Apollo Tyres Ltd is planning to become a $5 billion company by 2026 on the back of Apollo and Vredestein’s dual brand strategy, an improving economy, higher exports and a sharp recovery in India’s automobile sector. The next five years will be about consolidation and reaping the benefits of investments made in technology, capacity and brands over the last five years, said Satish Sharma, president-Asia Pacific, Middle East and Africa.
Tyre manufacturers in India are expected to be the key beneficiaries of an upturn in the world’s fifth largest automobile market. They will benefit from a higher offtake of tyres by automakers on the one hand and its ripple effect that would result in a steady growth for the replacement demand, on the other.
In a bid to strengthen its product offering further in the Indian market, Apollo Tyres on Saturday said it plans to introduce its locally manufactured premium tyre brand Vredestein in India. It would address the premium and luxury segment in passenger cars, while the two-wheeler tyres from the brand would cater to the growing superbiking segment in India. Apollo acquired the Dutch tyre brand in 2009.
The introduction of the Vredestein brand in the premium segment will be margin accretive and will give the company a beachhead among dealers who were only selling imported tyres. The market size for premium tyres in India is 20,000 a month but is expected to grow manifold as the demand for premium and luxury car models and performance bikes gains traction.
Elucidating on the 5-year vision, Sharma said, Apollo Tyres has built a lot of inherent strengths in the last few years and is now ready to capitalise on it. “The India operations have done quite well and we have a range play in the tyre market— from two wheelers and cars to commercial vehicles and off highway,” said Sharma, pointing out that the firm now leads the replacement segment of the passenger car radial market and will soon be entering the performance segment of the two wheeler market. The company also seeks to benefit from an upcycle in the CV market and an overall improvement in the economy.
The tyre business, said Sharma, has a strong linkage to the overall growth of the country. A high focus on infrastructure projects augurs well for the company. “Everybody is forecasting the Indian GDP to have a bull run of 4-5 years and advance at 7-9 per cent,” he said. If the real estate boom lasts and the interest rates remain where they are, it would be followed by an investment by the private sector.
Sharma’s confidence also stems from the performance of Apollo Tyres’ US and European operations and a step up in exports. As of now exports account for 10 per cent of the revenue and are likely to touch 15 per cent in the near future.
Apollo restructured operations at the Vredestein manufacturing facility in Europe last year. The unit will now only focus 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 expected to benefit from this exercise from the current year onwards. Sharma said the Hungarian operations instead of being a drag will now complement the overall growth strategy.
Apollo Tyres is at the fag end of the capex cycle. It is operating at nearly 85-90 per cent capacity utilisation. It is expected to conclude the planned capacity expansion by the end of FY2022. “The company is expected to operate at around 65-70 per cent capacity utilisation, which gives the company the bandwidth to grow business for another 2-3 years at minimal capex,” said a recent research report by Sharekhan by BNP Paribas.
The brokerage expects the company to gain market share due to its competitive position in both trucks and passenger vehicle segments and estimates its earnings to post a robust 44 per cent CAGR during FY2021-FY2023E, driven by a 12.9 per cent revenue CAGR and a 160 bps EBITDA margin expansion to 17 per cent in FY2023. A strong operating leverage and improving product mix is likely to aid the expansion.
Meanwhile, even as the demand and volume outlook remains strong, a persistent inflationary trend in commodities has been a pain point and will weigh on the margins, said Sharma.The cost increase on account of higher input is close to 20-25 per cent. Though 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.