Apollo Tyres Limited
NSE:APOLLOTYRE
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Apollo Tyres Limited
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Thank you, [ Reil ]. Good afternoon, everyone. On behalf of JM Financial Institutional Securities, I would like to welcome you all to the Q1 FY '19 Earnings Call of Apollo Tires. From the management today, we have Mr. Gaurav Kumar, Chief Financial Officer, along with the senior management and IR team of the company. I would now like to hand over the floor to Gaurav for his opening comments. After which, we will move on to the Q&A session. Over to you, Gaurav.
Thank you for joining. Let me begin with a little bit of opening comments, and then we would be happy to take your questions. Consolidated results for this quarter stood at INR 42.5 billion, a growth of 30% for the same quarter last year and about 7% on a sequential basis. Both Indian operations and European operations registered healthy growth. EBITDA at the operating margin, excluding other income for the quarter, stood at INR 5.3 billion, a margin of 12.3%, a significant gain against 8.4% for the same quarter last year, though marginally lower than the previous quarter's profit number. The big reason for growth in margin was on account of higher scale and lower RM prices. The raw material cost was up 5% over the previous quarter, and we are continuing to see a cost push, so expect the raw materials to go up by another 5% in the current quarter over the June quarter. Gross debt came down from INR 46-plus billion at the end of March to INR 40 billion at the end of June quarter. The net debt was almost at a similar number of INR 27 billion, similar to last quarter. We continue to be fairly conservatively leveraged. Moving on to Indian operations. The sales for the quarter was at INR 30 billion-plus, a growth of 32% over the same period last year and an 8% growth on sequential basis. The growth story of India continued on a very strong momentum, and we had volume growth across the segments. Simultaneous with that, we have continued to add network. More than 100-odd network addition was done. Even on the two-wheeler segment, we continue to make gains, and we believe we are now nearly 5% of the replacement market. As mentioned to you earlier, we have now launched on a pilot basis our two-wheeler radial product, and we've received very encouraging response. So this is a segment that we would be looking to get into and establish our position in the two-wheeler [ higher-end ] segment even further. Further aiding this performance was continued decline of the Chinese imports, which are at an all-time low, and our overall capacity utilization continued to be at very high levels. The EBITDA, excluding other income for the quarter, was at INR 4.1 billion, a margin of 13.5% as compared to 8.3% for the same period last year. Gross debt for the operations and the net debt continue to come down with the strong operating performance. Moving on to Europe operations. The total sales for the entire European operations was at INR 12.4 billion, an upward growth of 22% over the same period last year. For our European sales and manufacturing operations particularly, we had a growth of 9%, with the Hungary operations ramping up, and we are beginning to see the benefits of stabilization. While we have had good volume growth, the pricing pressure has led to margins still being not at desired levels. We've had margins improving from last year, and we will continue to see those improvements, but they are not at -- yet at levels where we want them to be. And we are working on the mix, et cetera, to continue to improve the situation. One positive development has been a recent imposition of antidumping duty on Chinese TBR, which is timed very well with our introduction of TBR in the European market and could lead to a significant boost. We would continue to see the ramp-up of our Hungary operation. In this quarter, we would introduce or start manufacturing of truck radials in the Hungary plant, and more importantly, by end of the year, we should be reaching close to the peak capacity on the passenger car tires. That's all from my side. We will be happy to take your questions.
[Operator Instructions] The first question from the line of Ashutosh Tiwari from Equirus.
What are the volume growth numbers for India?
Come again?
Volume growth numbers for India operations.
Sure. The entire growth of 32% was essentially coming from volume growth.
Okay. And how is the TBR [indiscernible] running, what is the level it is running right now and the capacity also?
So the TBR average for this quarter would be around 10,000 tires per day. We will within this quarter reach the planned peak capacity of 12,000 tires per day. So in the second half, we would have the full capacity available.
Okay. Is there any pricing action in India recently?
We took a price, small price hike in the TBR segment in Q1. Given the raw material pressures, we are considering price increases in the current quarter. Timing is not yet known.
Okay. And, sir, last year, the European operations, if I look at your subsidiary EBITDA, it is tight from Q4 to Q1, despite the fact that in this quarter, generally, the reifen also shows some EBITDA margin losses in the fourth quarter. So what has happened over there?
