Apollo Tyres Limited (APOLLOTYRE) Earnings Call Transcript & Summary

Good afternoon, everyone. On behalf of Motilal Oswal Securities, I welcome you all for the Q1 FY '27 Results Conference Call of Apollo Tyres Limited. From the management side, we have with us today Mr. Gaurav Kumar, Chief Financial Officer. I would now like to hand over the call to Mr. Gaurav Kumar for his opening remarks, post which we will begin the question-and-answer session. Over to you, sir.

Aniket, thanks. Good afternoon, ladies and gentlemen, and thank you for joining us today. There's some glitch in my video, so I'll have to go through audio only. I welcome you all to the Apollo Tyres post results conference call. Neeraj is not able to join this call because of an urgent commitment. I'm pleased to share an update on our performance for the quarter, along with our outlook. But let me first begin with the announcement concerning myself. I had been thinking for some time to take up a new challenge and decided now that it is the appropriate time, having completed the Enschede project, which I was an integral part of over the last 18-plus months. It was an emotional decision to leave Apollo Tyres after 22-plus years career here. And as of now, I'm not sure what the future holds for me. I will figure that out over the next couple of months or so. But let's move on to the business performance and the outlook. The Q1 FY '27 proved to be a challenging quarter given the macro environment. However, we delivered a strong consolidated top line growth of 12.8% YoY, while on a sequential basis, the growth was muted. The consolidated revenue for the quarter stood at INR 74 billion with an EBITDA margin of 11.7%, down about 150 basis points year-on-year, primarily on account of RM cost pressures. On the domestic operations, I am pleased to share that we delivered our strongest year-on-year quarterly growth in the last 14 quarters. The India operations recorded their highest ever revenue. We delivered a double-digit growth across all segments compared to the same period last year, positioning us in line with and, in many segments, ahead of the market performance. The revenue for the quarter was INR 54.6 billion, representing a healthy growth of 15.6% YoY and 4.3% sequentially. The growth was largely volume led. The EBITDA for the quarter stood at INR 6.5 billion, a margin of 12% compared to 13.6% in the corresponding period last year. Looking ahead, demand remains healthy across categories and channels. July already delivered a strong start, providing confidence that the momentum will carry into Q2. Raw material costs escalated sharply during Q1 by the magnitude of nearly 17%. Despite this, we largely successfully defended margins through a combination of calibrated price increases and disciplined cost control. Commodity prices are likely to remain volatile until the geopolitical situation in West Asia stabilizes. Based on the current outlook, we expect raw material inflation of about 8% sequentially into Q2. In Europe, we delivered low single-digit volume growth on a YoY basis. Revenue for the quarter was EUR 147 million, up 0.5% YoY. The EBITDA for the quarter stood at EUR 13 million, a margin of 8.9%, lower than the previous year's 10.8%. To a certain extent, there is overlap of costs as we do the Enschede closure and transition, which will go away with time. The PCR replacement segment continues to deliver healthy growth and the positive momentum is expected to sustain through the coming quarters. Some revenue was impacted as a result of Enschede plant closure transition. The Netherlands plant stopped production as planned in June 2026, and we expect the financial and operational benefits of the restructuring to start materializing from H2 of the current fiscal year. The geopolitical situation in West Asia continued to create headwinds in select international markets, leading to heightened uncertainty and cost volatility across raw materials, energy, logistics costs. We remain focused on adapting to changing market conditions while exercising prudent cost management. While the broader macroeconomic environment remains challenging, we are well positioned to sustain momentum and further accelerate growth across our India and Europe operations. At the same time, we have maintained a strong balance sheet and continue to improve our leverage profile in spite of the current circumstances. Let me now briefly touch upon some of the strategic initiatives and key achievements delivered by the teams during the quarter. Starting with R&D, we continue to make good progress across product development and technology during the quarter. Alongside securing several OEM approvals and nominations, including for multiple EV platforms, we expanded our replacement portfolio and delivered tangible improvements in product quality and cost optimization. We also advanced our sustainability agenda with increased recycled material usage and process innovations. On the digitalization front, we continue to advance our transformation through the global S/4HANA program and scale deployment of AI across manufacturing, where multiple use cases are now delivering tangible productivity, energy efficiency and cost benefits. On the brand side, we continue to strengthen customer engagement across our key markets through integrated campaigns and trade initiatives. In India, our ICC Women's T20 World Cup campaign generated over 220 million consumer reach and 500 million views across digital and broadcast platforms, while dealer-led activations further enhanced the market connect. Finally, sustainability remains a key pillar of our long-term strategy. We exceeded our FY '26 environmental commitments and further strengthened our FY '30 sustainability road map with our continued progress, earning Apollo Tyres recognition amongst India's top 30 most sustainable companies. With this, I will conclude my opening comments. Thank you all for your time. We would be happy to take your questions.

