The Indian tyre industry is expected to continue its growth and is expected to witness a turnover growth of more than 10 % CAGR during the period between FY’12 and FY’14. The increasing level of investments to increase production capacity will drive the Indian tyre industry in the coming years. Further, expected steady growth of 8-10 % in replacement demand (~65 % of total demand) would lend a greater degree of stability to overall tyre demand in long term.
Apollo Tyre Limited (“Apollo” or the “Company”) can be the key beneficiary of the structural shift that the Indian tyre industry is going through, given its dominant position in the truck and bus radial (TBR) as well as replacement segment coupled with leading brands and a strong distribution reach.
The Indian tyre industry was mainly a cross ply or bias tyre industry but now; the industry is going through a structural shift towards radial tyres. Radial tyres have longer life cycle, superior quality and hence command a premium to bias tyres (20 % better pricing) and have better margins to the tune of 200-300 bps higher than bias tyres. The radial tyre market is expected to reach Rs. 393 Billion by FY 2015 growing at a CAGR of more than 21 % during FY 2011-FY 2015.
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.
In the short term, capital expenditure incurred on this expansion is expected to reduce profitability of the Company. However, future prospects for Apollo Tyre look bright as going forward these expansion plans and strategies will meaningfully improve the revenue and profitiabilty margins of the Company.
The Indian tyre industry is extremely competitive and is dominated by MRF. However, Apollo is one of the leading tyre making companies in India and has a significant market share in both commercial vehicles (CV) and passenger vehicles (PV) segments. At the end of FY 2013, Apollo had a 28 % market share in the CV segment and about 19 % market share in the PV segment and increasing radialization in the TBR segment is expected to lead to higher earnings growth and margin improvement for the tyre industry
Replacement Market offers a wide opportunity
Replacement Market offers a great opportunity as replacement cycle of a tyre is of 2-2.5 years. Also, with slightly reduced government spending on the country’s infrastructure, mainly roads, the replacement cycle of tyres will get reduce thus leading to an added demand for tyres in a future. Sales from replacement enjoy higher margins than OEM due to better pricing power and with Apollo deriving about 65 % of its revenues from replacement markets; will witness an improvement in margin performance.
Replacement market demand considerably helps the company in mitigating the impact of weak demand from the OEM segment.
Volatile Raw Material Price
The major risk which we see for the Company and the entire tyre industry is the higher than expected hike in the raw material prices. Among the raw material, natural rubber prices are the biggest risk. If production constraints do not get resolved globally in the near future, we may see immense pressure on the margins. Synthetic rubber prices may also increase on increasing in crude prices.
Nature of industry
Industry in which Company operates is highly competitive in nature with many established player operating domestically as well as globally. So there can be possibility of reduction in pricing power on account of production constraints and competition which may in turn leads to hamper margins for the company.
About the Author
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