Apollo Tyres Limited (APOLLOTYRE.BO) Earnings Call Transcript & Summary

Good afternoon, everyone. On behalf of Emkay Global Financial Services, I would like to welcome you all to Apollo Tyres Q2 and H1 FY '26 Earnings Conference Call. Today, we have with us from the management team: Mr. Neeraj Kanwar, Managing Director and Vice Chairman; Mr. Gaurav Kumar, Chief Financial Officer; and the Investor Relations team. We will start the call with brief opening remarks from the management team about the quarter gone by, and then we'll proceed to the Q&A session. Thank you, and over to you, sir.

Thank you. Good afternoon, and thank you for joining us today. I welcome you all to the Apollo Tyres Quarter 2 FY '26 post results. I would start with a broad overview of the results, followed by key initiatives that we've taken over the past quarter. We closed FY '26 quarter with consolidated top line growth of 6% Y-on-Y and an EBITDA margin of around 14.9%. Announced in September, the GST rationalization by the Government of India is a radical reform, which is expected to have a far-reaching impact on India's consumption story. I'm delighted to share that in quarter 2, we have achieved the highest revenue growth in the last 10 quarters on both stand-alone and on consolidated basis. On the domestic front, we saw volume growth in the replacement as well as in the OEM segment, coupled with a strong recovery in our export markets. In Europe, the demand environment continues to be challenging across key categories. We have registered a 4% Y-on-Y growth in our top line despite the weak demand scenario and 21% sequential growth in revenue on account of seasonality. We continue to maintain a close view of market dynamics and remain committed to delivering a profitable growth. Looking ahead, we anticipate to maintain and further accelerate the top line growth momentum in both our markets of India and Europe. Profitable growth continues to be our mantra, and we will continue to keep our focus on profitability, free cash flows and on return ratios. Let me now talk about our key pillars of FY '26. Beginning with R&D, I'm pleased to share that both in India and Europe, we continue to secure additional model wins from marquee German OEM manufacturers, thereby revalidating our product capabilities and further supporting our premiumization journey. I am also happy to share that we are continuing to win podium positions in Europe at independent test results. This reinforces our product strengths, deepens our ties with premium automotive players and further positions our brands in our premium segments of the car market. On the branding side, as we all know, we have maintained a strong brand awareness, underscoring our robust brand equity built on superior product quality and consistent customer satisfaction. In a landmark move, Apollo Tyres has become the lead title and jersey sponsor of the Indian cricket team. Cricket transcends age, religion and income and is India's strongest unifier. This is a historic moment for us as our logo is now prominently featured on the official team of India Jersey, symbolizing a powerful alliance between one of the world's most beloved sports and a brand ready to go the distance for our national pride. Cricket is India's strongest culture and sporting platform with unmatched reach and emotional connection. This is not just a sponsorship, but ownership of the nation's biggest state, cementing our leadership at the intersection of sports, culture and commerce. We believe this move will have a massively positive influence on Apollo Tyres' long-term story. Finally, in sustainability has always been our key pillar. I'm delighted to share that Apollo Tyres has enhanced its S&P Global ESG rating score compared to the previous year, achieving a score of 58 in 2025, up from 53 in 2024. We've also received the CII-ITC Sustainability Award for Corporate Social Responsibility in excellence, reflecting the company's strong commitment to CSR initiatives. Our Chennai plant also recently received Gold awards at the Safety, Health, Energy and Environment Competition organized by the Quality Circle Forum of India. Apollo's health care initiatives, a digital health care application has been launched for truck drivers. This tool facilitates video consultations with health care professionals and helps our users locate near Apollo Tyres health care centers. With this, I will conclude my opening remarks. Let me reaffirm all of you that we are consistently monitoring our market trends across geographies, our cost structures, maintaining an unrelenting focus on driving sustainability and profitable growth. We are proactively positioning ourselves to navigate emerging challenges and seize new opportunities, and I'm confident that our strong fundamentals and strategic direction will enable us to capture the long-term value across our core markets. Thank you for listening to me, and I'll now hand over the call to Gaurav, who is our CFO. Thank you.