[Operator Instructions] Our first question is from the line of Raghunandhan.

Best wishes for future, and sincerely appreciating your efforts at Apollo.

Thank you, Raghu.

Starting with the questions. For the India business, if you can share the volume growth, total OEM replacement exports. And if you can also talk about the outlook for each of the segments?

Sure. So the volume growth, Raghu, across these 3 channels was fairly stable. Replacement was 13%, OEM was 10%, and exports was 15%. So fairly in a narrow range, but all in double digits. And similarly, even across product categories, barring TBB, it was all double-digit growth. The outlook remains strong. Replacement momentum is strong. Given the rains, this is a seasonally weaker quarter, but we should be delivering good growth YoY.

Got it, sir. And in Europe, 2 questions. First is, recently, there was an announcement of antidumping duty on Chinese tires. How will it benefit Apollo, both for exports from India and, second, for the production from Hungary? And on back of this, do you think there can be a double-digit growth for our Europe business?

Sure. So we expect this to be positive. Clearly, Chinese were taking a certain amount of share at the lower end, which would feed into the Apollo brand volumes. The Vredestein brand on PCR does not compete with the Chinese tires. But overall, it will definitely benefit the domestic players. Even in this quarter, Raghu, the PCR replacement growth was in double digit, well ahead of the market. The reason why you see a muted top line growth is on account of agri tires where the transition resulted in a certain amount of revenue loss, which we knew. And similarly, even the shifting of the truck radial capacity from Hungary to India, and the market in Europe and in India boomed, we had the capacity in transition and that resulted into certain revenue loss resulting into a muted top line growth at Europe. So we definitely expect Europe operations to pick up growth as we move forward.

And on the capacity shifting side from Netherlands towards Hungary or India and even this truck radial shifting from Hungary to India, if you can talk about when the production will start off and how the ramp-up will happen?

So it's a mix of shifting from the Netherlands capacity, which was manufacturing about 750,000 tires in terms of what our sale was last year. A large part of that would shift to Hungary. And some bit of Hungary capacity, in terms of the lower-end tires, the 14-inch, the 15-inch tires, would be transferred to India. That process had been started, Raghu, as soon as we got the Works Council of Netherlands clearance, which was in September of 2025. It's a fairly intense process. We anticipated about 12 months, and it would be completed in September, October of 2026. Similarly, another product category, which was Space Master spare tire. Post the clearance, that capacity has been set up in our Baroda plant. We have already got OEM clearances. And going forward, the supplies would be there from our Baroda plant. The only place where we did not have an equivalent capacity was in the high-end agri tires, and we didn't even have a space for setting up that capacity. That is where we are resorting to offtake of a certain quantum.

Noted, sir. And just a last question. On the commodity side, if you can indicate how much price hike in India and in Europe has been taken so far? I think in India, the requirement is about 15% to 16% kind of price hike if you have to cover the entire commodity inflation. So how much has been taken so far? And how is the market accepting these price hikes? How much is competition taking? And similarly, what is the requirement in Europe, and there, how much has been taken?

Sure. So in Q1, RM went up, Raghu, roughly by 17%. So applying a thumb rule of 2/3, we needed about, at a very broad level, let's say, 11%, 12% price increase. What was implemented, and that also in a staggered manner through the quarter, was about 7% to 9%. Further price increases into Q2 have already been announced. So the current quantum of price increase is about 9% in TBR and 11% in other categories. The raw material is still going up in Q2. So overall, what we need is about a 15% to 16% price increase, whereas we are currently at the 11%-plus zone. So at least 1 to 2 more price increases are needed.

Got it, sir. And in Europe?

