Apollo Tyres Limited (APOLLOTYRE) Earnings Call Transcript & Summary

Good afternoon, everyone. On behalf of Equirus Securities, I welcome you all on this Third Quarter FY '23 Conference Call of Apollo Tyres. From the management side, we have Vice Chairman and Managing Director, Mr. Neeraj Kanwar; CFO, Mr. Gaurav Kumar, and members of IR team. Without further ado, I hand over the call to management for opening remarks, post which, we'll start Q&A. Over to you, Mr. Kanwar.

Thank you, and good afternoon, and thank you for joining us today. We are pleased to provide an update on our company's performance and outlook. We have had another healthy quarter despite difficult operating environment, driven by our continued focus on operational efficiency, profitability returns and on our cash flows. We continue to register improvement in our operating performance, and we are confident of our ability to sustain this momentum. Thank you again for your interest and support. Before I dwell further into our company's performance, let me take this opportunity to thank the Indian government for presenting a budget with strong focus on capital expenditure in line with government's policy to drive growth through CapEx and investments. Furthermore, global agencies are pegging India as a shining star amid global turmoil. As for IMF, India is likely to be the fastest growing major economy in the world in 2023. With this backdrop, let me reiterate that we see huge opportunity in medium to long run across our key markets and are extremely well placed to leverage the same. The current quarter was once again impacted by macroeconomic environment and geopolitical events. On one hand, we had subdued demand momentum in India and replacement market and concerns around slowdown in Europe. On the other hand, OEM segment is holding up well in India, and we have started witnessing impact of correction on our raw material prices. We had another strong quarter in North America with strong top line growth and healthy operating margins. We will continue to focus on premiumization both in India and in Europe in terms of partnering with premium OEMs and increasing our proportion of our premium sizes. Going forward, we expect earnings momentum to continue, helped by demand recovery in key markets, further correction in raw material processes and our relentless focus on price discipline and profitability going forward. We remain committed to reach our intended margin range, and the same is highlighted by sequential improvement in margins over the last few quarters. We've had healthy positive free cash flow in the quarter, and the ROCE for the current quarter is approximately 12%, the lower end of our desired range. Profitability margin was also a little below our stated mid-term target of 15%. Continuing from where I left last time, we, at Apollo Tyres, are relentlessly working on our 5 key pillars of our Vision '26 as we work towards an even more balanced and resilient business model. This has helped us report another quarter of strong operating margins and double-digit growth in net profit despite a challenging environment. I will now highlight some of the work done by our teams in the quarter. Starting with R&D. We recently inaugurated Advanced Tyre Center in the R&D center in Chennai. The new facility will further augment our testing capabilities for future vehicle models. We'll be able to fine tune the performance of our products by simulating closely to the real-world conditions using this facility. This would also help us to reduce more time and money spent on tests at different tracks around the world. We are working with new and innovative raw materials to lower our rolling resistance. Moving to digitalization. We continue to work on new age technologies as we optimize our current processes and prepare for future. As a part of our cloud journey, we have recently migrated our primary business of SAP to cloud. With most of our business processes being cloud-enabled, it sets the foundation to accelerate our digitalization journey and our business transformation. We are using AI and machine learning extensively across plants, manufacturing processes to drive productivity and capacity gains. This would enable us to move to a CapEx-light model, preserve cash flow and improve our ROCE. We have opened a Digital Innovation Hubs in Hyderabad and in London, to further accelerate this journey, including generating new innovative business ideas. We are also launching apps leveraging state-of-art technologies like artificial intelligence to track our dispatches and improve our customer engagement. Another key area of focus is sustainability. We've been making more headway in this respect, and I'm proud of what our sustainability team has achieved in a short span of time. We're the first company in the automotive sector in India to receive the prestigious ISO 20400 certification for Sustainable Procurement. We have recorded an improvement in our CDP Climate Change score to B from '22 -- in '22. We were D in '21. Early in December '22, we also laid down further commitments in the ESG space. All of these would help us achieve our aspiration to be carbon neutral by the year 2050. I would urge all of you to go through -- to our website. We have also recently partnered with Tyromer, Canada-based organization, to set up processes of devulcanizing rubber in a nonchemical manner, again, supporting the use of recycled material. Talking about the brand, we continue to invest in brands across our key geographies, to start with in India, we have launched an integrated TV plus digital media plan for the PCR category. The quarter also witnessed a visit by a few Manchester United team players resulting in an engagement with more than 4,500 fans on the ground and online engagement with more than 22 million people. Vredestein tyres also entered India Book of Records with a drift record, further showcasing product superiority. Moving to Europe, we released Quatrac EV, the first all-season tire designed especially for electrical vehicles. During the quarter, we also undertook advertising campaigns in our focus markets. Our association with the 20-kilometer [ de Paris ] marathon was also well received and has helped us gain excellent visibility. We're also the new global sponsors of the Winter Ski Championships at Courchevel in France. Finally, the last pillar of our strategy is people. We kicked off Chairman's Recognition Week in December 22. This included multiple recognitions like Apollo Pillars, Roll of Honor, Global [ Learning ] Champions. We also initiated next batch of Apollo laureates, Leadership Development Program. This is a year-long new-age learning journey supported by Skillsoft and MIT Sloan. As always, we are keeping a close watch on the markets and our cost. We continue to be judicious about CapEx and follow our CapEx-light growth model. We will continue to focus on profitable growth and free cash flow generation. We are in fact taking the ROCE and free cash flow targets as part of our variable pay parameters across the management teams of Apollo. With this, I'd like to conclude and hand over to Gaurav. Thank you.

