Apollo Tyres Limited analyst Q&A

Yeah. Hi, sir. Thanks for that.

Hi, Siddhartha.

Sir, my first question is on the India business. So, if you can first share for the replacement side, what is the segment -wise breakup between PCR, TBR? And going ahead, how should you think about the full year growth? I mean, last quarter, we had expected probably a better growth in this current quarter. But given the way things are on the demand side, how do you think we should expect the overall growth to be for the year?

Siddhartha, yes, we had expected better growth when we began the year and in our commentary of May. We believe that on the replacement side, we have performed in line with the market. OEM, as I mentioned, we've lost some bit on the passenger car side based on the accounts that we walked away. And exports, the peers may have outperformed us. I would say the topline growth, while we would still be pushing for a double-digit, but maybe a high single- digit would be a more realistic estimate.

This is on the volume side, right?

Right now, there is hardly likely to be pricing action, given that the raw material cycle is reversed.

Got it. And second question is on the commodity. So again, I mean, on a sequential basis, actually commodities haven't actually fallen as much compared to the 4% nearly drop Q -o-Q, which we have seen per ton basis. So, any other reason why this has been so sudden and whether is this sustainable going ahead?

I'm not sure I get your question as to where you're talking about the 4%. The raw material did come down on a sequential basis.

Yeah. I was talking about per tons, RM per ton is down around 4% Q - o-Q. So, we had expected a flattish to a marginal decline probably when we started. So, is this fully reflective of the current prices or should we expect more improvement going ahead?

As I mentioned, we expect Q2 raw material unless we get significantly surprised on the USD rupee exchange rate, we expect Q2 raw material to come a little further down.

Understood, sir. S ir, lastly, on the Europe side , I mean, the margins really have come down despite on a Y-o-Y basis, revenues actually are flat. So, any other reason, I mean, operating leverage should not be the case if revenues are flat on a Y -o-Y basis, but we still have seen a correction in the margins. So, any further thing why it has happened?

See there have been inflationary pressures and as we've mentioned in the last few calls that in the last couple of years, the inflationary pressure in Europe has been higher than normal, whether it's the energy prices, salary prices, etc. And that's one of the causes which has led to our decision on the Netherlands side. So, the cost part has kept pushing up, and particularly from a sequential basis, there was a big revenue decline.

Got it. So, we have not done any pricing changes in our products. So , is that the right assumption?

Yes, there has been no pricing changes.

Okay.

There were certain price cuts taken towards last quarter, which is Q4 in line with raw materials coming down.

Okay. Understood. Thanks a lot, sir. I'll come back in the queue.

Thank you, Siddhartha.

Thank you, Siddhartha. Amyn, you can unmute your line and go ahead.

Hi. Am I audible?

Hi, Amyn. Yes, Amyn.

Okay. So , one question was, you know, on the similar lines that Siddhartha asked on the Europe margins. So, would it be fair to say that the inflationary pressure that you're seeing in Netherlands is higher than Hungary, or is it the same? I'm just trying to understand that, you know, as we move on to Hungary as being our sole supply base, in addition to the, you know, reduction that we will see in, you know, production costs, is there a difference in the inflationary pressure also in these two geographies or is it the same?

It is, it is mostly similar, Amyn. The big pressure, Y-o-Y to again touch on the point Siddhartha asked and you've said, on a Y -o-Y basis, the raw materials were up 3% in Europe.

Okay.

So that's sort of eating at the margins with the topline being flattish and then the staff cost increments, etc. further hit, if your revenue hasn't grown.

Okay. Okay. And sorry if I'm repeating this, the revenue flat is flat volumes and prices or has like, what is the breakup there, if you can just help us.

Just let me see if I have the volumes. PCLT volumes are slightly up.

Okay.

We have a big decline in the space master tyres, which is that special category tyres, which is not market linked. It is largely linked to the fact that it's manufactured in a high cost plant and hence as contracts are ending, the customers are not renewing those contracts. So that's a big decline of almost 40%. And a gri market continues to be sort of weak. And then similarly, the TBR also has had a negative market growth. So that's why the overall, since the PCR part, which was still positive, and we outperformed the market, the other segments pulled it down.

And I'm guessing that PCR has a better realization, that's why your revenue has ended up still being flat Y-o-Y?