Europe, the impact immediately was smaller, because the first hike up was on account of natural rubber. So in this quarter, Europe raw material basket went up by 8%, but they are getting the hit in the second quarter. Europe, the price increases total for Q1, Q2 needed is about 10-odd percent. As of now, only 3%, 4% has been implemented.

Our next question is from the line of Amyn Pirani.

Wishing you all the best for your future endeavors.

Thank you.

Okay. So coming back to the Europe business, you mentioned that there were quite a few overlapping of cost between Netherlands and Hungary. So I don't know if it's possible to quantify, but say, if there were no overlap of cost, what is the kind of margin that you would have had? Or maybe another way, once we move entirely to Hungary, after all this is done, what is the kind of margins that you are aspiring for in the European operations?

Sure. So I mean, at a very high level, I wouldn't have access to those figures quickly, but I would say if those overlaps were not there, we would have been at about 11% odd margin levels, okay? In terms of your second part of your question, on a full year basis in Europe, with this change, we would look to deliver high-teens EBITDA.

High-teens?

Yes. And that was the goal we had set for ourselves saying that if we get this manufacturing footprint right for this brand and these categories, that is the potential of the European operations.

Okay. Okay. Okay. That's good to know. Secondly, you mentioned that on the high-end agri tires, right now, you are having to do some offtake. But what is the medium-term plan? Because I am guessing that these were made in Netherlands and these were relatively higher price and potentially higher-margin products. So what is the medium-term plan for this one?

So I mean, we are still thinking through, because one of the constraints is that our OHT capacity was only there in Kalamassery, which is now in the part of the city in Kochi. So that capacity has limitations in terms of how much it can be expanded. Setting up a new plant somewhere else has its own challenges, because it would not be an economic sized capacity if we were to set up a 10, 15 tonnes capacity, because Enschede agri capacity was all of 20 metric tons per day. So right now, we have identified an offtake partner. And I would say, for midterm, we would be with this offtake partner. And even selecting and certifying that partner took time, because we are talking about a high-end production. So as of now, the midterm plan is to continue with the offtake, because setting up a small 10 tonnes capacity in a new location in India would not have economic scale and then would not make sense.

Okay. Okay. And this offtake partner is in India or in Europe?

It is at the cusp of India -- Asia and Europe.

Okay. Okay. Okay. And just a broader question. You have moved quite a few things to India. And I think this process had started even before the European FTA things. Does all of this get benefits from the India-Europe FTA, or it's not even material to think about that?

It's not much, it's not material. And for us, it made sense. So India would continue to have bulk of the capacity with Hungary always expanding strategically. Like even now if you see, the Hungary capacity is being expanded by 4,000 passenger car tires per day, whereas our plant in AP is expanding double that capacity. And frankly, while I think the financial market had thought that some of our expansion plans are aggressive, but the kind of demand that we've seen in India, this entire FY '27, we will continue to be very tight on capacity. We are currently running into the 90s. I would only say in hindsight that it's a beneficial thing that we took those decisions. If anything, we are a quarter late than early.

Okay. Okay. And that brings me to the last question. Your net debt has continued to come down or actually be stable in this quarter. Is it fair to say that the main CapEx, because you had guided for more than INR 3,000 crores of CapEx this year. Is the CapEx outflow not started yet? Or is it despite that, that you've maintained the net debt? Any color there would be helpful.

So the CapEx definitely has started. It's not -- so even India, for example, the quarter CapEx was INR 500 crores, which is higher than what it has been in the recent past, where our annual CapExs used to be, for India, INR 1,200 crores, INR 1,300 crores. So yes, it will go further up in Q2, Q3. So to a certain extent, you are right that it's not exactly 1/4, but the CapEx is onward and we anticipate that our net debt-to-EBITDA ratio will go up slightly in the current year. We will be a net borrower.

[Operator Instructions] Our next question is from the line of Siddhartha.

Sir, you mentioned that we had taken about a 7% to 9% price hike over the quarter. But you also indicated that a large part of the revenue growth is volume-led. So why have we not seen any benefit on the realizations? And has there been any offsetting factor in the ASPs in the quarter? So if you can just help us with that first.

Sure. So Siddhartha, if you look at the 15.6-odd percent growth, about 12% is coming from volume, which is why I made the statement, largely volume-led, because the price increases were taken, I think, in 3 lots through the quarter. So when I talk about the 7% to 9%, what is flowing into the revenue would only be the 3% to 4%, because they were taken staggered through the quarter. And the full effect is what will now flow into Q2.