So in terms of the manufacturing and sales operation, which is Dutch and the Hungarian operations, Q4 is a strong quarter. So vis-à-vis that, the top line, et cetera, comes down. The margins come down. And while reifen has shown an improvement, the overall impact is what you are seeing as flattish.
Okay. So what's the level of production Hungary plant running it in Q4 -- sorry, Q1?
Hungary plant was running at about 5,500 tires per day.
And you're saying by end of this year, you'll reach what level, FY '19?
By FY '19, we should be in excess of 12,000 tires per day.
[indiscernible]
Yes. For example, currently, we are already touching about 7,000.
The next question is from the line of Nishit Jalan from Kotak Securities.
Sir, you alluded to the fact that there's an antidumping duty on trucks in Europe. Can you share some more details as to how much was Chinese imports as a percentage of the European market overall? And what does this mean to volume? Obviously, we'll gain, but what does this mean for pricing? Was the pricing depressed in Europe market? And how much increase do you see for this?
Sure. Nishit, I'll have to get some of the data. We do know that Chinese TBR was a significant factor in the European market. It's still too early to quantify some of the impact. So maybe around next quarter, we can. But to give you an example, in India, 1 year down the line from a level of the peak level, it was not pre-antidumping. There were other factors also, but the level from 150,000 tires a month is below 50,000 now. Still too early to say what will be the final impact in Europe. But yes, it would benefit, both in terms of volume and the ability to get price increases.
But it will be roughly 20%, 30% of the market, right?
Probably not 30%. We will come back to you with the data.
And anything you are getting on PCR imports? Because what I understand is Chinese PCR imports will also be about 30% for the replacement market, and the Chinese pricing is like significantly lower as compared to any other players in the market.
You're talking about Europe?
Yes, sir, I'm talking about Europe. Sorry. Yes.
I recall a figure more around the 20% mark, but we'll check both the TBR and the PCR import percentage. I'll get back to you.
Anything you're hearing that regulatory bodies are evaluating and putting some antidumping duty on the PCR side as well? Any [indiscernible]?
No. PCR, as of now, no. But the fact that they moved on TBR is an encouraging sign. And for us, if something was to come on the PCR side, that would be a great boost.
Correct, correct, correct. Gaurav, my next question, if I look at your subsidiary annual report, which you came out with, and if I look at the consolidated manufacturing operations in Europe, what I saw that year, RM cost to sales in 2017 to '18 was flattish. Now 2018 was a year when there was like significant cost pressures, and we saw in India about 5% gross margin there. And we keep on hearing about that, that there are pricing pressures in the European market. Despite these 2 factors, what was the key reason why you were able to maintain gross margin? Like what was the kind of improvement you saw in the product mix? If you can provide, if you can give more color on this?
Sure. So there is -- there's a significant one drive, Nishit, is to continually improve the product mix, which is, at a very broad [ sensing ], if I can say, the UHP proportion, the ultra high performance proportion within the overall PCR basket. And that's something that's constantly worked on. Broadly, last year, you could say that we would have driven up the mix anywhere between 6% to 9%.
And what will be the mix now?
So a few years back, our UHP proportion used to be somewhere around 20%. We are now at late 20%. So it's not a 1-year improvement that I am talking about. It's a multiyear, over a couple of years. The UHP proportion has moved from about 20% to late 20%.
Okay, that's great. And my last question, if I may. If I look at, right now, the relation that we are seeing in the Indian market is more in OE than in replacement, right? So what will be the OE/replacement mix in TBR in India? And how do you see that moving in the next 3 years? Because it will be an important driver for margin improvement in India, right?
Sure. The current mix, OE versus replacement [indiscernible] OE proportion against a normal trough of about 25%. So it's 1:3. For TBR, it would be almost close to 1:1 or, let's say, 40-60.
Okay. And how do you see that in the next 3 years? Because relationship pickup in the replacement segment going [indiscernible].
So ultimately, maybe not in the next few years. But ultimately, it will move to the same mix, which is a stable one for trucks. So over time, a shift which is beneficial for us is that it will continue to move towards higher proportion of replacement.