That's correct. And there is further improvement in the mix, which we continue to drive, which is the UHP proportion is now in the high 40s.

Okay. Okay. And secondly, just on the commodity comment that you made, now we saw natural rubber ease off a bit, and then I think it has stabilized and maybe slightly moved up. But the benefit from crude falling, which has happened in the last three months, the crude-related derivatives, are you still to see the benefit or this comment for 2Q incorporates some benefits that you're seeing in the crude derivatives also?

So Amyn, some of the benefits is incorporated because the contracts are signed ahead of time. So , we expect that benefit to come through and hence the only element of risk there is the exchange rate because that will hit us on a spot basis. Your comment on natural rubber is absolutely right because even on a sequential basis, natural rubber actually was up 3%. We saw a reduction in synthetic rubber and nylon fabric.

Okay. Thank you. And just lastly, slightly more, you know, a question on the medium-term. So, you know, when you had put out that FY ’26 plans, obviously you had some ROCE targets as well as margin targets. You had actually achieved the ROCE targets, you know, before time , in, you know, sometime in FY23-24 itself, but obviously the market has changed. So, how should we think about that 15% number in the context of where you are right now? And realistically, you know, based on whatever assumptions you can make, you know, in the best of your knowledge, when can we see that return to 15%?

So, if the current market conditions, Amyn , were to continue, which is let's say raw material tailing off a little bit more, we should be returning to that . Right now , in fact, in the current quarter, it is the Europe operations with market challenges, which have pulled down the overall returns. So, I would say while we are not there in near -term, but medium-term, definitely return to that 15% is possible. And as we get back on the table to look at our targets and vision for the next 5 -year period, starting from next fiscal year, we will see whether the target should remain at 15% or higher as we go forward with a very different manufacturing mix.

Plus, I think in Q2 , Amyn, you will see a much better performance on Europe side. Things are looking better than before, unless there’ s a geopolitical issue with the US. But things are looking better. And I can see Q2 results on revenue side being much better.

Okay. Great. That's good to know. I'll come back in the queue.

Thank you, Amyn.

Next question is from Raghunandhan. Raghunandhan, you can unmute your line and go ahead.

Thank you for the opportunity.

Hi, Raghu.

Hi sir. Sir, on Europe side, you know, you have highlighted focus on sales mix improvement, cost optimization, and Q2 is also expected to be better. How do you see the broad range for EBIT margin for FY’26? Can it be flattish on a full -year basis compared to last year? And also, your thoughts on the restructuring efforts, how do you see -- what would be the timeline when they will reflect in the margins? And if you can give some quantification of the benefits we can expect, say in FY’27 or ’28?

So, Raghu, yeah, as we stated repeatedly, we do not give out margin guidance. So, on the first question, I'll have to say that we will not comment on that. On the second one, we expect to finalize the consultation process with the Works Council within the current quarter. This is also a period when there's 3-weeks of annual maintenance leave when people also go on holiday. So, the consultation process will resume towards the end of August, and we would hope to complete the same within this quarter. The intended decision of closure, which will get finalized as part of this consultation process, is towards the summer of next year. So, it is still a significant period away. The expected benefits, etc. still too early to quantify, but yes, they will start flowing in from FY’27. Nothing in FY’26.

Got it, Gaurav. Thank you. My second question was on India replacement. How has been the TBR -PCR performance, and how do you see the outlook ahead? Replacement, you indicated that you've broadly performed in- line with the market. How is it between the categories?

Sure. So , on TBR replacement, Raghu , we grew mid -single digits. Passenger car replacement was low-single digits. We might have been slightly behind market on the passenger car replacement, but TBR slightly ahead. And that's why I said over the two main categories, we were in-line with the market growth.

Got it. And the share of Vredestein, however, given that you highlighted that it is the highest ever volume, so how should we look at it? Within PCR, how would be the share of Vredestein?

It is still quite low. I don't have the exact figures here, but the percentage proportion would be, I think, still in single-digits.

Got it. Just the last one. Can you share the commodity prices for the quarter?

Sure, Raghu, just a minute. Natural rubber was around 210, synthetic rubber 180, carbon black 120, and steel cord 160.

And the blended RM basket?

Blended RM basket would have been around somewhere 166.

Got it. Thanks so much, Gaurav. Wishing all the best.

Thank you, Raghu.