Okay. Got it. Got it. And will this full impact be taken in the current quarter? Or do you think you will also space it out and maybe take more towards the end? So then probably in the next 2 quarters, we should see a benefit on the realizations?

Sure. So as I mentioned, because the raw material continues to go up in Q2, we expect a sequential 8% increase for India operations. So we need about a couple of price increases more. One has been announced in July, and I think we would look to take one in August as well. But yes, you are right. If that is where the raw material situation stabilizes, the full impact of the 5-odd price increases will flow into H2 of revenues. Also take into account that in some cases with the OEMs, where there is formula-led pricing that's with a quarter delay, so we will get the price increases in Q2 based on the RM increase of Q1.

Right, right. Got it. And on the capacities, can you remind us when does the first phase start for you in terms of production and volumes are visible?

So the Hungary one is almost about to start and in H2, we'll start producing and ramping up. So Hungary would go up from about 17,000 car tires to 21,000. India was started later -- just a minute. The India capacity will probably, I think, start coming on stream towards the end of this year and then ramp up through FY '28.

Okay. Okay. Got it. And lastly, if you can share the consol net debt level and the CapEx done for till quarter 1?

At a consol level?

Yes.

So the full CapEx for Q1 was INR 650 crores at a consol level. The net debt-to-EBITDA at the consol level was 0.4.

And sir, the absolute net debt will be?

Absolute net debt, just a minute, was about INR 1,700-plus crores.

INR 1,700 crores. Understood. Sir, last question is on the exports. I mean, we have started seeing good pick-up there. Can you help us understand the geographies where this is primarily going into? Is it largely Europe or you are also looking at more geographies to broaden the outlook?

We are looking at more geographies. But in the current quarter, it has been largely Europe. The West Asia geographies have been impacted by the war. So they are behind budget. Even U.S., with the kind of inflation it was facing, has had issues in terms of dealers' inventory not going off the shelf and hence, them not buying additional tires. So U.S., which is a focused geography, has not performed as per expectations with a tougher market. West Asia, et cetera, has been impacted. So there are small other pockets, but it's been largely on the back of Europe.

Next, we have a question from Vijay Pandey.

All the best for your future endeavors. One, I wanted to understand about the other expenses. So that has come down quarter-on-quarter. It was expected, but can you guide us how it is going to look going forward? And should we expect this level? Or is there potential to come down further?

So one of the major reductions was on the advertisement and sales promotion. And that was reduced by almost 50%. That was keeping in mind the tough scenario, keeping in mind the overall environment. It will go through its little bit of ups and downs, because it's also dependent, with the BCCI sponsorship, on the match schedules, et cetera. So, to your question, would we expect a further reduction? I would say no. There will be quarters where we will press our foot on the pedal on the advertisement and sales promotion. But clearly, I would say, as we look back, the demand boost from GST reduction and even the kind of demand pull that we are seeing as a result of the jersey sponsorship is justifying those spends, because we've seen our growth, particularly in the consumer tire categories of passenger car, 2-wheelers, et cetera, accelerating significantly over the last 3 quarters.

Okay. Okay. Secondly, sir, in Europe, so if you can help us understand what will be the agri business that we currently are offtaking from other players? And what does the growth outlook look like? Because some of our peers have guided that there was some level of prebuying. So just want to understand both in PCR and agri business in Europe.

So agri business in Europe, sequentially, to give you an example, we had a decline by high teens, partially our result. Year-on-year was, of course, a small single-digit decline. At this stage, in terms of how much we are offtaking, I would say, about 20% to 25% of our agri business would be through offtake. It's not just with one player. There are 2 partners from which we are offtaking depending on which category of tire. That business, the team has to sort of go through its changes, stabilize with customers, because it's not a simple product that you just go to a partner and start picking up. The tires are customized specifically with your specifications, et cetera. So we are now in the process of just about starting that process. I would say we would need at least a couple of quarters to reach some sort of stable situation on that. Whereas on the other product categories, the transition has been done and we are already in a stable state.

And sir, on prebuy?

I have not heard from my people. So I would admit to you that we'll have to get back to you. I can't give you a conclusive answer if there's been a prebuy.