Apollo Tyres Limited
NSE:APOLLOTYRE
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Apollo Tyres Limited
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I welcome you all to the post-results conference call of Apollo Tyres. I also take this opportunity to welcome Gaurav Kumar, Chief Financial Officer of Apollo Tyres, as well as other members of the management team. I request Gaurav to make his opening remarks and that will be followed by Q&A.
Thanks, Joseph. Good afternoon, everyone. We'll begin with some of the remarks. On a consolidated basis, the net sales for the quarter were at INR 40.2 billion. The first time in Apollo where we've crossed the INR 40 billion mark. And this was a healthy growth of nearly 17% on a year-on-year basis. Even on a quarter-on-quarter basis, the growth was similar numbers led by Indian operations, where the revenue growth was 21%. EBITDA for the quarter stood at INR 5 billion, a margin of 12.3%, which was up close to 2% vis-à-vis last quarter. The sequential growth in margins was driven by a decrease in raw material prices. Even though the number was an increase of about 7% on a year-on-year basis. We expect a slight increase in the raw material prices going forward. The gross debt on a consolidated basis stood at INR 43.6 billion at the end of this quarter.A slight reduction vis-à-vis the last quarter on account of scheduled debt repayments.The net debt came down substantially from INR 41.4 billion to INR 23.4 billion, primarily on account of the QIP proceeds that we had closed in the beginning of the quarter. The net debt-to-equity at the end of the last quarter stands at 0.25. In the current quarter, we also started work on our next manufacturing facility in India, the foundation stone was laid in the state of Andhra Pradesh on 9 January, and the company plans to invest to close to INR 2,000 crores in the first phase. We continue our brand-building activities with sponsorship of the Indian Super League. We'll become the principal sponsor for the Chennai team, and also another title sponsor for another team, which is Minerva Punjab. Moving on to Indian operations, there was a significant benefit on account of decline in TBR imports, post the antidumping duty imposition. The sales for the quarter for the Indian operations were INR 26.3 billion, a growth of 21% over the same period last year and nearly 9% on a sequential basis.This was primarily led by growth in volumes. Year-on-year basis, the volume growth was nearly 16% with the largest volume increases coming in the TBR segment. The EBITDA for the quarter stood at INR 3.7 billion, a margin of 13.7% as compared to a 14.6% last year. But again, an improvement on a sequential basis.In terms of revenue segmentation, 90% of the revenues continue to come from the domestic operations and 10% through exports. Given the strong volume growth in the truck segment, the revenue from the truck category increased to 62%, about 2% higher than our normal standards.The raw material basket came down by about 3% on a sequential basis. For the European operations, the sales for the quarter was at INR 13.9 billion, a growth of 11% over the same period last year. EBITDA for the quarter was at INR 1.2 billion, at 8.3%. Our Hungary plant progress continues to be on track. The plant has currently reached a manufacturing of about 5,000 passenger car tires per day, and we expect to close the year at about 7,000 car tires per day production. The total CapEx spent on the plant is now close to INR 450 million and pretty much everything will be closed out in first half of next year.If you look at the European sales and manufacturing operations to give you a like-to-like comparison, we had a small growth, from EUR 118 million from the same period last year to EUR 121 million. And there was a significant growth contributed from reifen operations, which is our German distribution company, given the winter season.In terms of EBITDA margin for the European sales and manufacturing operations, given the seasonal impact, they improved from 8.5% to 12%. Hungary continues to be a loss with the peaking of losses in the current quarter at about EUR 3 million. Going forward, the situation would improve, we would continue to target as we had talked to you earlier of trying to reach a breakeven situation by end of the current quarter.This is all from our side, we would now be happy to take your questions.
[Operator Instructions] We have the first question from the line of Mr. Nitesh Sharma from PhillipCapital.
So beginning with this, can you help us with the revenue and EBITDA number of reifencom and for Vredestein?
Sure. So this revenue number of -- well, there is no Vredestein, so let's refer to it as Apollo Europe. The revenue number for that is EUR 121 million, which would combine whether the production is happening out of Hungary or Netherlands.
