Rating Rationale
June 28, 2019 | Mumbai
Apollo Tyres Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.1900 Crore (Enhanced from Rs.1600 Crore)
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.325 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
Rs.450 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
Rs.300 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
Rs.900 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities and debt instruments of Apollo Tyres Limited (Apollo).
 
Apollo is undertaking a large capital expenditure (capex) of over Rs 7,000 crore between fiscals 2019 and 2021, half of which would be funded by debt. However, sustained cash accrual and healthy capacity utilisation should support the financial risk profile over the medium term. Net debt to earnings before interest, taxes, depreciation and amortisation (EBITDA) ratio was 2.16 times as on March 31, 2019, and is expected to remain below 3 times over the medium term, despite the planned capex; there is no other large investment during this phase. Timely completion and stabilisation of the ongoing expansion would remain key rating sensitivity factors.
 
The ratings continue to reflect a strong business risk profile, driven by a sustained market position in the domestic and European markets along with a diversified revenue profile and a healthy financial risk profile, despite large capex plans. These strengths are partially offset by exposure to cyclicality in the tyre industry, to volatility in raw material prices, and to implementation risks in capacity expansions.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Apollo and all its wholly owned subsidiaries, as they are in the same line of business and have strong operational and financial linkages.

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:
* Strong position in the domestic tyre industry, with leading market share in the truck and bus (T&B) segment
The company is the leading manufacturer of radial tyres for the domestic T&B segment (over 25% market share), and has established its position in the light commercial vehicles (LCV), tractors, and passenger car radial (PCR) segments as well. A pan-India distribution network, comprising 5,000 dealerships, including exclusive outlets that operate under the Apollo brand, further strengthen its market position. Despite intense competition, the company should be able to sustain its market share, given its leadership position, significant ramp-up in radial tyre capacity, healthy operating efficiencies, and a wide distribution network.
 
* Diversified revenue profile, driven by a presence in different geographies and segments
The diversified profiles 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 also operates in the European PCR market through Vredestein. In fiscal 2019, Indian operations accounted for around 70% of the consolidated revenue, while Vredestein operations accounted for 25%. The remaining contribution came from various subsidiaries in the United Arab Emirates, Thailand, and South Africa etc. In terms of segmental diversity, the replacement market accounts for around 70% of the consolidated revenue, thereby providing revenue stability. Due to gradual ramp up of the Hungarian operations, the European profitability has been declining since 2018; however the healthy performance in India led the consolidated EBITDA margin to remain stable at 11.5% in fiscal 2019, against 11.6% in fiscal 2018.
 
* Healthy financial risk profile, despite large capex plans
The consolidated gearing was low at about 0.5 time as on March 31, 2019, and the interest coverage ratio healthy at 10 times for fiscal 2019. Apollo is undertaking a substantial capex of around Rs 7,000 crore between fiscals 2019 and 2021, including the Rs 3,800 crore capex in Andhra Pradesh. Around half of the capex is expected to be funded by debt. Nonetheless, given the healthy cash accrual over this period, gearing should remain below 0.7 time and interest coverage above 6 times. Timely completion and stabilisation of the ongoing expansion, and any debt-funded inorganic expansion or larger-than-expected capex will remain key rating sensitivity factors.
 
Weaknesses:
* Exposure to cyclicality in the tyre industry and vulnerability to volatility in raw material prices
Revenue and profitability remain vulnerable to the cyclicality in the tyre industry, primarily driven by fluctuating demand from end-user CV players, especially in the T&B segment. Demand in the tyre industry is also dependent on economic growth and infrastructure development. Furthermore, raw material costs account for more than 60% of the operating costs. While the price of natural rubber is dependent on global demand, area under cultivation, and yield factor, the prices of carbon black and other materials are based on crude oil prices. The operating margin reduced to 11.5% and 11.6% in fiscals 2019 and 2018, respectively, from 14.3% and 16.9% in fiscals 2017 and 2016 due to an uptick in rubber prices as well as decline in profitability of the European operations as the Hungarian plant ramps up. Operating performance is likely to remain susceptible to cyclicality in the tyre industry and volatility in raw material prices over the medium term.
 
* Implementation risk in the ongoing expansion
The company is undertaking large capacity expansion in Andhra Pradesh, half of which is expected to be funded through debt. . It has also recently commissioned a new facility in Hungary. This exposes it to risks related to project implementation, particularly in Hungary, which is a new geography for the company and is taking time to ramp up, impacting profitability. Timely commissioning and stabilisation of these capacities will be closely monitored.
Liquidity

Liquidity should remain adequate. Cash accrual, projected at Rs 1,500-1,700 crore per annum over the medium term, should amply cover the yearly maturing debt of Rs 700-1000 crore. The company wrote-off its entire investment in IL&FS Financial Services Ltd worth Rs 200 crore, leading to a 6% decline in profit after tax (PAT) to Rs 680 crore for fiscal 2019. However, cash equivalents of around Rs 500 crore as on March 31, 2019, and bank lines of Rs 1,000 crore, which remain largely unutilised support liquidity.

