Rating Rationale

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. A pan-India distribution network, comprising 5,000 dealerships, including exclusive outlets that operate under the Apollo brand, strengthen the market position. Despite intense competition, Apollo should sustain market share, given its leadership position, significant ramp-up in radial tyre capacity, healthy operating efficiency, and wide distribution network.

* Diversified revenue, driven by presence in different geographies and segments
The 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, Apollo operates in the European PCR market through Vredestein. In fiscal 2019, APMEA (Asia Pacific, Middle East, and Africa) operations accounted for around 60% of the consolidated revenue, and Vredestein for 25%; the remaining revenue came from operations in the US. In terms of segmental diversity, the replacement market accounts for 72% of the consolidated revenue, thereby assuring steady revenue flow. Due to modest ramp-up of the Hungarian operations, profitability in Europe has been declining since 2018. However, healthy performance in India led to a stable consolidated EBITDA margin of 11.5% in fiscal 2019 (11.6% in fiscal 2018). Impact on demand and profitability, driven by the nationwide lockdown and muted economic growth, will be closely monitored.

* Healthy financial risk profile, despite large capex plans
Consolidated gearing was low at 0.5 time as on March 31, 2019, and the interest coverage ratio healthy at 10 times for fiscal 2019. The company plans to defer its capex due to lower demand in the domestic market. Nonetheless, given the expected healthy cash accrual, gearing and the interest coverage ratio should remain healthy over the medium term. 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 fluctuations in raw material prices
Business remains vulnerable to the 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 Covid-19 outbreak across the world will impact demand over the next few months. 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. 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 and decline in profitability in the European operations as the Hungarian plant ramps up. Exposure to risks related to cyclicality in the tyre industry and volatility in raw material prices are likely to persist over the medium term.

* Exposure to 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. Although, Apollo plans to defer some of the domestic capex to subsequent years, it faces risks related to stabilisation of operations of its capacity in Hungary, which is a new geography and is taking time to ramp up. Timely commissioning and stabilisation of the new capacity will be closely monitored.