Okay. So just one question, if I may squeeze again. Like you mentioned about UHP mix in Europe, can you talk a similar thing about in India as to how this mix is moving in India and what does it mean for your profitability? And what I understand is, right now, in PCR, your mix is significantly skewed towards OEs. And how do you see that moving ahead? Because the models which you are supplying right now, if that -- when that comes to the replacement market, you may -- you should [indiscernible] volumes with replacement market, right?
True. So the OE journey on the PCR front is a strategic move, both from establishing ourselves as a technology leader and the fact that a very high proportion of OE sales translates into replacement sales. And clearly, we are seeing -- being recognized as a technology leader on the PCR front. And we will -- we believe we will continue to see those gains coming through in terms of volumes on the replacement side. Today, we have higher market shares on the OE front, and we are beginning to see the benefits on the replacement side.
The next question is from the line of Pramod Amthe from CIMB.
With regard to the CapEx, which you indicated in the analyst day today, you're talking about, if I'm right, almost like 5,500 [ gross ] for India for next 3 years, which is almost like, what, 50% higher than what you spend in last 3 years?
That's correct, Pramod. But in the last 3 years, of which I think a couple of years have been the Chennai expansion, prior to that was very little CapEx. Out of this 5,500, the 3,800 is Andhra. We have completion of Chennai which will happen this year. Similarly, as we have talked about earlier, there are projects on PCR debottlenecking, the small motorcycle radial capacity, high-end bias capacity, et cetera, and then the maintenance CapEx. So yes, it is significantly higher than the previous 3 years. But given the Greenfield plant and some of the other ongoing projects, this is what is needed to capitalize on the growth opportunity.
So in that context, is there any room to reduce debt? Or when you are looking at this scenario, it looks like debt can only go up, even though you have headroom. The issue is more on the interest cost hurting you again.
Yes. So there is enough headroom, as, Pramod, you mentioned, on the -- from a leveraging perspective, yes, debt would go up primarily in FY '20, which is the peak CapEx year, and it would start coming down only from FY '21.
The next question is from the line of Amyn Pirani from Deutsche Bank.
You mentioned that the Europe manufacturing operations had a 9% revenue growth. So this is the euro revenue growth you're talking about?
This is the euro revenue growth.
But can you share the revenue number in euros, if it's possible?
EUR 119 million, Amyn.
EUR 119 million. And the EBITDA margin at this level?
EBITDA margin was 9.1% against 8.1% of the same period last year.
And sequentially also, it is more or less similar, right?
Sequentially, the number was in excess of 10% last quarter.
10%. Okay. But it's a seasonally strong quarter?
Yes.
Okay. And on your PCR market share in India, is there something happening on the network expansion? So you mentioned that you added some 100 new networks. This was mostly on TBR or is a mix of TBR and PCR? And what is the current level of the network?
Total mix of TBR and PCR, in fact, if I could just separate those out, then the addition was more than 100 on the PCR front. And our total overall number of sale points would have gone up to about 4,500.
Okay, okay. And broadly, out of this, is there a -- I mean, is there something that you tried? Like what percentage of these are exclusive? Or is a driver of replacement growth in PCR?
In some areas, having an exclusive may make sense. So it's not something -- it is tracked internally. But is that a greater focus than overall network addition? I would say overall network addition is a greater focus. We are getting to about close to 1/3 of our distribution being exclusive.
Next question is from the line of Bharat Bhagnani from Tasha Invesco.
I just want to ask you regarding your TBR capacity expansion, which you have mentioned. So currently, I think what you said was, this quarter, you'll be reaching about 12,000 tires a day in India. And after the expansion and by when do you think expansion will be completed? And by what capacity will the increase be?
Yes. So when we started the Chennai expansion, we were at 6,000 tires per day. And over the last couple of years, with the CapEx, this capacity is being ramped up, being stabilized. So as I mentioned, the current quarter, we were at 10,000 [indiscernible] per day. But the equipment, et cetera, has been put in place and is being commissioned and stabilized. So by the end of this quarter, we would have reached the 12,000. So the additional 20% is what could be there to meet the demand for the next year, 1.5 years. There is some bit of import -- exports to Europe, which will get taken care of by the Hungary facility and, hence, available for the domestic market. And in 2020, the capacity being set up in the new Greenfield and AP will kick in.
Okay. How much will that capacity be?
The current sales that we are going in for, that's 3,000 truck tires a day.
