| Apollo Tyres Limited | ||||||||||||
| Ratings Reaffirmed | ||||||||||||
| Rating Action | ||||||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||||||
| 1 crore = 10 million | ||||||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of Apollo Tyres Limited (Apollo). The rating on the Rs 105 crore NCDs has been withdrawn as these have been fully redeemed. CRISIL Ratings has received confirmation of redemption from the trustee (see annexure: Details of rating withdrawn). The same is in line with the withdrawal policy of CRISIL Ratings.
The reaffirmation factors in the healthy business risk profile of Apollo, backed by its established market position. While operating profitability in the domestic business was impacted in the second-half of fiscal 2022 due to rise in raw material prices, overall margin has been supported by strong demand growth in the European business.
Post-restructuring, European capacities are operating at near-full utilisation with the Ebit margin of operations outside India improving to 7.5% for the nine months ended December 31, 2021, which was at breakeven for the corresponding period previous fiscal. The strong demand across segments should sustain owing to the expected uptick in economic activity in fiscal 2023. Margin may remain muted in the domestic business in the first-half of the fiscal owing to high material prices. However, strong demand outlook for European business and the cost-saving measures undertaken during the pandemic should support overall operating profitability.
The ratings continue to reflect the strong business risk profile of Apollo, driven by a robust position in the domestic and European markets, a well-diversified revenue profile, comfortable financial risk profile and moderate capital expenditure (capex) plans. These strengths are partially offset by exposure to cyclicality in the tyre industry, volatility in raw material prices, and susceptibility to risks related to implementation of capacity expansion. |
Analytical Approach For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Apollo and all its wholly owned subsidiaries as they are in the same business and have strong operational and financial linkages. These companies have been collectively referred to as Apollo.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
Apollo is the leading manufacturer of radial tyres for the domestic T&B segment (around 30% market share), and has established its position in the light commercial vehicles (LCV), tractors, and passenger car radial (PCR) divisions. Further, market share is estimated to remain stable across segments in fiscal 2022. A pan-India distribution network, comprising 6,800 dealerships, including exclusive outlets that operate under the Apollo brand, strengthen the market position. Despite intense competition, the company should sustain market share, given its leadership position, significant ramp-up in radial tyre capacity, healthy operating efficiency and a wide distribution network.
Diversification should continue to shield the business from unfavourable conditions in any particular segment or geography and add stability to cash flow. Besides a strong foothold in the domestic T&B segment, the company operates in the European PCR market under the Vredestein brand. In fiscal 2022, the APMEA (Asia Pacific, Middle East and Africa) operations accounted for around 60% of the consolidated revenue, the European around 30%, and the remaining came from operations in the US.
In terms of overall segmental diversity, the replacement market accounts for 82% of the consolidated revenue in fiscal 2022, thereby assuring steady revenue flow. Due to the modest ramp-up of the company’s Hungarian operations and high production cost, profitability in Europe had been declining since fiscal 2018. In 2021, the company restructured its operations: now the Netherlands plant only manufactures specialised tyres while most of the other production has been shifted to the relatively low-cost Hungarian plant. This has improved profitability, as seen in the quarter ended December 2021. Continued growth in consolidated revenue with sustenance of healthy operating profitability will be a key monitorable.
Sustained healthy accrual has led to significant improvement in financial risk profile, with net debt to Ebitda (earnings before interest, tax, depreciation and amortisation) ratio falling to 1.9 times as on March 31, 2022, from 3.4 times in fiscal 2020. Also, consolidated gearing is estimated to be less than 1 time as on March 31, 2022, while interest coverage ratio was robust at around 9 times for fiscal 2022. The company plans to undertake capex of Rs 1,100-1,200 crore in fiscal 2023, most of which would be towards maintenance and upkeep of existing capacities. Given the expected healthy accrual, gearing and interest coverage ratio should remain stable over the medium term. Any debt-funded, inorganic expansion or larger-than-expected capex will remain a key rating sensitivity factor.
Weaknesses:
Business remains susceptible to cyclicality in the tyre industry, driven by fluctuating demand from end-user CV players, especially in the T&B segment. Demand in the tyre industry also depends on economic growth and infrastructure development. The second and third waves of the pandemic also impacted overall demand. Furthermore, raw material cost accounts for more than 60% of the operating cost. While the price of natural rubber depends on global demand, area under cultivation, and yield factor, the prices of carbon black and other raw materials are based on crude oil prices. Material prices rose by 10-20% in fiscal 2022 and led to decline in operating efficiency mainly in the domestic business. The players are able to pass on only part of the increase to end customers due to intense competition. Exposure to risks related to cyclicality in the tyre industry and volatility in raw material prices is likely to persist over the medium term.
The company undertook a capex programme of around Rs 1,800 crore in fiscal 2022 mainly for research and development and digitalisation. It is also setting up a plant in Andhra Pradesh, which is likely to fully commission in the first quarter of fiscal 2023. Moreover, Apollo is expected to incur capex of Rs 1,000-1,100 crore in fiscal 2023. In the initial phases, the company will face risks related to stabilisation of operations in the new capacity. Timely commissioning and stabilisation of the capacity will be closely monitored. |
Liquidity: Strong Annual cash accrual is expected to be Rs 2,000-2,500 crore against yearly debt obligation of Rs 1,000-1,300 crore, over the medium term. On account of healthy cash accrual and fund infusion, cash equivalents and unutilised bank limit stood at around Rs 1,100 crore and over Rs 1,000 crore, respectively, as on March 31, 2022. |
Outlook: Stable Apollo should maintain a healthy operating performance over the medium term, leading to steady financial risk profile despite large capex. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Apollo, established in 1972, manufactures automotive bias and radial tyres, and tubes. It has plants in Kochi (Kerala), Vadodara (Gujarat), Pune (Maharashtra), Chennai (Tamil Nadu) and Chittoor (Andhra Pradesh). Product profile includes prominent tyre brands in the T&B, light truck, passenger car and farm vehicle segments in India, catering to both original equipment manufacturers and the replacement market. In February 2013, the company sold its South African operations to Sumitomo Tire for USD 60 million.
In May 2009, Apollo acquired Vredestein, a subsidiary of Amtel-Vredestein NV, incorporated in the Netherlands, for EUR 40 million. Amtel-Vredestein NV, Russia’s largest tyre manufacturer, was declared bankrupt in April 2009 by a court in the Netherlands. However, its subsidiary, Vredestein, was excluded from the bankruptcy as it had separate financing arrangements.
Vredestein has one manufacturing unit in Enschede near Amsterdam, with capacity of 55 lakh tyre per annum. It produces premium, high-speed PCRs, collapsible passenger car tyres, and agricultural tyres. It has two brands, Vredestein and Apollo, in the premium and mid-range segments, respectively. In fiscal 2016, Apollo acquired Reifencom GmbH, a distributor that operates 37 stores in Germany, for EUR 45.6 million.
For the nine months ended December 31, 2021, on a consolidated basis, Apollo reported net profit of Rs 525 crore on operating income of Rs 15,456 crore, against Rs 63 crore and Rs 12,439 crore, respectively, for the corresponding period previous fiscal. |
Key Financial Indicators (Consolidated; CRISIL Ratings-adjusted numbers)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
Annexure - Details of ratings withdrawn
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 25-Apr-22 in line with the lender-wise facility details as on 17-Aug-21 received from the rated entity.
Criteria Details
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