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Outlines Vision 2026…

In its virtual investor event, Apollo Tyres (ATL) outlined Vision 2026 targets for key performance parameters. It includes (1) revenues of US$5 billion, (2) EBITDA margins in excess of 15%, (3) pre-tax RoCE of 12-15% & (4) <2x net debt to EBITDA. It reiterated its intent of sweating of assets in the near term, de-leveraging b/s, augmenting capital efficiency and calibrated capex spend.

Targets near doubling of revenues over next five years

The company’s revenue ambition in FY2026 compares to ~US$2.3 billion net sales of FY21, placing FY21-26E CAGR at ~17%. In India, ATL is the volume and price leader in TBR (31% market share) and has a sizeable presence in PCR (21% market share). Impending CV cyclical revival is set to benefit the company, with expected improvement in radialisation levels (from 47% as of FY21) and vehicle penetration levels being other tailwinds. In Europe, ATL aims to grow faster than the industry on the back of building upon TBR introduction (~2% market share), entry into new geographies within Europe, targeting all-season tyres and on-boarding German OEMs in PCR. Additionally, product mix improvement remains a focus area, to be achieved via increasing share of ultra-high performance i.e., UHP tyres in sales mix from present ~36% to ~40%. Elsewhere, the company has begun seeding the large US market and would be serving it via facilities in India and Hungary. Share of exports in India revenues is set to increase to ~20% vs. present ~10% in the next five years. ATL would soon be launching EV tyres (value add in terms of low rolling resistance and less noise incidence) under Vredestein brand for Europe and US (to be manufactured in India).

Focus on margins, return ratios encouraging

On the margin front, ATL said that Europe margins achieved in H2FY21 (~15%) are sustainable, with Dutch plant specialisation holding the key to future performance. The company seeks to reduce raw material consumption by ~5-7% on like-to-like basis over the next five years, with production ramp up set to deliver operating leverage benefits across geographies, going forward. ATL is exploring organisation-wide capacity de-bottlenecking opportunities as a means to improve efficiencies. In order to meet revenue target, a fresh round of PCR and TBR expansion would be required by 2026 but capex spends for the same would not be lumpy. Brownfield capacity expansion in the future would require ~25% less capex than PCR, TBR greenfield expansion in the recent past.

Valuation & Outlook

ATL’s plans, while ambitious, are largely achievable if stringent focus on profitable growth, capital allocation and deleveraging are maintained. On the revenue target front, it is comforting that it intends to achieve the same through organic route only. We believe a majority of the outlined ambitions would be met in a back-ended manner and, hence, do not alter our estimates at present. We retain our BUY rating on the stock with a revised target price of | 275 valuing it at 6x FY23 EV/EBITDA (earlier TP: | 260).

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