Okay, okay. So meaning that once the current capacity, 20% extra, comes in, until 2020, for about 1, 1.5 years, we do not have -- if the demand scenario pans out, as such where there is more demand, we don't have any capacity as such to [ get that ]?
We will not have incremental capacity. We would have a, we think this capacity is sufficient, because 20% is not a small quantum jump. And b, we would have levers, as I mentioned, that there is a certain quantity which goes to Europe. And the capacity is coming up. So Hungary could take care of not only the exports to Europe but some of the neighboring markets. And the Indian capacity continued to be dedicated to the Indian market, if demand should require.
Next question is from the line of Sonal Gupta from UBS.
So, Gaurav, just on -- first on the numbers side. I mean, what are the reifen revenues for this quarter?
Just 1 minute, Sonal. Reifen was EUR 40 million.
EUR 40 million. And would there be EBITDA margin? Like what...
EBITDA margin was slightly in excess of 3%.
Okay. And just in terms of -- I mean, like you have taken some price increase this quarter in the Indian market on the TBR side. So overall, I mean, what are we -- and there was a TBB increase, right, as well?
TBB was -- previous quarters are up.
Okay. So -- but about what -- what's the quantum of TBR increase?
2%.
2%. And in terms of -- okay. And just moving to the Hungary side again. The 5,500 that you're doing currently, how much of that is just the shifting of production from India to Hungary, right? We were exporting 1 million tires, so roughly, that's your, what, 3,000 is basically that transferred? Is it...
Yes, that's about 3,000. It is still not all substitution. So some -- because -- while we are talking at the aggregate level, when the shift has to happen, it has to happen at [indiscernible] that particular SKU has to be industrialized. The molds have to be available. So a significant quantity was still going from India, which will continue to come down. And we may end up with a scenario where we say that, for some SKUs, it's not the best thing to produce small production runs in Hungary, just continue them from India. So that's something that the supply chain team constantly evaluates.
Right. So basically -- sorry, I'm basically trying to understand from a volume growth standpoint. So what was the volume growth for Europe this quarter in the -- on the [indiscernible] operations?
The volume growth on the passenger car side was 2%.
2%.
Year-on-year.
I mean, revenue growth was almost like 9%, 8% -- 8% to 9%.
That was driven by the mix. As I said, that there is a constant work being done on mix improvement for the balance that you see. And, in fact, the volume growth was lower, because on passenger, if it was 2% on some of the other product categories, it was lower. So large part of the growth is driven essentially by the mix improvement.
Right. No -- so that's what I'm trying to understand, that while the plant has ramped up to, say, 5,500, and like we discussed today, it will eventually go to 13,500, we've not really seen that much of a translation into volume growth. And when we are talking about that, by end of this year, the plant would be running at full capacity, then suddenly, is there going to be enough demand in the market to -- because right now, you've not really gained in terms of net market share growth or net volume growth from the market, it's just an internal transfer. But -- and suddenly, we are talking -- and what we are talking about is, by end of Q4, we should be running at full capacity, which seems a very tough ask, really speaking, that suddenly, your volumes will go up 20%, 30%, 40%, right?
Sure. So some parts of those volumes [indiscernible] are already beginning to go for exports. But that's not the majority chunk. But Hungary is serving the North American market also. But for Europe, we are beginning to see volume traction. And yes, if you see last year, that doesn't reflect in any significant volume gain. But we are beginning to now see some of those volume gains in the current year. And with OE demand also kicking in, we are confident that as we enter Q4 with that capacity ramped up, we will have demand there.
Right, right. Sorry, just -- because, I mean, like when we did the Analyst Day in Hungary, that time, you had said that the Netherlands plant was being sort of scaled back from 18,000 tires. It's come down to 16,000, and it will eventually go to 14,000. And up here, we are adding. So what -- I mean, so what is the expectation? And like if you were to look at from a volume standpoint, eventually, on the European PCR thing, do we see -- what sort of net final volume growth do we see on -- at the market level?
Sure. So the final level earlier from the '18, because of not investing in certain really old machines in terms of replacing them, we expect that our overall capacity in Europe between the 2 plants should be at about 28,000 tires per day.
Next question is from Bharat Gianani from Sharekhan.
I just wanted to understand that you mentioned 28,000 per day would be the final capacity for the previous question. That would be end of FY '19, right?