Thank you, Neeraj, and good morning, ladies and gentlemen. Continuing from where Neeraj left, let me start by thanking all our stakeholders for their support. In India, we witnessed a strong revival in the OEM demand. However, demand momentum was moderate in the replacement segment. Export markets also faced challenges. Overall, we had a sequentially flat quarter, which was also on the back, largely, of higher price mix. More importantly, we have continued to maintain strong pricing discipline and have even backed out of a few OEM opportunities due to concerns on pricing and profitability. While this has had a limited volume impact, it has helped us improve our price positioning among our peers. Helped by this and control over costs, we reported a significant improvement in our EBITDA margins. The Europe performance in the last quarter was impacted again by a subdued demand environment. The PCR and the TBR replacement markets declined by 14% and 10% during the quarter. We continue to outperform the market in the current year. Despite the sluggish demand environment and a challenging cost environment, we were able to maintain top line and margins on a sequential basis. More importantly, we continue to register improvement in our sales mix. The UHP, the UUHP mix in the last quarter stood at 45% against 43% in the same quarter last year. In terms of outlook, while we expect the demand in India to remain subdued in the replacement segment in near term, the OEM demand momentum is expected to remain healthy. Similarly, in Europe, while in near term, there would be some demand challenges, we expect that in midterm, the demand momentum will pick up across both our markets and should result in good growth. Moving on to financial results. The consolidated revenue for the quarter stood at INR 64 billion, a growth of 13% over the same quarter last year and 8% on a sequential basis. The consolidated EBITDA for the quarter at INR 9.1 billion, a margin of 14.2% improvement compared to 13% for the same period last year. and 12% in the previous quarter. Given this performance, we've been able to improve our leverage ratio. The net debt to EBITDA for the consolidated operations was at 1.6x. For the India operations, the revenue for the quarter at INR 42.5 billion was a growth of 12% over the same period last year, though flattish on a sequential basis. The EBITDA for the quarter at INR 5.5 billion was at 12.9% compared to a 9.1% for the same period last year and also a big improvement over the sequential quarter at 10.3%. For the European operations, the revenue for the quarter was EUR 180 million, up 7% compared to the same period last year and flattish sequentially. The top line was essentially driven by improvement in price and mix. Despite a challenging environment, we've been able to maintain our market share in the quarter in the key product segments. The EBITDA for the quarter stood at EUR 28 million with an EBITDA margin of 15.4% compared to a sequential of 15.3%, though a drop from the same period last year of 20%. The margins were impacted both by raw material cost push and energy costs. With this, I will conclude my opening comments. Thank you. We would be happy to take your questions.

Thank you, Neeraj, sir, and Gaurav, sir, for the detailed opening remarks. We'll now open the floor for question-and-answer session. [Operator Instructions] Yes. So we have our first question from Mr. Siddarth.

Congrats on a great set of numbers. Sir, my first question is on the volume. Sir, if you can just give us some more details on how the replacement growth has been on a Y-o-Y or Q-o-Q business? And on subsegment also if you can throw some light [indiscernible] -- sorry.

Yes. So Siddharth, the overall volume decline for the quarter was 4%. We did not have volume growth. We had a decline, and replacement volumes were down 8%.

Okay. So overall, the volumes declined 4% Y-o-Y and replacement was down 8% Y-o-Y?

That's right.

And what will be the breakout sir, for the segments like truck and PV in the replacement.

For truck replacement, the decline was 8% and the same number for passenger car replacement.

Understood. So sir, on this demand outlook, just some more clarity. I mean when you say that you expect the replacement to remain subdued in the near term, now this is the second quarter when we have seen the demand remaining soft on a Y-o-Y basis. So what is -- how should we think about the growth for the coming years for the segment?

