerned, [ in the event ] the industry cycle is that you reduce prices, the nature of industry is such.
So it's a mix, it's not just one factor, Chirag. A, we've had very good test results. So the product is right up there. We've had OE wins with premium OEs visiting our plant, clearing our plants, so they are at various stages and with at least one of the premium OEs, we expect to start business soon. So as a combination of all of that, there is a certain pricing position that we have. And hence the team did not take the easy route on saying that there is pressure from the market or there is pressure on volumes, so let's just get back by dropping prices because then to get them back up again, it's not as if that you could play with these quarter-on-quarter.
And last, if I can just squeeze in. Anything on the pricing action you can indicate what you did in Q4 as well as Q1?
As of now, there has been no action taken on the pricing front, Chirag.
Okay. Even in Q4 and even in this new year also, right, [ both ] periods?
Yes. We have announced a price increase in Europe on the TBR front.
Okay, but it has been implemented?
It is getting implemented next month.
And it will be how much?
To the order of 5%.
And it is driven by cost push? Or...
It is driven largely on the fact that the product is being very well received, the product performance is right up there. And hence on truck we are moving up the pricing ladder to say that if the product performance is there, we would like to position it at a different level. Given that the volumes are small, at this stage, we can afford to get the price positioning right, so that when the volumes go up significantly, we don't start fighting the pricing battle then.
And if -- and how far -- how much lower you would be with your immediate peers or your benchmark peers with the 5% hike?
We would be ahead with some of the benchmark peers. The immediate peers being the likes of Hankook, et cetera, but on truck really the benchmark in the European tire industry is Michelin. We would be at a level even after this price increase in at 70 or early 70s and that's the kind of product strength or brand strength, if I may say, we have in the Indian market because against the same player on TBR, in the Indian market, against a premium or a discount of close to 30%, that number is just a couple of percentage points to sometimes being equal for the Indian market.
Next question is from the line of Prateek Poddar from Reliance Mutual Funds.
Sir, just 1 question. Europe is a very mature market and just for the quarter 4 part, I am just not able to understand, the market would grow by [indiscernible]...
Mr. Prateek Poddar, I'm so sorry to interrupt, but sir, your audio is not very clear.
Now is it clear? Okay. And so my just -- my 1 question was Europe is a very mature market with almost 300 million to 320 million tires for the full year replacement and we are just at 6 million, so ideally end market's volatility should not impact us at all. Why is that, that it has impacted us this quarter? That's question #1. And second is why have we not gained market share in Europe?
So both of those are related, Prateek. When you -- at a broader level what you say is right. But our market share gain or volume gain, et cetera, you're talking about not millions of tires, but in terms of decimals. If this number had been up by even 100,000-odd tires, the whole story would have been that we have had growth. So you're not talking about as if we have missed volumes by a few million tires, we are talking about missing it by 0.1, 0.15 times million tires. And that is in a quarter, you take certain decisions on an overall basis of pricing, where you will push, et cetera, and it doesn't work out, that's the small miss, which results in you saying that you've not had the volume growth. That volume growth was there across 3 quarters and if fourth quarter had gone as per plan, we would have ended the year by saying that European operations continue to grow in the market. And that is where we will continue to target and we are confident about that. Can we confidently tell you that no for the next 12 quarters, there is not a single quarter that will go wrong? That's a difficult one to say for any company. But you're not talking about a miss of a large magnitude, it's just that within the context of the market and our own size within the market that shows up more sharply.
Understood. Understood. And, if I may ask sir, on a y-o-y basis, if I look at your revenue growth for the Hungary operations, they're flat, is it? Or they will grow?
They would grow because the Hungary volumes have continued to grow and as I said, you will...
No, I was saying about the European manufacturing operations, which included Hungary, Netherlands on a y-o-y basis for Q4 has your revenue grown, ex of the distribution arm at all?
So as I mentioned earlier, y-o-y our European sales manufacturing revenue was 128 million, which was a decline of 4%, 4-plus percent compared to the same period last year. So we did have a revenue decline.
So -- but then you're taking the benefit of pricing also, right?
Pricing was maintained. We did take a price increase. And at the moment, the revenue goes down there are fixed costs which eat into the operating leverage and have an impact on the margin.
And lastly, you talked about the forward guidance, right, of some 6.7 million tires will be 7.5 million. How much of this would be driven by OE, so in the incremental say 0.8 million tires, which you are about to sell in FY '20. How much -- is this predominantly OEM exports? Or this is replacement?
There is some growth in the replacement market as well as I mentioned and the 6.7 million odd of this year also had certain quantum. So let's say, a larger proportion of growth is OE and exports. I would not be at liberty to give out very specific segment wise volumes.