That's right.
Okay. So just continuing on that, you said the European operations will have a capacity addition also. So what would be the truck capacity that you are planning to add? And what's the plan to ramp up in that space?
So the truck capacity will be about 1,200 tires per day. That is just starting commercial production in this quarter. The ramp-up will continue and will probably be achieved by end of 2019.
So what will be the capacity end of 2019?
1,200 tires per day.
Okay, okay, okay. Fair enough. Okay, okay. And so just 1 more question from my side. Given that you have raised your, in your operations, CapEx for the next 3 years, so if you have to get an overall sense of CapEx for the next 2 to 3 years, considering all the factors, maintenance, CapEx and stuff like that, what will be your broad CapEx guidance for the next 2 or 3 years? Maybe if you can give some light on an overall basis.
For the overall operations, India and Europe, the number for next 3 years, which is the current year and next 2 years, is INR 6,500 crores, of which, as I mentioned, the Indian operations will be INR 5,500 crores.
The next question is from the line of Siddhartha Bera from Nomura Securities.
Sir, my first question is on the pricing strategy. So I just wanted to understand, say, for India, we are the market leader in the truck and bus segment. Our pricing is mostly around 5% to 6% ahead of the peers. But in terms of pricing action, we have seen that RM basket is a 5% [ QQ ] in the quarter. And for the next quarter, again, it is up 5% [ QQ ]. So why does -- to understand why the price hikes have been sort of slightly delayed or not in the quarter. So just wanted to understand your thoughts on that.
Sure. That's a function of industry dynamics, and it's not something that we could say, that because we a volume leader or a price leader, we will take a price increase. There is a certain premium which is established, which the customer is ready to pay. A disturbance of that price ladder or equilibrium could potentially lead to volumes being impacted. So we still typically take the lead on price increases. The quantum and when is something which is sort of taken by the operations team, looking at various factors, market conditions, et cetera. It's very difficult to say as to why a 2% was taken and not a 3%.
Understood. Third, in the passenger car segment also, will the sales strategy be followed for the truck and bus also? Or will it be something different, given that we are the second player and we are looking to be the market leader in the next few years?
We will look to take price increases, but again, the story would be similar. We will look at industry dynamics, and then time and quantum will be chosen accordingly. Given the raw material price pressure, we are definitely looking to take price increase across segments. But as of now, when and quantum is not something that is decided.
But how much will be the quantum required to offset the complete cost increase, assuming the 5% RM basket is up for the next quarter also?
Well, from this quarter to next quarter, broadly about a 3%-plus price increase would be needed if everything else was equal.
Okay. Understood. Second question is on the capacity side. So can you just broadly indicate, I mean, for the 13 tier tires per day of production capacity, say, for truck and bus and passenger cars, what will be the broad amount of CapEx that will be required? And how has this changed over the last few years?
For the current AP, which is a reality, which we are going ahead with, there is 15,000 tires per day of passenger car tires and 3,000 tires per day of truck tires, which is costing us INR 3,800 crores. The numbers on account on inflationary pressure, construction costs, et cetera, have changed significantly in 2008, so about a decade back when we set up the first investment we made in Chennai, which was 16,000 car tires and 6,000 truck tires, that costed all of INR 2,500 crores.
Sir, in this, can we get a broad breakup between the cars and trucks? I mean, will it be in the ratio of these numbers? Or will it be slightly higher towards the trucks? And how -- will be the mix for the CapEx worth INR 3,800 to grow the number?
Well, it will never be in the ratio of number, because for the simple reason that a truck tire is more than 6 to 7x the weight of a car tire. So the proportion will be much more skewed towards truck if you were saying per tire of capacity. On a metric tonne basis also, car tire capacity is typically slightly higher than truck, but I would not have the breakup as of now.
Okay, sir. Got it. Sir, my last question is on the commodity cost. If you can just indicate what would have been your natural rubber and the synthetic rubber cost for the quarter.
Sure. The natural rubber was around INR 135 of kg; synthetic rubber, INR 130; steel cord, INR 133; carbon black, INR 83.
Next question is from the line of Nitesh Sharma from PhillipCapital.