Okay. And how do you see your European operations going forward in the coming quarter? How do you see the scale up happening and the reifencom business shaping up going forward?
Sure. And just to complete the questions, the sales for the quarter for reifen was EUR 67 million. Going forward, Hungary, as I mentioned, would have seen a peaking of losses. It's now reaching a capacity, and going forward, as it scales up, we would continue to see improvement. The target internally is to go for an EBITDA breakeven by the end of this quarter, and it will start contributing positively to these results from next year onwards. The European operations will continue to scale up as the capacity comes on stream. This year, they have had the challenge of, while Hungary was still ramping up slowly, there was no additional capacity or volumes coming from the Indian operations, given the strong demand in India.So going forward from next year onwards, we would expect the European operations to scale up and margins to start improving because the losses of Hungary would disappear.
Coming back to India, can you help us with the segment-wise volume growth for the domestic operations? How was the performance in passenger vehicles and your light commercial vehicles in the replacement segment?
Sure. So the volume growth on the truck segment is 22% with a small growth in TBBs, bulk of the growth coming from TBR which is close to 50%. On the passenger car, we've had a flat vis-à-vis last year. On the 2, 3-wheelers, we continue to make good ground. We've had, even though on a small base, a volume growth of close to 90%. Light commercial vehicles, we've had a volume growth of 10%. So across product categories, strong volume growth except passenger car, which was flattish.
So in TBR segment, are we seeing a strong demand momentum even in our premium segment products or is it the lower-end products which are helping boost -- the overall volumes?
No, it has strong volume growth in the premium segment. The Apollo product on TBR is priced at a premium. As I mentioned, we've seen a volume growth of 50% on that. So...
And how do you see raw material prices behaving in the coming 2 quarters because, again, [indiscernible] RM would start in Chennai, so how do you see that panning out? And [ indiscernible ] will you see [ industrial ] beginning -- small price hikes in the coming quarters to negate the same?
So we expect slight increase in the RM basket in Q4. And we've seen a couple of players already announcing price increases in few product segments. So given the strong demand situation, there exists definitely a possibility of price increases.
Okay. So you would expect the industry's pricing power will remain strong moving forward as well because of lower Chinese and overall pricing dynamics?
That's correct.
[Operator Instructions] We have the next question from the line of Mr. Nishit Jalan from Kotak Securities.
My first question is on the domestic volume growth, when you say TB is flat Y-o-Y, that will be because of reduction in exports, right?
Yes, that's true also, because we've been running pretty flat out on capacity, Nishit. So right now, everything that is being produced is being sold. And hence, to a certain extent, there is debottlenecking exercise that is on. Till then, it's a capacity constraint which is driving or a limiting factor on the volume growth.
But is it safe to assume that the domestic volumes, basically, the supply to domestic market would have still grown in, like, 8% to 10% kind of a number? Because the export would have come down significantly, right? Especially to Europe?
Yes, you are right. We would have reduced exports. Domestic volumes may not have grown 8% to 10%, probably around mid-single digits.
Okay. And Gaurav, whenever you say about RM basket going up, you always mean the procurement price, not the P&L price, right? Because I think, last quarter you mentioned that RM basket is down 9%, but the benefit we have seen over the -- in 2Q and 3Q combined. So I'm assuming that when you say RM basket is inching up or basically down 3% q-o-q, there is further decline in 4Q -- 3Q, for which we will get some benefit in 4Q as well?
No, this is the -- our overall consumption price, Nishit. So we expect that to go up because some of the raw materials contracted towards end of Q2 -- Q3 is what would have already been factored in, in our expectations.
And this would also build in the impact of the increase in import duty that has been imposed on all the commodities that we import, right?
This would not have taken into account probably this latest budget where there's a cess imposed. That may even put it up by another small amount. But overall, we would still expect the raw material basket increase to be low to mid-single digits, not any significant increase.
Okay. So my last question is on the European business. When you say that the production capacity is 5,000 tires per day, back in the achievable capacity, we would not be selling those numbers yet, is it? Right to assume that?