Next question is from Mumuksh. Mumuksh, you can unmute your line and go ahead.

Yeah, thank you, sir, for the opportunity. Sir, I just wanted to understand, firstly, on the Europe res tructuring costs, we have done around INR 500 crore of cost over the last two quarters. So, I just want to understand, is this now the cost complete or there could be more further cost in the coming quarters, sir?

So, Mumuksh, what we took in March was based on a desktop study of asset impairment, which is a non-cash charge. And again, while from a business perspective, we would have said that it should be taken all in one go once we have clarity , our auditors and accounting standards dictated that we make an assessment immediately. The second one, which has come in the current quarter of about INR 370 crores, is the actual cash payout that will happen if all the employees that are currently there are paid as per the signed social plan. Now, if an employee leaves in between, then that cost will not be incurred. We will still have to do a more thorough assessment on the asset side of things. We will send in our team to go through the entire asset list in detail, including a physical examination. So, there might be something more on the asset impairment side.

Got it. Got it. And sir, anything on the land sale, sir? Will there involve any land sale which can give a cash in, and can receive some cash for the land, sir, other plant?

Too early to say, Mumuksh, because we want to first concentrate on the entire consultation process with the Works Council. It is a tough emotional decision to take care of the employees and then come to the other aspects of this decision. So, too early to say on that.

Got it, sir. So, secondly, I just want to understand, how do you see the new competition which is planning to come build in India for TBR and PCR segment? And just want to understand, how do you see if any impact on the talent for your team or the retention of the network, sir?

We will have more competition. The competition will take time to make not just an entry, but establish themselves. Both TBR and PCR are technology products, and apart from technology, establishing a vast distribution network. But yes, it will add to the competitive intensity and it will add to the fight for talent.

Right, right. And also, any challenge on network side, sir, to hold on to dealers or there could be -- is there a challenge around network also, sir?

Gaurav, let me answer that. So, I don't think -- I mean, it depends on the product and the brand. Today, Apollo has a very good brand equity in India, both in TBR and PCR. As you know, we are leaders in PCR and TBR. So, we'll continue to come out with new product launches, which serve the dealer network. Yes, there is attrition, but there is also add-on. Every month we are adding dealers. We are also going into the rural market. And so , expansion of distribution is the core strategy for Apoll o going forward. And especially in the rural markets, that's where the growth is going to come. And on your keeping the talent, you would have seen in our balance sheet that we've also come out with the ESOP scheme recently. So , to the top tier of the management, T ier 2, T ier 3, T ier 1, we've given ESOPs across the board. So those are the talent retention tools that we are introducing into the company.

Got it, sir. Thank you so much for the answer. And sir, lastly, sir, I just want to understand, in terms of the volume growth, sir, when do you see our volume growth catching up with the overall industry growth, sir? There's been last one year of underperformance. Just want to understand, based on your customer order wins, how do you see that growth coming back to the normal level, sir?

So, you know, in India, we have been growing at the market rate. Competition has obviously grown in 2-3 wheeler, where Apollo is not a significant player. And therefore, when you see the revenue numbers, there are double- digit numbers coming off competition, which is primarily driven by 2-3 wheeler. But as far as truck and PCR is concerned, we are putting in all efforts to try and see that we achieve a double-digit growth. And you'll see that in Q2.

Got it, sir. Thank you so much for the opportunity.

Thank you.

Thank you.

Next question is from Arvind. Arvind, you can unmute your line and go ahead.

Hi. Good evening, sir.

Hi, Arvind.

Hi. Hi. Good evening, sir. Thank you for taking my question. Sir, first question would be more on the accounting part. There was a big exception around INR 3.7 billion, but versus that when we look at your taxation that seems a little different. So, two parts of it, first of all what should be the tax rate going forward? And secondly, if one was to see the post-tax implication of this exception what would that be?

So, the tax rate for our Europe operations usually if I remember correctly, Arvind, is around high-teens which is a mix of Netherlands tax rate and Hungary tax rate and then smaller component in other geographies. So that will continue as a normalized thing. We will get the tax benefit of this significant exceptional items , including if there are carry forward losses. So, to that extent we get the tax shield on the cash out.

Got it, sir. Yeah, I was talking from that perspective only. If we look at the PBT around INR 4 billion and then INR 3.7 billion of exceptional. So, on that taxable profit , the actual tax of INR 255 million seems a little on the higher side. So just how should one look at the blended consolidated tax rate going ahead?

