We attended the Apollo Tyres’ investor conference and Andhra Pradesh (AP) plant visit last week. The AP plant impressed us with its well-planned layout and utilisation of machines sourced from Europe. Currently, the plant is operating at near-full capacity, but there is potential to increase its capacity by three times in the future. The management reaffirmed their Vision FY26 targets, which include a revenue goal of $5 bn, implying a CAGR of approximately 17% for the period from FY23-FY26. Additionally, they aim to achieve an Ebitda margin exceeding 15% and a return on capital employed (ROCE) ranging between 12-15%, while keeping the net debt/equity ratio below 2x.
The company’s main focus will be on improving ROCE and profitability rather than gaining market share. The passenger vehicle segment, which offers better profitability, is expected to experience strong growth. Additionally, premiumisation in the industry, such as the sale of higher rim sizes, and market share gains in the premium PV categories, will act as catalysts for margin improvement. The company’s current production capacity is sufficient to meet demand until fiscal year 2025.
To meet future demand, the company may need to invest Rs 15-20 bn in capital expenditure over approximately 2.5 years to establish a new passenger car radial (PCR) plant. This plant is projected to have a daily production capacity of around 8,000 tyres. In the near term, demand is healthy in TBR (truck bus radial), but weak in PCR and it expects to grow volumes in high single-digit in India in FY24E. Exports remain weak and EU is likely to be flat in FY24E.
Stable commodity and profitability focus to enhance the ROCE to 13% by FY25F. It is worth noting that the low capex intensity contributes to this improvement. However, during the upcoming phase of capacity expansion, the capex intensity appears to be higher, which may potentially impact short-term ROCE due to any substantial spending.