Just to clarify, the capacity is higher. The capacity in place would have -- would already be in excess of 10,000. What first limits is the number of SKUs that are industrialized and hence, cleared for commercial production. The actual production today has already crossed 5,000 tires per day. And hence, it is salable production.
Okay. And sir, we also had a TBR capacity in our European plant, and since the -- and you're talking about that the entire CapEx of INR 450 million would be done, should we be assuming that the TBR production would also be up and running in next couple of quarters?
Yes. So TBR production will start in the next couple of quarters. So you take it that, that's a lag of almost 1 year vis-à-vis the passenger car, and would follow a similar curve where you have to stabilize the equipment, go through SKU industrialization. So the TBR capacity in FY '19 in Europe would be a very small one. And in any meaningful manner, only from FY '20.
But this would not lead to any further ramp up cost or basically startup cost. Can we expect that once the TBR plant start, then we will see further increase in startup costs?
There would be some increase in startup cost and preoperatives, but broadly within the numbers that we have talked about. Because bulk of the payments for equipments, including for TBR, have already been made. Now only mostly the retention money as equipments get commissioned et cetera, is pending.
But I'm talking from a P&L perspective. Like, we are having in the Hungary plant right now, around EUR 3 million, EUR 4 million...
There would be small quantum, but not of the order that we have been witnessing, let's say, in Q2 and Q3.
We'll have the last question from the line of Amyn Pirani from Deutsche Bank.
Actually, my first question was, so sequentially, your India volumes have grown -- appear to have grown faster than the revenues. So I mean, is there a quarter-on-quarter decline in the realizations and if that is the case, then, I mean, any reason for that?
There would not be really any reductions, Amyn, that could be a mix impact in terms of various product categories having grown at different rates. Sequentially, overall, our volumes are up by, just a minute, 12%. And the only reduction in pricing that you're talking about, possibly could be because the supplies to OEM, which is a significant component is directly linked to the raw material pricing formula. So that's the only place where reductions would have been passed on.
Understood. And in any case, this quarter also, even on the TBR side, the OEM growth would have been substantially stronger than the replacement?
That's correct.
And generally, in the truck replacement side, last quarter, you had mentioned that you were seeing mid-single digit kind of a growth. Any further indications of what is -- it's pending at right now?
Right now, for us, both on TBB and TBR on replacement, we've seen double-digit growth.
Double-digit growth, okay, okay. So that's very strong. And on Europe, this quarter, it's a seasonally strong quarter. And generally, we've seen 300 to 400 basis points improvement between 2Q and 3Q. So -- and that is the same thing that we have seen in this quarter. So in this quarter, there has not been any benefit coming in from Hungary yet, right? Is that the correct understanding?
Yes. That is a correct understanding, Amyn. Because in this quarter, if anything, Hungary losses were around the same level or slightly higher. So the entire benefit is really on the seasonal impact, which usually comes through.
Okay. So fourth quarter, ideally, I mean, should have a slightly lower decline than what we have seen in the past, given that Hungary improvements should come in?
True.
We have the next question from the line of Mayur M. from IndiaNivesh Securities.
So I was looking at your domestic other expenses, they shot up to about INR 488 crores, sequentially also up by about almost 130, 110 bps. Can [ indiscernible ] any one-off or any specific advertisement spend? Or why would that [ indiscernible ] be up?
Just a minute. It would continue to be increases in brand. But even otherwise on account of significantly higher production and volumes, even the freight charges and power, fuel, et cetera, would go up.
Okay. And secondly, on your capacity utilization. So at this point, specifically India, what would be our capacity utilization on the TBR as in, if you're looking at, let's say, an additional demand coming through because of the additional duty on Chinese tires. Are we really in a position to cater to that?
TBR, we are in a good comfortable position because our capacity itself will keep going up. If you take at the current capacity, which is capacity for last quarter, we would be pretty much going flat out in terms of producing close to the high 80s. You would have very little scope available. TBR, current TBR, producing about close to 9,000 tires per day, and we would continue to go up to a capacity of 11,500 tires.
So this 11,000 would come on board by?
It would come on board by towards end of 2018. So the capacity keeps going up every quarter.