So, if you take out the exceptional item that's what I said about the high-teens is the tax rate for the European operations. Difficult to give you a simple picture because Hungary is high-single digits. There are other geographies because we have subsidiaries in other European entities and each of them have their different tax rates based on the profits made, whether it's Germany, France etc. The largest one which is Netherlands, our tax rate is about 20%.

Got it. Thanks . Thanks so much for this. Just one more of a clarification. The blended replacement demand you said was volumes were up low-single digit and OEM was up mid- single digit, was that because the presentation had low-to-mid for both of them.

Yeah. Replacement was low-single digit OEM was mid-single digits.

Got it. Thank you so much sir for taking my question. That's all from my side. Thanks.

Thank you, Arvind.

Next question is from Joseph. Joseph you can unmute your line and go ahead.

Thank you. I had three questions. I'll take one by one. The first one is on the European operations. So, when I look at the last 3 years typical seasonality that I see is that the average revenues in say 2Q, 3Q, 4Q in Euro terms is typically about 20% higher compared to 1Q, a typical seasonality that we have seen everywhere. So , when you said that this year also the subsequent quarters would be better, are you referring to better Y-o-Y trends or are you talking about sequential improvement which happens every year?

So Q2, Joseph, we are talking about more the seasonality factor. The market as of now is still negative. So, the improvement in the topline that I'm talking about is more a seasonal factor, but at least it provides a better operating leverage coverage, which should then impact the margins that Neeraj talked about. The expectations of growth coming back to a positive territory is still a little away, we would hope that in Q3.

Understood. Thanks. The second question that I had was on the Indian operations opex line. So last year, you were averaging about INR 800 crores per quarter in terms of opex and I recall very clearly that you had mentioned we will try and cut that down with lower travel costs etc., etc. This quarter we have seen a good result . There is a good sequential drop in opex. So, are these efforts to bring down opex bearing fruit and hence this kind of run rate sustainable or is there a risk of it jumping back to the old INR 800 crores odd?

Currently, we would say Joseph, these levels are sustainable. We did, apart from the cut on travel and various other costs, the only one which was cut also very sharply was the advertisement and promotion spend. At some stage that will have to be released back for the sales growth. Other than that, the other costs are very much which should continue at the current levels.

Understood. And Gaurav, the last question that I had was Vredestein – sorry, Reifencom, if you can share the revenue and margins for the quarter.

Yes, Joseph, just a minute. Reifencom did EUR 53 million in revenues, about 5% up year-on-year and an EBITDA margin of about 4%.

Great. Thank you. That's all I had.

Thank you, Joseph.

Next question is from Basudeb . Basudeb, you can unmute your line and go ahead.

Hi, thanks.

Hi, Basudeb.

Yeah. I have a few questions. What was overall India volume growth Y-o-Y or standalone?

Overall, India volume growth was flattish, Basudeb.

Okay. And as you earlier said to Raghu’ s question that raw -mat basket overall was INR 166 rupees a kg, how much it was down sequentially?

Sequentially it was down about 2%.

2%. And third question is in current raw-mat basket overall, how much is the import content percentage?

I won't have the exact number Bas udeb, but in general about half of it is imported. We can get back to you with a more precise number.

And as we discussed last time, now any plans of increasing natural rubber import content with domestic prices still remaining high and global prices being lower?

That's a constant call being taken by the procurement team based on the equation. I will have to check with them and we can get back to you, but, is there some very dramatic shift? - unlikely, because there's a certain fine balance, a little bit movement in terms of the mix between domestic and imports can be done, but it will not be as if a 50-50 will be changed to 80-20 either way.

Understood. And last question, in today's call you mentioned Hungary sustainable tax rate is high-single digit?

That's correct, because the tax rate in Hungary is 9%.

So once operations shift fully to Hungary from Netherlands, so other than operational benefits, will it be right to assume European tax rate will also come down from high- teens to high single digit or maybe 10%, 12%?

There may be only a slight impact because our headquarters of European operations remain at Netherlands. So, the headquarters, which is the Apollo Tyres Europe entities buys products from all the plants, be it Hungary, be it the Dutch plant or India plant, for example, and then they sell to the customers. So, the central entity will continue to be Netherlands.

