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Apollo Tyres eyes becoming US$ 5 billion firm by 2026 as auto mkt, exports improve

IBEF:  October 27, 2021

Apollo Tyres Ltd announced its plan to become a US$ 5 billion company by 2026 on the back of Apollo and Vredestein’s dual brand strategy, an advancing economy, growing exports and a sharp revival in India’s automobile sector. The next five years will be about strengthening and realising the benefits of investments made in technology, capacity and brands over the last five years, said Mr. Satish Sharma, president-Asia Pacific, Middle East and Africa.

Tyre manufacturers in India are anticipated to be the key recipients of an upturn in the world’s fifth largest automobile market. They will gain from a elevated offtake of tyres by auto manufacturer on the one hand and its ripple effect that would lead to a stable growth for the replacement demand, on the other.

In a bid to reinforce its product offering further in the Indian market, Apollo Tyres plans to introduce its locally produced premium tyre brand Vredestein in India. It would focus on the premium and luxury segment in passenger cars, while the two-wheeler tyres from the brand would offer to the budding superbiking segment in India. Apollo acquired the Dutch tyre brand in 2009.

The launch of the Vredestein brand in the premium segment will be margin accretive and will give the company a strategic position among dealers who were only offering imported tyres. The market size for premium tyres in India is 20,000 units a month but is anticipated to expand manifold as the requirement for premium and luxury car models and performance bikes achieves traction.

Expounding on the 5-year vision, Mr. Sharma said, Apollo Tyres has built a lot of fundamental strengths in the last few years and is now ready to exploit on it. “The India operations have done fairly well and we have a range play in the tyre market—from two wheelers and cars to commercial vehicles and off highway,” said Mr. Sharma, mentioning that the company now leads the replacement segment of the passenger car radial market and will shortly be move into the performance segment of the two wheeler market. The firm also pursues to benefit from an upcycle in the commercial vehicle market and an overall improvement in the economy.

The tyre business, said Mr. Sharma, has a strong connection to the overall growth of the country. A high focus on infrastructure projects bodes well for the company. “Everybody is estimating the Indian GDP to have a bull run of 4-5 years and advance at 7-9%,” he said. If the real estate surge lasts and the interest rates remain stable, it would be followed by an investment by the private sector.

Mr. Sharma’s confidence also stems from the performance of Apollo Tyres’ US and European operations and a step up in exports. Currently, exports account for 10% of the revenue and are expected to reach 15% in the near future.

Apollo reorganized operations at the Vredestein manufacturing facility in Europe last year. The unit will now only concentrate on high-performance passenger cars and agricultural tyres. Production of mass-market car tyres would be shifted to relatively low-cost locations such as Hungary and India. Apollo is anticipated to gain from this exercise from the current year onwards. Mr. Sharma said the Hungarian operations in place of being a drag will now accompany the overall growth strategy.

Apollo Tyres is at the fag end of the capex cycle. It is running at ~ 85-90% capacity utilisation. It is anticipated to conclude the planned capacity extension by the end of FY2022. “The company is expected to operate at ~65-70% capacity utilisation, which gives the firm the bandwidth to grow business for another 2-3 years at minimal capex,” stated a recent research study by Sharekhan by BNP Paribas.

The brokerage believes the company to gain market share due to its aggressive position in both trucks and passenger vehicle segments and estimates its earnings to post a robust 44% CAGR during FY2021-FY2023E, driven by a 12.9% revenue CAGR and a 160 bps EBITDA margin expansion to 17% in FY2023. A robust operating leverage and increasing product mix is likely to aid the expansion.

Meanwhile, even as the demand and volume outlook remains robust, a constant inflationary trend in commodities has been a pain point and will weigh on the margins, said Mr. Sharma. The price rise on account of higher input is close to 20-25%. Although the company has been passing on the costs in phases every quarter. It will take at least two years to pass on the total cost increase,” he said.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.