CRISIL has assigned its ‘P1+’ rating to Apollo Tyres Ltd’s (Apollo Tyres’) bank guarantee facility, while reaffirming its ‘AA-/Stable/P1+’ ratings on the company’s other above-mentioned bank facilities and debt programmes.

The ratings continue to reflect CRISIL’s belief that Apollo Tyres’ financial risk profile, which has weakened because of the acquisition of Vredestein Banden BV (Vredestein) in June 2009 and debt-funded capital expenditure (capex) on a greenfield project undertaken in Chennai, will improve over the medium term on the back of the healthy expected cash accruals of wholly owned subsidiaries, Dunlop Tyres International (Pty) Ltd (Dunlop Tyres) and Vredestein. The ratings also reflect Apollo Tyres’ strong market position in the Indian tyre industry, and moderate financial risk profile. These rating strengths are partially offset by the company’s vulnerability to cyclicality in the tyre industry and to volatility in raw material prices.

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Apollo Tyres and its wholly owned subsidiaries, Dunlop Tyres and Vredestein.

Apollo Tyres’ strong position in the domestic tyre industry is based on its leadership in the truck and bus (T&B) segment (which accounts for 60 per cent of India’s tyre industry), the company’s strong operating efficiency, and wide distribution network. With acquisition of Vredestein, Apollo Tyres gained entry into the European passenger-car radial (PCR) market. CRISIL believes that Apollo Tyres will benefit from the Vredestein acquisition, as Vredestein will provide Apollo Tyres with ready access to an established brand, clientele, and manufacturing and distribution network in Europe. The acquisition will also enable Apollo Tyres to upgrade its PCR technology. Apollo Tyres has moderate financial risk profile, as reflected in its steady revenue growth and large net worth, which will help the company withstand downtrends in business. Apollo Tyres had a net worth of Rs.12.9 billion and a gearing of 0.69 times, as on March 31, 2009. CRISIL believes that Apollo Tyres’ gearing, which is expected to increase to over 1 time in 2009-10 (refers to financial year, April 1 to March 31), will decline to less than 1 time over the next 24 months. Moreover, Apollo Tyres has called off its plans for a greenfield project in Hungary, subsequent to the acquisition of Vredestein.

Apollo Tyres’ revenue and profitability remain vulnerable to downtrends in the tyre industry, which are primarily driven by fluctuating demand from end-user commercial vehicle (CV) players. CRISIL believes that demand cyclicality in the medium-and-heavy CV (MHCV) segment will continue to affect the growth prospects of the tyre industry, as tyre demand from this segment forms bulk of the volumes in the domestic market. Also, the profitability of Apollo Tyres is vulnerable to fluctuations in raw material prices. Natural rubber, carbon black, and nylon tyre cord (NTC) costs account for 70 per cent of the company’s operating income. Natural rubber prices are dependent on global demand, and area under cultivation and yield factor, while carbon black and NTC prices are based on crude oil prices. In the first half of 2009-10, the profitability of Apollo Tyres improved because of decline in raw material prices. CRISIL believes that the expected increase in the prices of natural rubber and crude-related inputs could affect the profitability of Apollo Tyres.

Outlook: Stable
CRISIL believes that Apollo Tyres will maintain its strong market position in the domestic tyre industry over the medium term. The outlook may be revised to ‘Positive’ if the company improves its margins and efficiencies, and strengthens its market position. Conversely, the outlook may be revised to ‘Negative’ in case of a steeper-than-expected decline in Apollo Tyres’ margins, or if the company contracts fresh debt to fund its expansions, or if Vredestein’s margins come under pressure.

About the Company
Set up in 1972 by Mr. Raunak Singh, Apollo Tyres manufactures automotive bias and radial tyres, and tubes. The company has plants in Kochi (Kerala), Vadodara (Gujarat), and Pune (Maharashtra). Its product profile includes leading brands in the T&B, light truck, passenger car, and farm segments in India, which cater to both original equipment manufacturers and the replacement market. In April 2006, the company acquired 100 per cent of Dunlop Tyres for Rs.2.9 billion. Dunlop Tyres is a private limited company incorporated in South Africa. It has three manufacturing units in South Africa and Zimbabwe, and produces a range of bias and radial products.

For 2008-09, Apollo Tyres reported a profit after tax (PAT) of Rs.1.4 billion on net sales of Rs.50 billion, against a PAT of Rs.2.7 billion on net sales of Rs.47 billion for 2007-08. For the half year ended September 30, 2009, Apollo Tyres reported a PAT of Rs.2.99 billion on net sales of Rs.24 billion, against a PAT of Rs.0.86 billion on net sales of Rs.20.58 billion for the corresponding period of the previous year.

About Vredestein
Vredestein is a niche player in the premium, high-speed PCR segment. It is a profit-making company, and derives over 90 per cent of its revenue from the replacement segment. The company was set up in 1946 as a joint venture between Vredestein Banden B.V and BF Goodrich Tires. In 1977, the Dutch government acquired 51 per cent stake in Vredestein, and in 2005, the company was acquired by Amtel N.V, Russia. Apollo Tyres acquired Vredestein in June 2009. Vredestein has a manufacturing unit at Enschede, near Amsterdam, with capacity to manufacture 5.5 million tyres per annum. The company has two brands: Vredestein in the premium segment and Maloya in the mid-range segment.