Outlook: Stable

CRISIL believes Apollo will continue to maintain a healthy operating performance, leading to a steady financial risk profile despite large capex plans.
 
Upside scenarios
* Significant and sustainable increase in profitability
* Stabilisation of newer capacities ahead of schedule, strengthening the financial risk profile
 
Downside scenarios
* Steep decline in profitability
* Large, debt-funded acquisition, weakening the capital structure
* Significant time and cost overruns in the expansion projects

About the Company

Apollo, established in 1972, manufactures automotive bias and radial tyres, and tubes. It has plants in Kochi, Vadodara, Pune, and Chennai. The 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 niche player in the premium, high-speed PCR tyre segment in Europe. Vredestein was set up in 1946 as a joint venture between Vredestein Banden BV and BF Goodrich Tires. In 1977, the Dutch government acquired 51% stake in the company, which was later acquired by Amtel NV in 2005. Vredestein has a manufacturing facility in Enschede, near Amsterdam (The Netherlands), with capacity of 5.5 million PCR tyres per annum. The company's European sales are under two brands, Vredestein (premium) and Apollo (mid-range). In fiscal 2016, Apollo acquired, Reifencom GmbH, a distributor which operates 37 stores in Germany, for EUR 45.6 million.

Key Financial Indicators
Particulars Unit 2019^ 2018*
Revenue Rs crore 17,537 14,856
Profit after tax Rs crore 680 724
PAT margin % 3.88 4.87
Adjusted debt/adjusted networth Times 0.54 0.59
Interest coverage Times 10.33 9.96
^ Provisional
* Audited

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs crore)
Rating assigned
with outlook
NA Cash credit** NA NA NA 1000.0 CRISIL AA+/Stable
INE438A07086 Non-convertible debentures 30-May-16 8.65% 30-Apr-24 105.0 CRISIL AA+/Stable
INE438A07094 Non-convertible debentures 30-May-16 8.65% 30-Apr-25 105.0 CRISIL AA+/Stable
INE438A07102 Non-convertible debentures 30-May-16 8.65% 30-Apr-26 115.0 CRISIL AA+/Stable
INE438A07110 Non-convertible debentures 21-Oct-16 7.50% 21-Oct-21 105.0 CRISIL AA+/Stable
INE438A07128 Non-convertible debentures 21-Oct-16 7.50% 21-Oct-22 105.0 CRISIL AA+/Stable
INE438A07136 Non-convertible debentures 21-Oct-16 7.50% 21-Oct-23 90.0 CRISIL AA+/Stable
INE438A07144 Non-convertible debentures 31-May-17 7.80% 29-Apr-22 150.0 CRISIL AA+/Stable
INE438A07151 Non-convertible debentures 31-May-17 7.80% 28-Apr-23 150.0 CRISIL AA+/Stable
INE438A07169 Non-convertible debentures 31-May-17 7.80% 30-Apr-24 150.0 CRISIL AA+/Stable
NA Commercial paper NA NA 7-365 days 900.0 CRISIL A1+
NA Letter of credit^ NA NA NA 600.0 CRISIL A1+
NA Term Loan NA NA 31-Mar-29 150.0 CRISIL AA+/Stable
NA Term Loan NA NA NA 150.0 CRISIL AA+/Stable
**Interchangeable with working capital demand loan/foreign currency non-repatriable (B)/buyer's credit/overdraft/foreign bill discounting/export bill receivables
^Interchangeable with bank guarantee/letter of undertaking or acceptances for buyer's credit/packing credit
 
