Apollo Tyres Limited has set a target to become one of the top 10 tyre makers globally and aims to clock sales of U.S. $ 6 billion (about Rs.33,270 Cr.) by the year 2016. In FY 2012, the Company had posted a turnover of about U.S. $ 2.2 billion (Rs. 12,153.29 Cr.), placing it at the 16th position globally. The top three players are Bridgestone, Michelin and Goodyear, followed by Continental and Pirelli at fourth and fifth positions.
In order to achieve this target, Apollo Tyres is focusing on three key factors – capacity expansion, research & development (R&D) and marketing. Recently, it has come up with a strong strategy in terms of capacity expansion, scaling up R&D and marketing.
The Company is expanding its capacity in radial tyres since 98 % of the passenger vehicle segment uses radial tyres while in the commercial vehicle segment Radialization is 15–18 %. However, manufacturing radial tyres is far more capital intensive than manufacturing cross-ply tyres. At the same time, selling price of radial tyres is higher than that of cross-ply tyres.
Apollo Tyres is planning to invest U.S. $ 1 billion (about Rs. 5,545 Cr.) in the next five years to expand its global footprint, which includes setting up two new greenfield plants, one in South East Asia ( either in Thailand or Indonesia ) and the other one in Eastern Europe.
► According to the Management “The first phase of the South East Asia will entail an investment of about U.S. $ 250-300 million. The initial capacity of the plant will be 16,000 units of Passenger Car Radials (PCRs) per day and 1,500 units of Truck And Bus Radials a day (TBRs)”, the second phase will entail an investment of around U.S. $ 200 million after which the proposed plant would have a full capacity of 24,000 units of PCRs per day and 3,000 units of TBRs a day. The plant in South East Asia will mainly cater to the ASEAN countries and China, while 20 % of the production will be exported to Europe and Latin America.
► The Company will also be converting its Kalamassery plant in Kerala into a dedicated unit for production of off-highway tyres (OHTs) with about 85 % of the output from this plant is aimed to cater to export markets, including the US, Europe, Australia and Latin America.
► The Company is planning to hike the production capacity of its factory in the Netherlands to 7.5 million units a year from the current 6 million units a year which entails a total investment of around U.S. $ 350 million and for the Kalamassery plant; Company will be investing about Rs. 200 Cr.
► On the R&D front, The Company is shifting its research and development centre for passenger car tyres to Holland from India and will also be increasing its spending on R&D and marketing.
Funding of these investments, would be partly through the U.S. $ 150 million which the Company plans to raise via placement to qualified institutional buyers (QIBs) and via internal accruals.
The top global companies are currently spending about 6-7 % of sales on R&D and marketing. While Apollo’s spending on R&D is just about 2 %. In order to scale up the Company’s worldwide visibility, Apollo is also setting up a global marketing office to be based in the UK. This will mainly focus on branding and communication strategy.
In the short term, capital expenditure incurred on this expansion is expected to reduce profitability of the Company. However, future prospects for Apollo Tyrelook bright as going forward these expansion plans and strategies will meaningfully improve the revenue and profitiabilty margins of the Company.
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Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.Follow @SanaSecurities