Thank you, Neeraj, and good afternoon, ladies and gentlemen. Continuing from where Neeraj left, let me share further details of our operations for the last quarter. The consolidated revenue for the quarter stood at INR 68.3 billion, a growth of 6% over the same quarter last year. The consolidated EBITDA for the quarter stood at INR 10.2 billion, an improved margin of 14.9% compared to a 13.2% in the last quarter and 13.6% in the same quarter last year. Coming to the balance sheet, our consolidated net debt stood at a level of INR 26 billion as on September '25, similar to the level in March 2025. The net debt-to-EBITDA for the consolidated operations stood at 0.8x at the end of this quarter. As Neeraj mentioned, the GST rationalization has given a flip to our growth, leading us to achieve the highest revenue growth in the last 10 quarters on both stand-alone and consolidated basis. In India, the revenue for the quarter was INR 47.1 billion, a growth of 6% over the same quarter last year. The EBITDA for the quarter stood at INR 7.2 billion, a margin of 15.3%, significantly higher compared to the 13.6% in the last quarter and 12.1% in the same quarter last year. The volume growth Y-on-Y was in mid-single digits based on growth in both replacement and OE volumes and a significant recovery in exports. Our premium brand, Vredestein, continues to get very strong traction in India with the highest-ever volumes in the Q2 of FY '26. Regarding the demand outlook, we expect to maintain the healthy demand momentum in H2 of the fiscal with the new GST regime and the rebound in infrastructure and mining segments post monsoon. We saw continued demand acceleration coming in the month of October with healthy year-on-year growth. Moving over to the raw materials. We expect the raw material cost to be range bound in Q3, which should continue to support our healthy margin story. Coming to the balance sheet for the India operations. The net debt level stood at INR 27 billion, again, similar to the levels compared to March 2025. And the net debt-to-EBITDA for the Indian operations was at 1.1x, marginally lower than the 1.2x at the beginning of the year. Moving to the European operations. The revenue for the quarter was EUR 177 million, a growth of 4% over the same period last year and a 21% over last quarter. The EBITDA for the quarter stood at EUR 22 million, an EBITDA margin of 12.7% compared to 10.8% for the last quarter. It is still below the levels that we expect our European operations to perform. But given this year of transition, as we are undertaking some significant decisions, we are positioning ourselves very well for the European operations. Continuing with our premiumization journey, the UHP mix for the quarter increased to 49% compared to 46% for the same quarter last year. Our PCR capacity expansion in Hungary is underway, and we expect an acceleration in demand momentum going forward as we ramp up this capacity. Further to our earlier announcement about the intended decision to close production and production-related activities at the Enschede plant in order to optimize our manufacturing mix, we have now reached a settlement with the Works Council in Netherlands. In the results for this quarter for Europe operations, the exceptional item below EBITDA level is related to the additional estimated cost of this restructuring to the tune of EUR 17 million based on the settlement reached with the Works Council to go ahead with the intended plan to close Enschede production. We had explained to you last quarter that the earlier figure was based on the basic signed social plan dictated by accounting standards to immediately take a charge in spite of not having clarity. Now based on the consultation process over the last 4 to 5 months, there is certainty on the figure. The current additional figure reflects the payout to employees as per settlement reach and the other associated costs with the closure. This payout would only be done in the next fiscal year. We expect the implementation of Enschede closure to happen by end June 2026. And in long term, this would have a positive impact on the profitability of European operations as was seen post the restructuring in FY '21. Lastly, we continue to monitor our CapEx outflow, and there is no change in our CapEx guidance for FY '26. As always, profitability, free cash flow generation and return ratios are our key focus areas, and we are progressing well on our trajectory of profitable growth with a consistent uptick in margins. With this, I would conclude my comments. Thank you. We would be happy to take your questions.

Participants, we'll begin with the Q&A session. [Operator Instructions] We'll take the first question from Raghu.

Congratulations on the strong margin performance. Sir, as you indicated, it has been a better growth compared to last several quarters and the marketing efforts have also increased. So if you can talk about how you see the future shaping up in terms of regaining market share and your efforts towards that?

So as you know, we have invested in the brand the Indian cricket team, and I am hopeful and optimistic that this will give us a reach in the rural markets of the country, where we see, after GST, a huge demand for our car tires and for 2-wheeler tires. It will also have impact on agri and on truck. And we are already seeing in the month of October, a good demand that has come up. We are hopeful that quarter 3 revenue growth should be, if not better, but at least at the same level. Profitability will continue to remain at this level, if not better. So looking at the H2, we believe that there is much more to happen given the brand strength that has also come in and our focus on increasing dealer network in India, our distribution network and with the current dealers also expanding our base with them. So all in all, I'm very optimistic about H2.

Good to hear that, sir. Gaurav sir, can you talk about the volume growth for India business across channels and how you are looking at the replacement demand across segments as well?