So the volume -- I don't -- I think in the quarter 4, you will see replacement coming back. Definitely, it will come back. OE is already up, both in commercial and passenger. And generally, there is a lag effect that volume will start coming up and you will see in quarter 4, January has been a little bit cold, but come February, March, I believe the volumes will be back...

Okay. And this does not factor in any -- I mean, is there any market share loss in this also in the truck side or the industry would have also declined in the similar lines?

There is no market share loss. All players, you've seen sequential quarter-on-quarter or quarter 2 and quarter 3. We have been flattish whereas our competition has been negative.

Understood, sir. Sir, lastly, on the commodity side, if you can throw some light, how much benefit we can see further in the current quarter given where commodity prices are. And do you expect any further benefit in the coming quarters also?

Gaurav, you want to...

Siddharth, we expect the raw material corrections to continue. We saw a decline of 6% in Q3 vis-à-vis Q2, and we would again expect a mid-digit -- mid-single-digit correction in raw material prices in Q4.

So we have our next question from Mr. Raghunandhan.

Congratulations on strong numbers. Firstly, a clarification, so in terms of OEM and export, can you share what was the growth in OEM and what was the decline in exports? And also, if you can talk a little about how you are seeing the overhang on exports to continue in the near term, and what are the factors you think can aid for improvement in volumes there?

Gaurav?

Raghu, the growth in the OEM volumes was about 30%, whereas the decline in exports in the current quarter was about 25%. As Neeraj mentioned, we are seeing bullish demand for the -- from the OEMs, and that we expect to continue. Exports, at least in near term, we think with the macroeconomic environment, the demand would be subdued. We still had substantial growth in exports on a full year basis. And going forward also, we expect some of it to come back. But near term, the export market will continue to be subdued.

Got it, sir. On the Europe replacement market, as you indicated that the industry has seen a double-digit decline both in passenger vehicles as well as on the truck side. How do you see it? How much of it is because of a mild winter on the passenger vehicles and how much because of the macro weakness? I'm trying to understand whether the muted volume performance will persist? And what are the factors you think can lead to a recovery and by when you are hoping that the recovery could take place.

Should I take on, Gaurav?

Yes.

So, I think, the whole question is around Europe. Europe has had a slightly delayed winter. Also, market sentiment is very down given that Europe is going through a recession, even the U.S. is going through a recession. Where Apollo in Europe is on a very strong foothold, the market was down minus 14%, whereas Apollo was down only 5% -- minus 5%. So we actually gained market share. Our whole strategy in the passenger car is to become a premium company. So our UUHP and UHP share also went up to 44%, 45% of the whole pie. Given that we are a very niche player, I think that's where we are trying to make market share gains in new channels in new countries. So focus countries are really Spain and France, whereas Germany and Netherlands continue to be the top 2 countries for us. U.K. is the other third focus market for us. So I believe that quarter 4 is going to be on revenue. We will have a growth because we are sticking on to our price. But on volume, again, it will be -- no. So the first 6 months of this year, calendar year, are going to be a bit challenging in Europe. Then I see things panning out.

On the Europe side, the lower gas prices in Europe, are we getting the benefit of it as most of our exposure was hedged?

Gaurav...

Yes, the energy prices are beginning to come down. We still had an escalation in energy prices, though the hedging strategy largely insulated us, and that's reflected in the fact that we were able to report quite healthy margins, though down a little bit vis-à-vis last year. But now the prices are beginning to come back to reasonable levels and should not be a factor going forward into the next year.

We have our next question from Mr. Jinesh.

My question pertains to the European market. It seems the large part of impact is more on the -- because of the inventory destocking. On the retail side, are you seeing similar pressures or that's reasonably okay.

Retail, the inventory at dealer level is high. So drives driven on the road have come down in Europe. And that was primarily because of the recession, plus the gas -- oil prices were very high. So slowly, slowly, things will ease out as we go into the next quarter.

Okay. Okay. Got it. And secondly, in the European market, we did not see -- or European operations, we did not see any benefit of commodity prices. In fact, you called it out as a factor by margins that corrected on Y-o-Y basis. So can you talk about what led to the inflation on the RM side? And how do you see that shaping up?

European operations usually get the impact of raw material with a lag so a large part of the RM correction was initially led by natural rubber, which is a much smaller component for the European operations. So the RM correction for the European operations will come through in Q4.

Okay. So Q-o-Q, we expect some benefit of RM coming in fourth quarter?

That's right.

Got it. And that would be, again, similar mid-single-digit kind of benefit like we expect in India, given that synthetic -- I mean, the crude-based derivatives have come off quite reasonably.

Yes. In the last quarter.

Okay. And lastly, any update on the antidumping duty on TBR side in India?

So the antidumping duty is no longer there. But from our perspective, the other constraint, which is the res -- tires being on the restricted list continues.

Okay. So hence, no material increase in exports so far? Imports, sorry...