Understood. Yeah. Thanks all the best.

Thank you, Basudeb.

Thank you. I request the participants to raise hand if they have any questions for the management. We have a follow -up question from Arvind. Arvind, you can unmute your line and go ahead.

Hi, thanks so much sir, for taking my question again. Good to hear your optimism on the India demand going forward. If you could just elucidate what are the key drivers for demand going ahead over the remaining part of the year? That would be the first question.

So, one, post-monsoon, which is typically a little low vis-a-vis season. We see demand pick up in Q3 and then Q4. Also, there is expected better demand from the mining segment, etc.

What about PCR?

Expectation is there, car sales improve post this season, but there's nothing like to say that we have some concrete orders to say our numbers will go up by a certain quantum. It's based on a judgment call on what our teams are feeling from the market.

Right. And it's difficult to find out the exact market share, but this assumes market share to be stable, right?

As of now, this assumes market share to be stable. Our estimates, our market share in PCR is about 20% and in TBR replacement is 30%.

Got it. Thanks. And just one more accounting question. The staff cost in the standalone business saw a sharp uptick on a quarter-on-quarter basis. Is this seasonality because last year also first quarter was high or is it something which will sustain going forward?

The seasonality factor is only the increment part. So, there is always a jump in the Q1 based on the increments given. W here you see a slightly larger increase this year is also the reason that last year the variable pay, which gets concluded in the last quarter, the payout was lower given the financial results. So that sort of depressed that figure from the normal levels and you see a bigger jump.

Plus Gaurav, there have been new talent that we've taken at senior management level, both in supply chain and manufacturing. And that would have also come in staff cost.

Yes.

All right, sir. Very clear. Thank you again for taking my questions.

Thank you, Arvind.

Next question is from Amar. Amar, you can unmute your line and go ahead.

Yeah, good afternoon, sirs. And thanks for taking my question. I had two questions. One was on the restructuring happening in Europe. Has that plant ceased operations? So, we will not be getting any revenues from that plant or till what period will that be operational and what kind of revenues can we expect from there?

So, Amar, the plant continues to be operational. Right now, in fact, the exact shape and how we will go about the restructuring is not even finalized because the consultation process is on. And even in the intended decision, the intention was to close production there at that plant in the summer of 2026. So , at a bare minimum, we are talking about continuing the plant operations till June of 2026.

Okay. Okay. Thanks. Thanks for that. My next question is on the export side. We have seen our share of exports from India decline quite rapidly since the time that we had shifted some of the capacities that we have rationalized in Europe to India, and our exports had gone up to maybe 17%, 18%, and now it is down to 11%, 12% as a share of overall revenues, whereas we see share of exports for our peers continues to go up. So, is there something that probably you guys are looking at maybe strategically or anything to kind of address that?

Yeah, it is being looked at. Some of them was a result of let's say the whole supply chain disruptions which have been fairly frequent. Supplies particularly to far off places like South America were impacted. Also, a significant portion of our exports to Europe and US were impacted by the market scenario itself from last year resulting in the drop of share that you've talked about from about 17% to the 12% odd and it is being looked at.

Okay. Any kind of outlook you can provide on that? Any targets internally that you have where do you want to see that number?

Even now, while there are steps being taken in short -term given as Amyn mentioned earlier in the call, we are getting back onto the table for our next 5-year plan and targets would be set as part of that.

All right. Thanks, and all the best.

Thank you, Amar.

Thank you. We have next question from Ajox. Ajox, you can unmute your line and go ahead.

Hi, sir. Thanks for the opportunity.

Hi.

Hi, sir. Hi. One data keeping question. The India volume Q-o-Q, how much that has grown?

Sequentially, the volumes were up 4%.

Okay. Got it. And sir, second is on the outlook. In your comments, you mentioned that CV, there was some pre-buying due to AC cabin. So, do you expect a softness in the near-term because of this pre-buying demand getting absorbed in the system?

So, we did see some softness coming in June. I'll have to check as to how the current quarter is panning out. We've had a good July, but we'll have to check that and get back to you.

Okay, sir. Those were my questions. Thank you.

Thank you.

Thank you. That was the last question for the session. I'll hand it over to the management for their closing remarks.

Well, we'd like to thank everyone for attending our call and hope we are able to do better results next quarter. Till then, see you. Thank you.

Thank you.