Raghu, the overall volume growth was 4% for this quarter. It was still quite muted for truck and passenger car just in the positive zone. The big demand upliftment in terms of volume growth was in the farm segment, the 2-, 3-wheelers and the others. So that's for this quarter. Going forward, as Neeraj mentioned, we are expecting an uptick in the demand scenario. So we would expect the replacement demand to start moving up from this level to mid- to high-single digits.

How was the replacement and OEM growth, sir?

Overall, replacement growth was 2% and OEM was 4%.

And this was -- replacement growth was lower because of the GST issue and should improve going ahead?

That's correct. For almost a month, given the GST implementation, understandably, the market slowed down, but it's beneficial in the long term. So yes, there was some impact on the replacement growth in the current quarter.

And you indicated about recovery in the exports. How was the exports growth this quarter? And would you say that exports growth can be high-single digit for the full year?

So export growth was in double digits for the current quarter. We had not done well, if you would remember, in Q1. So overall, for the year, yes, we would push towards a high single-digit growth.

Got it. And sir, if you can share the raw material cost, what was the benefit in Q2 and your expectation for Q3?

So the raw materials in Q2 were down 3% sequentially from Q1, and we expect it to be stable to slightly down in Q3.

Got it. And can you also share the commodity prices for each of the commodities, natural rubber, synthetic rubber, et cetera?

Natural rubber was around INR 210 a kg; synthetic rubber, INR 175; carbon black, INR 115; and steel cord, INR 155.

And you referred to Vredestein, where the number has gone up significantly and highest revenue for Vredestein you have achieved. If you can indicate how salient it is when you look at the India PCR? And where would you like to take it up in terms of your effort on premiumization?

So the numbers within the overall basket, Raghu, are still small. But as mentioned, the growth trajectory is very good. But still within an overall level, it's at a level of 10,000 tires a month in a total mix of 450,000 to 500,000, but it continues to go up. We are positioning it as an absolute premium brand with fitments at the top end. And we will continue with that positioning rather than just try and gain volumes across all categories. So the dual brand strategy for passenger car with the Apollo brand and Vredestein brand will continue. And the proportion of this premium will keep going up.

Got it, sir. And just the last question, sir, on Europe, there is benefits of translation gains. But if you can talk about how you are seeing the volume trends? And going forward, would you expect a further improvement?

The top line growth in Europe was, as I mentioned, 4%, which was entirely from volume. There was nothing gained on the pricing front given the raw material scenario. So we did have positive volume growth. Take this into account that for one of the product categories, Space Master, it was a known case as this product continues to come down with the OEMs based on contracts. So it does feed into an overall operations number getting dampened. But on the passenger car side, things were definitely looking quite good.

Got it, sir. And outlook, sir?

Outlook for Europe market overall continues to be a challenging scenario. It's still not back into the positive zone, but at least it's improved from where the situation was 2 quarters back, and we are looking at growth coming back, even though it would be low single digits.

[Operator Instructions] We'll take the next question from Aniket Mhatre.

So just on the market share trends, right, last time around you had indicated we were losing some share in the TBR segment. So how is that shaping up now? And also, if you could talk about similar thing on the PCR side? How are our market shares shaping up in the India business?

So our internal estimates, we do not have official data for that. On the TBR replacement, we estimate our market share to be around 29%. And on the PCR replacement side, based on our internal estimates, we would be at 20% market share, which would be industry-leading.

Sure. So the -- I mean, we were losing some share in TBR that has been arrested now. Is that a fair understanding?

Yes.

Sure. Got it. And how about OEM share, sir, for us?

OEM shares have maintained. We had lost ground in PCR OEM shares as we did not bid for certain businesses on profitability count. Each RFQ is now being critically evaluated both on account of profitability and strategic part, and that is where on some of the models that we did not bid for still does impact the current business. But we are looking at the future and seeing how to correct this strategy. What has happened in the past has happened.

Understood. And while you did indicate about demand sustenance in H2, how is the overall OE recovery shaping up right now, both in TBR and PCR, if you could help us understand. Are we seeing a pickup as far as post the GST rate cuts? Or how do the segments stand?

We are seeing some pickups in the OEM side, particularly on the truck side. PCR, still not the great signs, but the expectation is some amount of growth will come back, but not at the high levels, which OEMs see when demand is really booming.

Sure. Understood. And just one final thing from my end. For the Enschede facility post the shutdown, would you like to quantify what kind of margin improvement can we expect once it shuts down?

That's a difficult one to estimate, Aniket. We have indicated the total cash costs, particularly around the EUR 55 million. Based on our expectations, the payback period should be about 2 years. So that's the best estimate as of now.