Got it. So then which means that we should really not lose onto any incremental demand that should come on the TBR?
That's correct.
We have the next question from the line of Basudeb Banerjee from AMBIT Capital.
A few questions. One, you are mentioning reifen and European manufacturing numbers. So you mentioned the revenue in euro but what about EBITDA pickup?
So EBITDA for the European operations is EUR 15 million, which is 12% [ flat ]. The reifen EBITDA is on the order of 5%.
Okay. And in figures like -- because in European operations, synthetic rubber is much more a larger contributor compared to India in this recent crude inflation. So what kind of RM basket moves in Europe has been happening and what is the pricing power scenario out there? Because it was quite bleak even till last quarter.
Yes. So Europe also would see such small increase in the next quarter going forward, on account of the fact that you've mentioned. The pricing scenario as of now in the industry remains weak. No players have announced price increases. So as of now, we have not seen any change in the industry. Even though the growth in the industry overall in 2017 has been positive.
So for Europe, this 11% revenue growth, how much was volume and value?
Volume was pretty much flattish. It came through a mixture of primarily determined by mix improvements.
Okay. And as we were discussing last time that unfortunately Europe demand did not pick up much this year, so the expectation of Hungary volume ramp up were delayed a bit. So that kind of weakness is still persisting there?
So the European Q4 volumes grew and overall, the industry has seen a positive growth in 2017. So weakness during the middle of the year has gone. The Hungary ramp up was not impacted by the industry scenario. Hungary ramp up being slow were our own challenges in stabilizing a greenfield plant, and that's something that you would go through in any geography, new geography, unlike India, posed a little bit more challenges. So that had nothing to do with the industry scenario.
Sure. And the quarterly commodity price, have you landed price rates which you tell?
Sure. Rubber -- natural rubber was in the region of INR 140; synthetic rubber, INR 125; carbon black, INR 65; and [ disc ] fabric at INR 265.
And as you said, India RM basket inflation on the base of Q3, will be, at max, mid-to single-digit. But the kind of crude which has moved up significantly for India also, do you see that risk percolating to beyond Q4 in a larger scale?
Yes, given where the crude is, we would expect Q1, the raw material basket, to go up further. And hence, industry would have to look at price increases, and we've seen encouraging signs from players already beginning to consider that.
That's great. And for the last question. You said that total TBR peak production capacity after Chennai's second [ line ] addition is 11,500 tires per day, is that right?
That's correct.
And you said present quarter production level was somewhere around 9,000?
That's correct.
So on the hindsight, we will reach peak utilization, where you are growing on the present base by another 30-odd percentage?
Yes.
Where you are presently growing at 50% year-on-year and with potential prebuying of trucks in FY '20 before BS VI comes in or a potential scrappage policy coming in, do you see the risk of shortage of TBR capacity in India from your angle?
See a potential shortage at least, as per our -- and such thing will not happen. If that problem occurs -- it's something, which, I would say, it's a better problem to have than to have a large capacity and then the demand not coming through. Because now any -- for any TBR capacity, it will have to go to a greenfield site.
Also, no brownfield -- or quick debottlenecking in Chennai is not possible beyond the 11,500, you mean?
That's correct.
Sure. And by -- when the PCR debottlenecking will be on stream?
PCR debottlenecking will be onstream by end of the year. It will again go up in phases. We are looking to uptick the capacity by 10% during this year.
End of fiscal '18, you mean?
End of fiscal '18, yes.
And 11,500 for TBR per day will also reach by end of fiscal '18?
That's correct.
We have the next question from the line of Nitij Mangal from CLSA.
A couple of questions. Firstly, what is driving the improvement in replacement demand in the truck segment and where do you see those standing?
A couple of things we've seen pickup in the economy, be it investment in infrastructure that's been announced or across industries, you hear of demand pickup. As a segment, that very directly reflects economic activity in the country. And any pickup in that immediately translates into movement of freight through trucks and reflects into the replacement demand. We've also had the benefit of government finally taking action on the antidumping side. So the Chinese imports volume have come down substantially, and that's benefited both the TBR and the TBB category.