Understood. Understood. And just Hungary, how much can you produce now? What's the production capacity? You said more than 10,000 tires. I was just looking for a more specific number. Have you ramped this up to 14,500 tires? Can we produce this at all, if we require 14,500 tires per day?
So the current year production capacity, keeping in mind the constraints of SKU wise industrialization, would be at about 4 million versus from a pure machinery perspective a capacity of 4.5 million. So we would be just a little short because of certain amount of capacity will continue to be used by R&D to industrialize various SKUs. The capacity was close to a little short of 3 million last year, that would go up to 4 million.
So you're almost about there when it comes to Hungary operation getting -- I mean at least from a production point of view getting fully utilized, if you want?
Absolutely. If the market is there and we are selling, yes. The plant is capable to -- by the end of this year, the plant would be there in terms of -- at its planned peak capacity.
I'm sorry, just one question on the Netherlands operations. For FY '20, you said 4 -- a little less than 4 million. Is that where you would like to maintain it going in the future also, like for the next 3 years? And incrementally from what -- I mean our strategy was to ramp down Netherlands and shift some of it to Hungary. Are we done with it? Or there will be further ramp downs possible in Netherlands as we keep on increasing Hungary?
No. There would not be further ramp downs and it's a call which the manufacturing experts take on a regular basis. As I mentioned earlier, the ramp down is also dictated by the fact that some of the machinery had become old. And the market conditions and the market requirements dictated that either one invested significantly in modernization versus what was done is to build up the capacity in Hungary. So as of now, what we have is a capacity, which is under 4 million in Netherlands, and eventually 4.5 million in Hungary.
Understood. And sir, Gaurav, just to understand, are -- my understanding was that 20% volumes in Europe will be OEMs, is that a correct understanding?
In a longer-term matured state. Today as we speak, that number would be significantly lower. It would be in fact even for the current year, I think less than 5%. So we are still a long way off because the OEs also take their time in building the confidence even after approvals. They would not immediately put you on multiple models. So you would typically start with 1 or 2 variants on cars and as they gain traction and confidence in you, then the volumes ramp up significantly. So yes, eventually one would like to have a mix where nearly 20% and that would be what even midsize players would have in a stable scenario.
But next year, in FY '20 as we just discussed, OEM share will go up, right, in PCR, in the European manufacturing operations, overall.
It would go up, but it would go up marginally and still be under 5% on average.
Next question is from the line of [ Sandeep Manan ] from Franklin Templeton.
I have one question related to the European replacement operations. So could you give an idea of how the growth will be driven by? Is it due to in terms of SKUs new network addition, geographic expansion? Could you give us some more details about your replacement strategy?
Sure. So it will be driven on the back of not new SKUs introduction, the -- our SKU basket is pretty full. It will be a mix of deeper penetration, so distribution, reach expansion or capitalizing on some of the recent test results, mix of brand and promotions. So deeper penetration in some of the key markets and continuing to maintain our position in our existing markets. Also some part of the growth will be driven by growth in the truck radial volumes, which are starting from a very small base and continuing to grow rapidly. So while the percentages there do not make sense because you are just starting, but part of that growth is also driven by the truck replacement volumes.
Next question is from the line of Amyn Pirani from Deutsche Bank.
My first question was on Europe. Now would you say that in Europe as far as the margins are concerned, mix has a bigger play? Or is it the fact that you are moving to Hungary, which is a lower cost? Because the reason why I ask this is that if you ramp up in Hungary, but if the mix remains the same or deteriorates, could it still be a pressure on margins? Because what you're doing in Hungary is what other players are also doing by moving to lower cost destinations. So that's an industry trend. So for you, is the mix improvement more important? Or is moving to Hungary?
So both are equally important, Amyn. I wouldn't say one is more important than the other. Hungary movement or Hungary ramp up, rather than movement because Netherlands is at a certain stable volume, is critical given that there is a large investment in the ground and unless we utilize the same, there will be pressure. Mix improvement is a journey, which has already been undertaken. It is dictated both by the market and by internal strategy. So even in the last 2, 3 years, where our margins have not been something that we have been happy about or you would have been happy about, the mix has continued to improve. The UHP proportion has improved by 3, 4 percentage points. And going forward, there is a clear-cut plan of continuing to drive the gain in UHP proportion within the overall mix. So both are being looked at in terms of driving up the gain, not just in top line, but even more significantly on the margin front.
And in 4Q, would you say that apart from the fact that volume growth and revenue growth was not there, was it also a lower UHP share quarter? I mean was winter sales disappointing? Is there any other reason apart from the fact that volumes were lower, that's what I'm trying to understand.
So that would have been slightly -- see, A, coming off the December quarter, the March quarter is always a little bit has come down. So -- but if I look at just year-on-year basis, not significantly off from a mix perspective, it was largely driven by the fact that we did not get to our revenue target and then the fixed cost starts eating very heavily into the margins.