Annexure - List of entities consolidated
Name of entities Extent of consolidation Rationale for consolidation
Apollo Tyres (Cyprus) Pvt Ltd Full Strong managerial, operational, and financial linkages
Apollo Tyres (Greenfield) B.V. Full Strong managerial, operational, and financial linkages
Apollo Tyres Cooperatief U.A. Full Strong managerial, operational, and financial linkages
Apollo (South Africa) Holdings (Pty) Ltd Full Strong managerial, operational, and financial linkages
Apollo Tyres Africa (Pty) Ltd. Full Strong managerial, operational, and financial linkages
Apollo Tyres (Thailand) Limited Full Strong managerial, operational, and financial linkages
Apollo Tyres (Middle East ) FZE Full Strong managerial, operational, and financial linkages
Apollo Tyres Holdings (Singapore) Pte Ltd Full Strong managerial, operational, and financial linkages
ATL Singapore Pte Ltd. Full Strong managerial, operational, and financial linkages
Apollo Tyres (Malaysia) SDN BHD Full Strong managerial, operational, and financial linkages
Apollo Tyres (UK) Pvt Ltd Full Strong managerial, operational, and financial linkages
Apollo Tyres (London) Pvt Ltd Full Strong managerial, operational, and financial linkages
Apollo Tyres Global R&D B.V. Full Strong managerial, operational, and financial linkages
Apollo Tyres (Germany) GmBH Full Strong managerial, operational, and financial linkages
Apollo Tyres AG Full Strong managerial, operational, and financial linkages
Apollo Tyres Do (Brasil) Ltda Full Strong managerial, operational, and financial linkages
Apollo Tyres B.V. (ATBV) Full Strong managerial, operational, and financial linkages
Apollo Tyres (Hungary) Kft. Full Strong managerial, operational, and financial linkages
Apollo Vredestein B.V. Full Strong managerial, operational, and financial linkages
Apollo Vredestein GmbH Full Strong managerial, operational, and financial linkages
Vredestein Marketing B.V. & Co. KG Full Strong managerial, operational, and financial linkages
Apollo Vredestein Nordic A.B. Full Strong managerial, operational, and financial linkages
Apollo Vredestein UK Limited Full Strong managerial, operational, and financial linkages
Apollo Vredestein France SAS Full Strong managerial, operational, and financial linkages
Apollo Vredestein Belux Full Strong managerial, operational, and financial linkages
Apollo Vredestein Gesellschaft m.b.H. Full Strong managerial, operational, and financial linkages
Apollo Vredestein Schweiz AG Full Strong managerial, operational, and financial linkages
Apollo Vredestein Italia Srl Full Strong managerial, operational, and financial linkages
Apollo Vredestein Iberica SA Full Strong managerial, operational, and financial linkages
Apollo Vredestein Tires Inc. Full Strong managerial, operational, and financial linkages
Apollo Vredestein Kft (AV Kft) Full Strong managerial, operational, and financial linkages
S.C. Vredesetin R.O. Srl Full Strong managerial, operational, and financial linkages
Apollo Vredestein Opony Polska Sp. Zo.o. Full Strong managerial, operational, and financial linkages
Vredestein Consulting B.V. Full Strong managerial, operational, and financial linkages
Finlo B.V. Full Strong managerial, operational, and financial linkages
Vredestein Marketing B.V. Full Strong managerial, operational, and financial linkages
Reifencom GmbH, Bielefeld Full Strong managerial, operational, and financial linkages
Reifencom GmbH, Hannover Full Strong managerial, operational, and financial linkages
Reifencom Einkaufsgesellschaft, mbH & Co. OHG, Hannover Full Strong managerial, operational, and financial linkages
Reifencom Tyre (Qingdao) Co., Ltd. Full Strong managerial, operational, and financial linkages
Saturn F1 Pvt Ltd Full Strong managerial, operational, and financial linkages
Retail Distribution Holding B.V. Full Strong managerial, operational, and financial linkages
Rubber Research LLC Full Strong managerial, operational, and financial linkages
KT Telematic Solutions Pvt Ltd Partial Joint Venture/Associate - Proportionate consolidation
 
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  900.00  CRISIL A1+      11-06-18  CRISIL A1+  24-05-17  CRISIL A1+  12-10-16  CRISIL A1+  CRISIL A1+ 
            30-05-18  CRISIL A1+      09-05-16  CRISIL A1+   
Non Convertible Debentures  LT  1075.00
28-06-19 
CRISIL AA+/Stable      11-06-18  CRISIL AA+/Stable  24-05-17  CRISIL AA+/Stable  12-10-16  CRISIL AA+/Stable  CRISIL AA+/Stable 
            30-05-18  CRISIL AA+/Stable      09-05-16  CRISIL AA+/Stable   
Fund-based Bank Facilities  LT/ST  1300.00  CRISIL AA+/Stable      11-06-18  CRISIL AA+/Stable  24-05-17  CRISIL AA+/Stable  12-10-16  CRISIL AA+/Stable  CRISIL AA+/Stable 
            30-05-18  CRISIL AA+/Stable      09-05-16  CRISIL AA+/Stable   
Non Fund-based Bank Facilities  LT/ST  600.00  CRISIL A1+      11-06-18  CRISIL A1+  24-05-17  CRISIL A1+  12-10-16  CRISIL A1+  CRISIL A1+ 
            30-05-18  CRISIL A1+      09-05-16  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit** 1000 CRISIL AA+/Stable Cash Credit** 1000 CRISIL AA+/Stable
Letter of Credit^ 600 CRISIL A1+ Letter of Credit^ 600 CRISIL A1+
Term Loan 300 CRISIL AA+/Stable Long Term Loan 50 Withdrawn
-- 0 -- Proposed Long Term Bank Loan Facility 75 Withdrawn
Total 1900 -- Total 1725 --
**Interchangeable with working capital demand loan/foreign currency non-repatriable (B)/buyer's credit/overdraft/foreign bill discounting/export bill receivables
^Interchangeable with bank guarantee/letter of undertaking or acceptances for buyer's credit/packing credit
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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