Okay. And on the import side, what is -- where are we in terms of, let's say, imports versus the peak? And will you still consider imports as a concern for the industry or are we largely past that phase?
So the current level of truck radial imports are slightly in excess of 50,000 tires per month. That's vis-à-vis a peak that had been reached of 150,000. So they are down to that level. At the current levels, it's a proportion which has always been there. So we would expect them to remain at these levels. As a factor, as you mentioned, as a threat, it's something that we have to always keep a watch on. To say that it's a completely threat which has gone away, would be probably taking it too simply.
And lastly, is there a scope for a mix improvement in India, given that you're hitting high capacity utilization in several of your segments?
That's always an ongoing job, but at the end of the day, it's also dependent on the market demand. For example, an area where we have had a capacity constraint on passenger cars, both based on internal efforts and also market conditions, we've had a significant mix improvement. Our largest selling size 10 years back used to be 12-inch tire. Today, that's moved to a 14-inch tire.
Okay. But is there a -- is there also a scope for or -- I mean, are you going to tradeoff, let's say, OEM versus replacement demand, given capacity constraints?
Most probably, no. OEMs is a long-term relationship that's been built up over the years. Once you get approvals, there are also commitments given on volume up to a certain point. It may not take into account any sudden spurt in demand. But usually, we have always honored our OE commitments and will continue to do so. The tradeoff typically happens between replacement and exports.
We have the next question from the line of Jasdeep Walia from Infina Finance.
First of all, I wanted to get the number for growth in truck bias tire volumes on Y-o-Y basis.
Just a minute, Jasdeep. Y-o-Y basis, the growth in TBB is 2%.
Why is that? Because my understanding was that Chinese tires are primarily replacing bias tires in India. And now since the imports are reducing, I thought bias tire volumes would gain.
Probably, Jasdeep, this quarter last year was also when demonization had hit. And in all probability, immediately in that quarter, there would have been a hit to the Chinese volumes.
Okay. So the base of volume was high?
Yes.
Okay, got it. And what -- why has been the growth in car tires flat on Y-o-Y basis? Are you including exports also in this flat Y-o-Y number?
That's correct. As mentioned on another question, just domestic volumes, we have mid-single-digit growth. It is flat, essentially, because of our capacity constraint.
Okay, got it. So there's no further capacity to increase domestic volumes?
We are in the midst of a debottlenecking exercise. So our capacity would go up by 10% through the year.
Okay, got it. And in Europe, would the scale up in TBR plant be slower than the scale up we've seen on the passenger car side, since it's the first time that you're manufacturing TBRs in Europe? So industrialization, would it take more time?
It would take more time. And also the volumes are small, so we would go about it slowly.
Okay. And in Europe, why are the volumes flat on a Y-o-Y basis? Because Hungary plant would have added to volume, right?
Yes, essentially, Hungary plant is going up but is going up gradually. And it's essentially only making up for the volumes, which have gone out, which were earlier supplied from India. Given the situation in India, one of the big trade-offs has been supplies to the European region from India and Hungary is now beginning to make up on that. Last quarter, we had a situation where European operations actually lost some sales where Hungary had not ramped up, and Indian capacity was still fully utilized. So we would start seeing volume growth only going forward once -- now that hurdle of, sort of, reaching the volumes which were coming from India had been crossed.
We have the next question from the line of Raghunandhan from Emkay Global.
Most of my queries have been answered, just 1 query. What is the effective tax rate we should work with for FY '18?
That would continue to be a full tax rate in terms of actual payout and deferred. I think about 2/3 of that is an actual payout and the balance goes to deferred tax.
Understood, sir. So it's been around 30% for the first 9 months of the year. So fair to assume a similar number for the full year?
Yes, fair to assume the same number.
We have the next question from the line of Sonal Gupta from UBS Securities.
So just, again, in terms of the outlook for the domestic market in terms of pricing, given that there's been a 5% increase in customs duty on, I mean, imports. And so does this cover other Asian markets as well or where do you have free trade agreements? And what do you think -- I mean, really, given that the cost pressures are increasing, will the industry see more price increases on the radial side now?