Yes. So wanted your thoughts on European antidumping duty given that EU has already imposed it. Could that mean the Chinese players might become aggressive in India to keep their plants running similar to what we saw when U.S. had implemented duties 4, 5 years back. So do you see that kind of scenario panning out this time around again?
That is always a possibility. But the fact is that the antidumping duties have been now in place on the Chinese imports for more than a year here. If anything, we have continued to see those levels coming down. And within the total imports, the Chinese share has come down even further. So if we are talking at an overall level of decline to 1/3 levels, the share of pure Chinese imports would be much more reduced than even 1/3.
Correct. So currently, most of the imports are happening from Thailand. Is that right?
That's correct.
Okay. And also, is the industry seeing some fatigue as far as pricing discipline goes? Because last year, despite a very sharp surge in raw material prices, the pricing action was much swifter. So is there a kind of a fatigue as far as pricing discipline and taking price hikes within all the categories?
Difficult to say because if you look at the margins of the current quarter, all the players have enjoyed the scale benefits. There have been some declines on a sequential basis, for us not so significant, for some of the others slightly more. But overall, the scale benefits have negated some part of the raw material push. Really this quarter needs to be seen because we would have had 2 quarters of successive raw material pressure. And the cumulative impact starts becoming significant. So difficult to say at this stage whether there is a fatigue in taking price increase or it will go through.
Okay. And my last question would be given that most of the players are adding capacity now and by FY '21, '22, almost every player will have increased capacities by 20% to 50% in that range, so over that -- do you see a scenario where all the players will be disciplined because everyone has additional capacity and there will be cash flow pressures? Or do you see a chase for market share?
Again, depends on the growth scenario. So if you take a sector which is growing at double digits over 3 years, that means roughly 1/3 of the capacity needs to be added to just maintain market share. For our case, for example, if you look at capacity additions, whether on the car side or the truck side, the numbers in the CapEx sound significant. But if you look in the context of overall capacity, the truck addition is 25% of the existing capacity. And passenger cars with the debottlenecking, et cetera, that we are doing to take care of demand, from about 36,000, 37,000 tires per day, we will add another 15,000, so which is slightly higher than 1/3. So as an individual player, it's not as if huge capacities are being added. If the demand growth or the overall economic growth continues in the manner that is currently, then highly unlikely that we are heading for a scenario of excess supply. If something unexpected was to happen and happen at a stage when everybody has gone far ahead, those are risks that you always have to take with you.
Next question is from Ashutosh Tiwari from Equirus Securities.
Yes. Sir, you mentioned about 5,500 tires per day in Hungary. What would have been the production level in The Netherlands plant in the quarter?
I will have to get back. I don't have that number readily.
Just want to understand that if peak capacity would grow to 28,000 tires per day, what would roughly be the operating level currently?
In Netherlands?
In all of Europe, you said that after your Hungary plant runs to full, you will have 28,000 tires per day capacity. So just wondering, sir, what is current production level broadly and not exactly?
I don't have readily the Europe production levels. Just hold on. Broadly, it should be around 14,000 tires in Europe for our Dutch plant.
Okay. So around 19,000, 20,000 level currently in total?
Yes.
Okay. And sir, generally, in terms of weight, TBR is around 6x or 7x of the [ PCR tire ]. In terms of pricing how that different will be, broadly, just to understand how much revenue can come from this [indiscernible] tires per day TBR plant?
Pricing with Europe is difficult to give you an average number because it's a mix of various markets. And while we talk of Europe as a whole, the pricing in different countries could be very different. In general, on an euro per kg or rupees per kg, even for India market, the PCR pricing is higher than TBR.
Yes, that's why I'm saying they're roughly 5x. You can make some mix on a TBR tire...
I won't be able to put a number to it, whether it's 5x or what. But yes, PCR gets priced higher on a per kg basis.
Okay. And lastly, in this AP plant, what would be the CapEx on this TBR plant only?
That mix is difficult to give because a large part of the CapEx is common building utilities, et cetera.
Okay, okay. And what -- any color on the price increases in European market? Like in India, obviously, supply would -- has the pricing been going up? Price increase being taken in Europe also right now or not?
For Europe, we have not taken any price increase. Europe also on its raw material did not face cost pressure. The chunk of pressure also came in Indian operation due to currency devaluation. And Europe, the raw material hits with a lag. So in Europe in the last quarter, there was no raw material pressure.