As of now, no.

We have our next question from Mr. Amyn.

Congratulations for hitting the 12% ROCE mark. I think it's quite heartening to see a double-digit ROCE in the company after a long time. My first question is on that, what is the CapEx for the 9 months? Because I'm guessing that if the demand environment is a bit flattish. I guess, a lot of the ROCE improvement will have to come from, a, margins, it should be strong given lower commodity and, b, better asset turns. So what is the CapEx for the 9 months? And any early indications of how it could look like for next year?

I mean frankly, the CapEx in light with what I've been talking has been fairly low. In India, it's just around the INR 450 crore mark. And in Europe, just EUR 20 million. So it's largely been maintenance CapEx, CapEx into digital initiatives, et cetera. As of now, we are on the drawing board with our budget for next year, et cetera. So a little early to give you the CapEx guidance. We are still assessing the demand/supply situation. Unlikely that we will have any major growth CapEx. As we've been talking to all of you, we need to just assess our demand capacity situation on the passenger car side and see if we do need to begin any mid-sized CapEx next year. We'll get clarity on that in about 1 quarter. So as of now, there is no growth CapEx, which has been sanctioned or approved.

Okay. Okay. And just to go back to the replacement demand, which mostly Europe, you understand. But in India, as this truck replacement has actually been quite weak, I think, for more than 2 quarters now. And it seems that activity level is happening on the ground, the e-way bill data and other data points seem to be quite strong. So what do you think is happening there? So is part of it voluntary, like part of the decline voluntary, like you let go off some market share at the margin to support pricing, or what is happening? Because it seems a bit troubling, I don't know, or maybe we are troubling -- we are worrying too much and maybe it's not so worrying.

See, demand on the replacement side has been subdued, you are right, for 2 or 3 quarters. If you look at the YTD figure, our volumes on the truck side are just slightly negative. Given our pursuit of a very conscious strategy of profitability, we do have let go off maybe some bit of volumes, but not significant vis-à-vis overall market. The expectation with the kind of infrastructure spend that the government is planning, we think that the demand will come back strongly. The OEM side is still holding up. So yes, we would have been happier with a better demand scenario in the replacement side, but we don't see a reason for worry midterm. We think it's a few quarters away where the demand will pick up.

We have our next question from Mr. Basudeb.

Heartening to see Kanwar sir start with focus on FCF and ROCE in his initial remarks. A few questions, one, in the initial comments when you said overall volume is down 4%. Is that India volume or it is a consolidated volume movement?

India volumes, Basudeb.

Okay. Second is what's the current rate of TBR utilization?

TBR capacity?

Yes.

Gaurav?

The TBR capacity current utilization is about 80% in the last quarter.

So will it be right even now to assume and combined with your controlled CapEx and focus on FCF that no incremental TBR CapEx in '24, '25, both fiscals.

That's right Basudeb. We don't expect that in the next 2 years, we need a TBR CapEx.

That's great. Third thing, as in your presentation, the debt reduction, which you mentioned, I recall in Q3, there was a spike in debt because of working capital surge because of the reasons which you mentioned both in Europe and India price hike related issue. So is it largely related to reversal of those working capital issues, or still scope of reduction there -- is there?

India, we had gone up on inventory, and they were conscious effect -- efforts to correct those inventory position. So that's been done. Europe, again, similar drive and also September, there is a seasonal increase in inventory. So large part of that is corrected, but Europe can still improve given the low demand, inventory levels, but it is slightly higher than the norm that we would like to maintain.

Sure. And as usual, Gaurav, as you mentioned the commodity-wise numbers for the quarter, if you can answer, the commodity prices.

Natural rubber prices for the quarter was about INR 175 per kg; synthetic rubber INR 185, Carbon Black, INR 130 and steel cord about INR 190 per kg.

And for Europe business, if I missed out, what was the euro revenue and EBITDA margin?

Europe operations revenue was EUR 180 million for the quarter. And the EBITDA margin was 15.4%.

And as initially, you highlighted that this being a winter third quarter and for what -- various reasons, the typical winter quarter margin, Q-o-Q improvement was not realized. And this weakness in margin next quarter where it is no more a winter quarter stuff. So the margin typically reverses back. So from that angle, this 15.4% coming back to somewhere around 12.1%, is that possible?

We will not give out margin guidance. And yes, Q3 margins are typically our best and clearly, we did not see the sequential improvement in margins. Some of the cost push, as I mentioned, for the European operations in terms of raw material and also energy will start going up. Where it would end up in terms of margin, we would not like to point through a specific theory.

And our next question from Disha Sheth.

Sir, wanted to check when you said volume degrowth of 4%, so -- and we have a sales growth of 12%. So it is because of a price hike or the product mix?