At least the reaction seems to be positive. And given the strong demand situation, the ability to take price increases is there. Even in terms of outlook in the current quarter or a little ahead, we continue to see strong demand. We are pushing our plants to continue to run flat out. So yes, price increases would be needed if margins are to be maintained. And situation and industry players scenario seems to be conducive for that.
Okay. And just to -- I mean, just to understand in terms of -- how was this -- I mean, because I think in terms of the breakout that you gave the farm sector or the tractor tire growth, I mean, is that -- how has that been in -- for India?
Farm this quarter was a flat because we had weakness in the domestic scenario. In fact, on a sequential basis, farm volumes saw a decline.
Okay, okay. Because, I mean, [ overall ] industry has been going pretty well, right? If you look at the OEM volumes. So...
The OEM was a segment where we still saw a growth. But replacement was flattish. Exports was negative.
Right. And just in terms of -- I mean, I'm just trying to correlate, again, your top line growth versus the overall volume growth, like you've mentioned. I mean, given that we've moved so much towards TBR, and TBR, I guess, would be now getting close to 40% of your revenue in India?
Just a minute, Sonal. TBR, currently, would be about 35%.
35%. Yes, so that -- I mean, so like earlier, also it was around 30%, 32%. So I mean, what I'm just trying to understand is, as the mix move towards TBR, I believe that realizations should be much higher. And therefore, the ASP or the overall revenue growth should also be much higher. So I'm just wondering where the disconnect is to that exchange level?
Well, definitely, with the move towards TBR, the average price would move up because TBR realizations are higher. As I mentioned, the only area where automatic price reductions would have happened along with raw material would be OEMs. Now that increasingly is a straight pass-through both ways. And we would have had lower realization of -- on nearly 30% of the portfolio.
Okay, okay. And just lastly, anything in terms of the European pricing outlook as to -- I mean, do we expect the situation to continue from now? Or are we seeing any sort of improvement in terms of margins at a general level for the industry?
As of now, we haven't seen any pricing action. And frankly, the European industry continues to do well. So it did pass on some price reductions. But given the current raw material basket, if we don't look at quarter-to-quarter movements, but take a step back and look at it in the context of where they were, margins of European players have been fairly good. So there is no, really, pressure in a big way on profitability on the European plays.
Our next question is from the line of Bharat Gianani from BNP Sharekhan.
I just wanted to understand what's the plan for ramping up the capacity at the Hungary plant. Basically, you said by end of the current fiscal, it would be 7,000 per day. But if we stretch it further for 1 or 2 years, what's your plan to have in your production from that plant?
Sure. Thanks, Bharat. The 7,000 by end of calendar year 2018 should start getting close to the plant capacity. If the plant capacity is 16,000, we should start getting close to producing about 14,000-odd tires per day. And that's the plant capacity in phase 1. So going beyond that, based on demand, that's the maximum that can be produced. The Hungary plant, starting from mid-next year, would start ramping on -- up on the truck capacity. As of now, there has been no discussion, no thought process on our phase 2 of Hungary. We first need to get this capacity up and running and in a fully stable state before we think ahead.
Okay. So just to clarify, 14,000 per day is achievable by end of CY 2018? That's what you're saying?
That's correct.
Okay. And TBR, what's the plan in lately phase 1? What is the kind of capacity that you are planning per day, if you can share the number?
The phase 1 of TBR is slightly short of 2,000 tires per day, and that would be reached somewhere towards second half of 2019.
Second half of calendar 2019, that's right?
That's correct.
We have the next question from the line of Chirag Khasgiwala from GMO.
If you look at your consolidated quarterly numbers, there appears to be a significant build up in inventory. So what could be the reason for that? And also possibly, if you can give the breakup of how much raw material inventory buildup is included in that?
Just a minute. Just hold up. Inventory buildup could be essentially as a factor of also sales going up. If I look at it in terms of number of days of sales, both for raw materials and finished goods in terms of number of days, it's down.
Okay. And secondly, in this quarter, you've seen the margins have declined on Y-o-Y basis, so which is mainly because of the unfavorable product mix. Going forward, how do you see this product mix shaping out? And also in next few quarters, you will be witnessing the input cost inflation. So how confident you are in terms of taking price hikes to provide cushions to the margins to take care of the inflation -- cost inflation in both India and Europe?
