APOLLOTYRE - Apollo Tyres Ltd Share Price

In the Q4 FY25 earnings conference call, Apollo Tyres management provided a cautious yet optimistic outlook for the future. The company reported a consolidated topline growth of 3% year-over-year with an EBITDA margin of 13%, although they acknowledged that this performance fell short of expectations and peers in both India and Europe.

Looking forward, the management anticipates a recovery in operating performance, driven by improved top-line momentum in both regions. Specifically, they expect growth in the domestic replacement segment in India and top-line recovery in Europe bolstered by new product launches and market growth.

Key points presented by management include:

1. Regional Performance: In Q4, there was a growth in the domestic replacement segment, while the OE segment experienced a decline. The revenue for India was INR 45.8 billion, showing an 8.4% growth compared to the same quarter last year. However, Europe faced a revenue decline of 4%, amounting to EUR 176 million.

2. EBITDA Details: The consolidated EBITDA for the quarter was INR 8.4 billion, which was lower than previous year margins due to raw material cost pressures and operational challenges.

3. Debt Levels: The net debt to EBITDA ratio stood at 0.8x for consolidated operations, indicating a healthy balance sheet, while India's operations reported a 1.2x ratio.

4. Capex Plans: The total capital expenditure for FY26 is projected at INR 1,500 crores, evenly split between growth and maintenance.

5. Capacity Expansion: To address capacity constraints in Europe, particularly in the UHP category, the company is expanding its facility in Hungary, which is expected to come online by the end of the current fiscal year.

6. Restructuring Impact: Management outlined the planned closure of the Enschede plant by 2026, anticipating that this restructuring will enhance cost efficiencies and improve margins sustainably in the coming years.

7. Profitability Focus: Apollo Tyres is implementing various initiatives to optimize costs and leverage their capabilities in responding to market demands across key geographies.

Overall, while the company faced challenges in FY25, management expressed confidence in a strong recovery and improved performance in FY26.

1. Question: "Could you provide some clarity on where the growth outlook stands, particularly in the OE and replacement segments, and the timeline for improvements?"

Answer: We have faced challenges this year, especially in the OEM sector, where we intentionally stepped back from low-quality product sizes, impacting volume. Currently, our replacement market is performing robustly. We expect to regain traction in both OEM and exports this quarter, with many initiatives aimed at enhancing performance already underway. I anticipate noticeable improvement in our numbers in Q1 FY26.

2. Question: "What is the revenue contribution from the Netherlands plant, and if it closes, how do we manage production?"

Answer: The Enschede plant contributes around 0.5 million PCR tyres to our total of over 6 million sold in Europe, accounting for under 10%. Its closure will be manageable, as we can absorb this volume within our existing capacities in India and Hungary. We expect the new capacity in Hungary to be operational by the end of this fiscal year.

3. Question: "Is the decision to restructure at the Enschede plant already impacting capacity, and can you elaborate on constraints?"

Answer: No, there hasn't been a reduction in production at Enschede yet; the restructuring decision is still undergoing consultation. Our focus has been on fulfilling demand for UHP and UUHP tyres, which are higher in capacity, resulting in a temporary trade-off affecting sales, but we are not facing direct capacity cuts from Enschede at this moment.

4. Question: "What kind of margin improvement do you anticipate due to the restructuring in the Netherlands?"

Answer: It's early to predict exact numbers, but historical precedent suggests that restructuring can lead to significant margin uplift. For example, our past changes boosted margins after a similar shift in 2020. While it's hard to quantify currently, we expect sustained improvements once capacity is optimally transitioned to Hungary.

5. Question: "What are your expectations for raw material costs in Q1 and Q2, considering recent global trends?"

Answer: We observed slight reductions in raw material costs in Q4, with the expectation that the trend would continue into Q1, although we currently expect a flat trend versus Q4. Factors like incoming seasonal demand for natural rubber may keep prices stable, but the casing for crude remains favorable.

6. Question: "How do you view the growth potential of your India operations considering the underperformance relative to peers?"

Answer: We have noted a decline in market share, particularly in the OE segment where we made strategic decisions. However, our replacement sector remains strong, and with continued focus on improving operations, I am optimistic about a comeback in fiscal '26, aiming for double-digit growth.

7. Question: "Can you explain the increase in operating expenses and potential areas for reduction?"

Answer: The rise in Opex is linked to increased travel costs and logistical challenges amidst restructuring efforts. While we aim to tighten efficiency and cut non-essential expenses, we also face some fundamental cost increases across various areas. We believe certain one-off expenses will taper off in time.

8. Question: "How will the ongoing global tariff situation affect your business, particularly with regards to the U.S. market?"

Answer: The U.S. market still relies significantly on imports due to insufficient domestic capacity. Future changes in tariff regimes may alter import dynamics somewhat, but currently, our exposure remains manageable, with about $100 million in revenue from the U.S., of which 40% is from Europe.

9. Question: "What specific measures are you taking in response to increased working capital requirements?"

Answer: Rising working capital, now at nearly 17% of sales, reflects industry-wide issues due to supply chain volatility. We are actively reviewing our inventory levels and supply chain processes to enhance efficiency and reduce working capital needs while ensuring effective service delivery to our customers.

10. Question: "What are your thoughts on the Dutch plant restructuring and its potential one-time costs?"

Answer: There will inevitably be one-time costs associated with restructuring. A detailed social plan has been signed, and specific calculations for employee-related expenses will emerge as consultations conclude. We'll provide clearer estimates in our upcoming earnings call.