Okay. Okay. My second question is on India. So in 4Q, you mentioned that replacement growth both on PCR and on TBR was 7% to 8%. So basically the OEM was despite being a lower revenue contributor, it was so much in the negative that it completely took away all the gains of volume growth. So going forward, at least in 1Q, it seems that OEM is going to continue to be as weak if not more. So how should we look at this? Because even if replacement were to remain strong, if OE is declining in double digits, can revenue growth remain like muted because of this?
So A, the OE number seem to be slightly better than Q4. But yes, not at levels where we were in the previous years. And replacement indications at least we are just 1 month into the quarter, seem to be looking even stronger than before. So yes, Q1, we are looking at both year-on-year growth or sequential growth, but yes, not at a heavy level. To achieve our target of double-digit growth, there is a certain amount of reliance on the second half pick up that I talked about.
Okay, okay. Okay. And just lastly, you mentioned that raw material is benign and you don't need any price hikes, and of course if raw materials remain this way, then price hike wouldn't happen. But the thing is that industry margins, not just for you but even for the others, are already down compared to where they were a year ago. So for some, it is down more, for some, it is down less. So which means that even if raw materials remain here, for the industry to make better return on capital, they still need to increase prices. So how do you see that journey into the year if the second half recovery does happen as we expect, will there be scope for the industry and for you to raise prices even if raw materials remain flat?
Amyn, A, there would be a certain amount of operating leverage that would kick in. But yes, as volumes pick up in this raw material situation only then we could take price increases. How the industry would play out, will have to be seen. But your point is right that yes, ideally we need to move up slightly on the margins. In the Indian context, we are not way off, but we are slightly off.
We take the next question from the line of Nishit Jalan from Kotak Securities.
So my question is on the Europe business. First of all, you mentioned that full year revenue growth was 7% in the manufacturing operation, right?
Yes.
But then you said that there is no market share gain, so was volume growth significantly lower? There was a mix impact in that revenue growth?
There was significant mix impact for the passenger car tires. There was also volume gains on the truck side. So when I said very little volume gains, which is under 1% in line with the industry, that's for the passenger cars.
And sir, on a full year basis...
Sorry.
On a full year basis, what's our EBITDA margin in the manufacturing operations?
Just 1 minute. 8.5% EBITDA.
Sir, if we are seeing such a strong mix because obviously your ASP is going up 3%, 4% just because of mix, would suggest a higher profitability in that segment as well, right? And raw material also is not that big a problem for Europe market because a large part of that in India is because of rupee depreciation also, so then why are we not seeing that on the margin front?
Fundamentally, Nishit, because you still continue to have a plant which was not optimally utilized. So if you go up on the margins, which would mean that the plant is fully utilized or at least at higher utilization levels, that's when the margin kicker comes in. So there is margin contribution from the mix improvement, as you have rightly said, which is getting negated by the fact that you have plants, which have still not reached to the reasonably good capacity utilization levels, which is where we need to get Hungary to volumes to 4-odd million against a capacity of 4.5 million, that's when you'll get the full operating leverage.
And sir, when you're guiding for 7.5 million volumes next year, which is about 12%-13% kind of a growth, your -- and that's only for PCR you're talking about, right? And so -- and given that the mix is improving, then essentially you're talking about mid- to high-teens kind of a revenue growth?
We would talk about close to double-digit growth, yes.
So that's what you are -- that's what is implied by whatever you have talked about in different parts of it?
Yes because some of these volumes come through OE and exports, which are then pulling down the overall mix, but yes, overall, we would look at targeting a double-digit growth in Europe.
And sir, my next question is on the India business. You mentioned that RM cost per Kg came down by 4%. When you talk about RM cost coming down by 4%, has it played out in the P&L? Or it's only the procurement cost? Because when I look at your quarter-on-quarter gross margins, the improvement is only about 100 bps and ideally if RM cost come down by 4% without much pricing change, your gross margin should have gone up by almost [ 240, 250 ] bps?
Some of it would also be as a result of inventory consumption because there was a buildup of inventory when the whole market and our sales slowed down. So some of the higher cost raw material, which was there in the inventory would have been consumed in the current quarter.
So which means your gross margins should improve further in 1Q assuming your RM cost stays flat, and even if you don't take price increase, is it correct to assume that?
Sure, if everything happens as you are saying.
Well, ladies and gentlemen, due to time constraint, we take that as the last question. I would now like to hand the floor back to the management for their closing comments.
Well, thanks, everyone. And we look forward to continuing to interact with you. If there are any follow-up questions, please send them to the Investor Relations team. Thanks.
Thank you very much.