Just, come again, which margins have gone down?
EBITDA margins.
For which operation?
I think [ on same comparable ] 13%, you have reported right? 13 point something, vis-à-vis 14% something?
On a sequential basis, the margins are up in both the operations. If you're looking on a Y-on-Y basis, the margins are down because one big factor is that raw material is still up 7% vis-à-vis last...[Technical Difficulty]
Ladies and gentlemen, we have the management back on the line. Please go ahead, Mr. Chirag Khasgiwala, you can put in your first question.
Yes, I mean, we're discussing about the decline in EBITDA, so, on a Y-on-Y basis.
So on a Y-on-Y basis, the primary reason for decline is the increased raw material prices.
So going forward, are you confident enough to take the price hike both in India and Europe to cover the input cost inflation?
That should depend on an industry scenario. It's very difficult to say whether we can do it. The situation seems more conducive in India as of now than Europe.
Okay. And regarding the inventory buildup, I think I will get back to you off-line, because I'm still not clear about the exact reason of increase in the inventory.
Okay.
We have next question from the line of Shyam Sundar Sriram from JM Financial.
Gaurav, you had mentioning that TBB volumes grew by 2% during the quarter. How has the same have been for the industry? Because, generally, over the last few years, bias has been continuously declining. And the antidumping duty and the hike in customs duty on imported Chinese radials, what is your outlook for bias for the industry maybe over mixed 1 or 2 years? And is it because of a specific end user segment that are witnessing this demand?
So broadly, Shyam, the bias will continue to...[Technical Difficulty]
Yes, we have the management back. Please go ahead with your question.
Yes, Gaurav. So I was asking on the bias demand for the industry as well for the next year, and is there any specific end segment demand that was driving this?
Yes.[Technical Difficulty]
Yes, go ahead we have the management back.
So Gaurav, I was just asking on the bias demand from an industry perspective, and is there any specific end-segment that is driving this and what is your outlook for the next year given that bias has been generally declining over last few years?
Yes, so this year has been an aberration where given the antidumping coming in, there's been no decline probably. And in fact, sequentially, we have even seen a strong growth in bias volumes. Mid-term, longer-term, it will continue to decline. OE is now pretty much entirely shifted to bias, and even some of the tipper segment or mining segment is also moving to radial. But it's moving at a certain pace. One would be too hasty if one was to completely abandon a bias capacity because there's a certain proportion which remains bias, and we continue to see decent volumes as of now.
Okay, okay. That helps. In Europe, any color on new passenger vehicle order wins from the OEMs?
Not in the last quarter. We will continue now -- or we will begin supplies actively from 2018 onwards to the few OEMs. The audit of the Hungary plant are already lined up with the OEMs, and 2018 would be spent really in our original target of getting the Hungary plant approved by the OEMs. So that in FY '20 onwards, we can do OE supplies in Europe from our Hungary plant.
Okay. Just 1 last question, if I may squeeze in. So largely, the tires that were -- passenger vehicle tires that were exported from India were the Apollo branded tires, right? Now the Hungary, which is supplying, that would be the Vredestein branded tires or how does that work?
So the Hungary plant would produce a mix of Vredestein and Apollo brand. Basically, our overall mix would remain somewhere in the region of 80% to 85% of volume would be the Vredestein brand and the balance would be Apollo brand.
[Operator Instructions] We have the next question from the line of Amyn Pirani from Deutsche Bank.
I have 2 questions. First of all, your interest cost hasn't really come down in this quarter. Is it just because of the debt repayment timing? Because now obviously, your net debt has definitely come down significantly.
Probably, it would be related to timing, on a consolidated basis also. So debt repayment, whatever has happened, I mean, is a small amount. And there would be other income, which has gone up, which really is treasury income on account of QIP money, bulk of the debt continues.
