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Focusing on FCF generation

We recently attended Apollo Tyres’ (APTY) annual investor day and following are the key takeaways from the event: 1) Revenue target of US$5bn (FY22: US$2.8bn) with >15% EBITDA margin for FY26. Within the revenue target, US$3-US$3.5bn is expected from India operations, while balance ~US$1.5bn from EU operations (FY22:US$873mn); 2) domestic demand is improving sequentially driven by resurgence in OEMs amidst steady replacement demand; APTY expects replacement demand to pick-up with market share gains in TBR segment from ICV/tippers; 3) in EU, debottlenecking in Hungary plant will improve capacity with mix improvement from UHP/All Season tyres; 4) no plans for expansion capex in India/EU; improving asset sweating to remain a key focus area towards better RoCEs amidst low capex requirements; 4) APTY has taken a lead in price hikes with ~3-4%/8-9% hikes in India/EU in Jun’22. It is witnessing demand pick-up in tipper, ICV segments, thus, pushing T&B tyre demand up. On ~1,000TPD TBR capacity, present capacity utilisation of ~75% is giving APTY visibility of absorbing growth in FY23-FY24E without investing for incremental capacity in TBR. Maintain BUY with an unchanged DCF-based target price of Rs305, implying 13x FY24E earnings.

Detailed takeaways from investor interaction:

* Domestic demand is witnessing sequential recovery led by the OEM segment while replacement volumes are flattish. Overall India utilisation was ~80%, with PCR being on the higher side vs TBR at ~75%. Andhra Pradesh phase-II capacity will be on-stream in coming quarters adding to the capacity by 1.7k TPD. APTY is using AI and ML to enhance productivity and to debottleneck its capacity to grow without depending much on incremental capacity addition. EU is currently operating at ~85% utilisation levels and is expected to improve production with Hungary plant de-bottlenecking exercise.

* The company has taken lead in taking price hikes with 3-4% price hikes in India being taken across segments at 45-day intervals (since last six months) against once a quarter previously. With crude price still at elevated levels, APTY is expecting raw material basket (RMB) inflation to continue even till Q2FY23. APTY is targeting exports to contribute 20% of sales with strong presence in South East Asia, Middle East and ASEAN markets. APTY has also added Americas and EU geographies.

* Despite taking more price hikes than peers, Vredestein was able to outperform EU replacement market. This is on account of Vredestein being able to add new markets in Eastern Europe as dependence of select competitors sourcing tyres from Russia. In EU, OHT/agri and premium PCR tyres will continue to remain under Vredestein brand and lower-end PCR and industrial tyres will be under Apollo brand to maintain product differentiation and avoid cannibalisation.

* India maintenance capex is expected at Rs3bn-3.5bn in FY23 vs EU maintenance capex of EUR30mn-35mn. With consecutive 2 years of positive FCF in FY21-FY22, despite RM inflationary pressures, and no major plans for further growth capex, FCF is likely to improve substantially, thus, further reducing the financial leverage

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