Next question is from Amyn Pirani from Deutsche Bank.
My question was on this -- your others in your segmental reporting, it's reaching a revenue base of around INR 1,000 crores a quarter now. So I just want to understand the profit that you show in this, is most of the profit recorded in India, and hence, the profit margin is low or it's just a scale issue?
I mean the large part of others other than the small sales and marketing operations, this is primarily Singapore, which is the raw material sourcing hub. And that marks up the sale to both the operations. So large part of this operation gets eliminated in the intercompany.
Next question is from Joseph George from IIFL.
My question, Gaurav, is in relation to the numbers that you quoted for the Hungary operations. You mentioned that currently, it's at 5,500 tires per day. 2Q it will be 7,000. And by the end of FY -- towards the end of FY '19, it will be 12k. What I wanted to understand was, is this the available capacity or is this your targeted production because the 2 are completely different concepts, right?
Yes, so this is available capacity, and we would target to work as close to that because also at these capacities already by second half, the Hungary cost of production will start becoming cheaper than the Netherlands' cost of production.
Okay. So does it mean that towards the end of FY '19 and hence, maybe early FY '20 when you have the full 13k production availability in Hungary, there would be some rundown of production in Netherlands, and then scale up in Hungary? Is that how we should look at it?
If there is not enough demand, overall, in the system from both Europe and the exports market, then yes. Again, the supply-chain team will take and while I'm talking at a macro level, there will be elements of SKU-wise consideration. But at a macro level, yes, if there is slight demand, then the cost of production would dictate that you produce at Hungary rather than Netherlands.
Okay, got it. And the second thing I wanted to understand was when we look at the incremental production in Hungary, I do understand that some of it, some part of it is essentially replacement of the exports that were happening from India. But if we look at it net of that and when you think about the incremental production in Europe as a whole, what would be the broad breakup of replacement sales to Mainland Europe, replacement sales to Eastern Europe and OE? Because as I understand, before the Hungary plant came online or maybe if I look at FY '17 or early FY '18, most of the sales from the Dutch operations would have been replacement to Mainland Europe. So in the new or incremental business, how is that mix and how does it compare with how it was maybe in FY '17?
Sure. So we are still reaching the stable states. So let me talk of a targeted endgame kind of a thing. You're right that the earlier mix would be predominantly all-Europe replacement. There were some small quantity of exports. A few percentage points. On a final basis, about 20% of the overall capacity should be towards OE in Europe. Another, depending on the demand scenario, 10% to 20% to exports to other geography.
As in non-Europe?
Non-Europe. And balance to replacement Europe. However, if the replacement Europe demand is stronger, that would have the first priority.
The next question is from the line of Jayesh Chandra Gupta from JM Financial.
My question is regarding the 17-inch tire in the PCR segment. Recently, Goodyear quoted that 17-inch tires are doing much better than the lower than 17-inch tire in PCR. So what is our mix in this -- the PCR segment in terms of rim diameter?
Sure. 17-inch market in India would be very small. So a little surprising, unless they were quoting on a global basis. For the Indian market, a decade back, the largest selling size used to be 12-inch. That moved slowly up to a 13-inch. And for the overall market, the largest selling size would be a 13-inch today. For us, we have continued to work on the mix even in India, and the largest selling size today for us is a 14-inch tire.
Sir, in case of Europe?
Europe, our largest selling size would be a 16-inch tire.
Next question is from Sonal Gupta from UBS.
Gaurav, just want to understand, one, in terms of the TBR replacement market, are there other level of radialization on the replacement side on your truck and bus tire segment? I mean what would that be currently? I mean because OE is almost 80%, 85% of TBR, right?
The current level in the replacement would be 40% to 45%.
And 40% to 45%. And this is sort of steadily moving up, right? Because of...
Steadily moving up. Yes.
Yes. And just also on the LCV side because that is treated as a separate segment rather than PCR, so what is the level of radialization in LCV? And how is that really progressing? And what is the plan there?
That's also at a level of 50-odd percent. But that's not sort of continuing to radialize very quickly.
Okay. So it is 50% already?
Yes.
In the replacement, is it?
Yes. No, overall. I'll have to check replacement and OE sales separately.