Okay, okay. Okay, understood. And secondly, this overloading ban, which has been happening in, at least, in Utter Pradesh and Rajasthan, which obviously is helpful from the point if you have higher OEM truck demand. But how should we think about this when you're looking at replacement demand for truck tires? Does it have any impact, either positive or negative, if overloading is clamped down?
Overall, it will also lead to the change in mix, the proportion of heavy overloaded tires, which is a specific subsegment in truck tires, is coming down. So the tire companies would start concentrating on tires, which were for normal load, mileage, et cetera. Also, as the payload on the trucks is expanding, for each new truck sold, the number of tires are much more. So there would also be a multiplier effect on the tires vis-à-vis the vehicle growth.
[Operator Instructions] We have the next question from the line of Bharat Gianani from BNP Sharekhan.
I just -- 1 clarification I required. The -- whatever currently we are supplying from the Hungary plant, what is the mix between OEM and replacement? Is it entirely through the replacement space?
Currently, Hungary supplies are entirely to replacement. As I mentioned, you need 1 to 2 years for approval by OEMs for any new plant, even though we are approved by those OEMs, but this specific plant is not approved. So the audits by the OEM are scheduled now for this current year.
Okay. So this 14,000 per day capacity that you earlier pointed out, that you'd reach by end of CY 2018, that would -- that 14,000, you are entirely budgeting for the replacement side, right?
Initially, yes. Because there are supplies to OEMs going from the Netherlands plant, or in some cases, as of now, even from the Indian plants for the European operations.
Okay, okay. So that would sort of come down to Hungary ramp up.
That's correct.
Okay, and just one last question. So with this Hungary ramp up, so what's the current market share in Europe in the replacement segment? And with this capacity, assuming that it gets entirely utilized, what is your targeted market share for the European replacement market this year?
So the PCR replacement our market share would still be very small. It's a little under 3%. And based on our assumed mix, we need to improve it by a few decimal points for the entire capacity.
Okay. So even if this Hungary comes out, there would be only, say, 3% -- [ go ] between 3.5%, 4%. That's the overall?
Not even 4%. It's not even a 1% improvement. Europe market is too large for this.
We now have a question from the line of Joseph George from IIFL Capital.
My question is in relation to the European operations. So if I go back in time and look at FY '14, '15, your EBITDA margins from the European operations used to be mid- to high teens. And that's come off substantially over the last couple, 2 or 3 years. I assume that there is some element of the startup cost et cetera, that is sitting there. But in addition to that, do you think there's anything structural that's happening in the European operation given the form of mix or any other reason, because of which, structurally those margins have come down?
Joseph, so one of the large factors is the startup reduction, which would be somewhere in the region of about 2%, 2.5%. Additionally, as we have gone into this phase of new plant add up additional cost to prepare for that, the second factor for us, which is a big change from the times you mentioned is, is looking at OEM business. And even while that business as of now is too small, the R&D cost associated with development for OE are substantial. And they have led to a certain amount of structural change. And thirdly, with the increase in RM in the current year, which is of the order of high single digits, the European industry hasn't taken any price increases. So I would say 3 factors really: the startup costs of Hungary; the increase in RM, not really followed up by the industry in terms of price increases; and our own change of a much higher cost structure looking at OEM business, et cetera, which still hasn't materialized in enough volumes to be setting off the kind of development cost we've been doing.
Sure. And when you think about it going into, say, FY '20, et cetera, do you think the cost savings from Hungary would be good enough to offset the structural factor that you mentioned, like R&D, et cetera?
Difficult to hazard a guess so far out. But probably, we would need another year for the Hungary plant to ramp up completely on even TBR capacity. Because on passengers car alone, it would be a sub economic sized plant at about 120, 140 tons a day. Only when TBR ramps up fully, it will get to about 250 tons then, full advantages to be getting back to earlier margins would be possible.
And the last question that I had was, what's a sense of the TBR capacity utilization for India as a whole for the industry?
Should be fairly close to peak, given the spurt in volumes, and we've seen healthy growth by all the peers. We think we would have outpaced the industry, but in general, all the players would have benefitted. So TBR utilization would be fairly high.
As there are no further questions. I now hand the conference over to the management for any closing comments.
Well, that's all from our side. Thanks, everybody.