Okay, okay. And just in terms of -- like on the -- like when we're talking about this shift towards using TBB capacities for agri and OHT, so is agri primarily -- will it continue to be -- I mean biased or do we see there also eventually, there will be more shift to radial?
India, we think it will continue to be biased for quite some time.
Okay. Okay. And in terms of -- so what would be your agri share of our revenues in India?
Just 1 minute. 7%.
7%?
Yes.
And after this, I mean, tremendous growth this year, where are we in terms of TBR and TBB as a percentage of revenues?
Overall, truck revenue is about 60%. That's now 35% is TBR and 25% is TBB.
Okay. Because, I mean, 60 -- so we are seeing that the other segments are also growing equally fast, not just the CVs right then?
As I mentioned, we have had extremely good volume growth across segments. So it's not one product segment led group. Even on passenger cars, we've grown by 20%.
Okay, okay. And passenger car would be roughly about 20% of revenues, right?
Slightly under 20%.
We take the next question from the line of Shyam Sundar from Sundaram Mutual Fund.
Gaurav, in Europe, what is the percentage of revenues currently from agri tires vis-à-vis passenger car tires?
Agri tires is about 15% of revenue in Europe.
And this would be largely from the replacement side? Or how do we look at it?
A fair mix of replacement and OE. OE is a sizable proportion in agri Europe.
The next question is from Nishit Jalan from Kotak Securities.
Sir, if you can talk more about how will the OE and replacement mix in this quarter in terms of numbers? And how is it moved? I just want to check if OE continues to -- mix continuously increase for us -- for the overall business.
So for Indian operations, for example, the OE component was 30%, which is slightly higher than what would have been last. Well, FY '18 would still be 30%, so it's not as if it's gone up -- would have gone up by a few decimal points. But if you look at a longer-term history, it's gone up from about 25% to 30%.
Okay. And sequentially, also, it will be roughly flattish, right?
Sequentially also -- in fact, sequentially, it's come down.
Okay, okay. I just got one more thing. You mentioned the INR 3,800 crores is the AP CapEx. Now obviously, whenever you set up a greenfield plant, and there will be a lot of CapEx, which will go into maybe a leveling off basically, you are preparing the plant for a much bigger size. That's why what my understanding is initially, the CapEx is always higher than what it would be -- it would be subsequently, right?
That's correct, Nishit. But where -- sometimes it may not reflect depending on when we are doing the CapEx. There are inflationary pressures. So 3, 4 years down, when you take the CapEx, you may see a similar number and say there were no economies which kicked in, but they are there. For example, the construction...
That I understand. That I understand, but if you...
Your point as such is valid. There's a lot of common infrastructure leveling utilities, which is being created, which will not be re-incurred.
Any broad number? I know it's not possible to get into very detailed and all. But any broad numbers like to what percentage would be towards that? I do understand that 3 years down the line the inflation would change and all. But just -- how much is in the common infrastructure normally?
I'll have to get that from the projects team. We can get back to you.
The last question is from the line of Bharat Gianani from Sharekhan.
Just one question I had. The axle overload norms, obviously, government has proposed. What's the impact of that? Do you foresee OEM, obviously, there would be somewhat -- replacement, what is your sense on an overall basis, if this norm, actually, go through. I mean, if I'm not wrong, currently, as per the norms, it's applicable to existing fleet as well. So what's your comment on what bearing it will have on the TBR replacement demand?
This is still being discussed. So a little early to say what exactly the norm would be and that will dictate. All the tire players would need some time if it means that a different tire has to be put because while an overall capacity is there, capacities are also created SKU-wise. Technology-wise, it's not a challenge because we are already manufacturing that. Overall, for us, there should not be an impact on the replacement side because we will -- we have the capability to produce those tires. If they carry higher load, they will also wear out the tire faster.
Our understanding -- our assumption was that since it will have a new -- an impact on the new truck demand so probably, 1 or 2 years down the line, if fewer trucks are sold, so probably that could have an impact on the replacement side of it. So do you think that is possible? Or would that not be there at all?
Difficult to say because the impact on the replacement market size is not just a function of the number of trucks. It's most fundamentally driven by the overall demand, the freight movement in the country.
We'll take that as the last question. I would now like to hand the conference back to the management for any closing comments.
Thank you, thank you, everybody. And we look forward to again meeting you next quarter.
Thank you very much.