Demand recovery key to Apollo Tyres' aggressive $5 billion revenue target

Street will watch out for capital allocation, deleveraging progress

With an aggressive revenue target of $5 billion over the next five years, tyre maker Apollo Tyres is looking at doubling its consolidated revenues from the current $2.3 billion. This translates to 16 per cent annual growth between financial year 2020-21 (FY21) and FY26 and is twice the 7 per cent growth it achieved in the FY17-21 period. 

The firm aims to hit the target by riding on the volume growth in the Indian market, doubling exports from India, new product launches, premiumisation and market share gains in key geographies here and in Europe.

In the Indian market, growth is expected to be driven by a recovery in the demand cycle. At 31 per cent share, the company is the largest player in the truck and bus radials (TBR) segment and has gained 400 basis points over the last three years. The company had a similar gain in the passenger car radials segment over this period with its share moving up to 21 per cent.

With the radialisation trend expected to continue and its share pegged at 55-60 per cent by FY25 from the current 47 per cent, realisations in the TBR segment should improve. Truck and bus segment is the largest contributor to revenues for Apollo Tyres, accounting for 60 per cent and 43 per cent of standalone and consolidated revenues, respectively.

Say Shashank Kanodia and Jaimin Desai of ICICI Securities, “Impending revival in commercial vehicles is set to benefit the company, with expected improvement in radialisation and vehicle penetration levels being other tailwinds.”

The performance in Europe, which accounts for 32 per cent of revenues, will be critical for revenue and margin expansion. The company is also improving its product mix with a focus on higher-end segments, including winter and all-seasons tyres and premium rim sizes. The company is eyeing an increase in share of ultra-high-performance tyres in the sales mix from the current 36 per cent to 40 per cent.

The global recovery in passenger cars is expected to help tyre makers — replacement demand in Europe is now back to 2019 levels, while 18-inch tyre demand is higher than in Q1FY19. Kapil Singh and Siddhartha Bera of Nomura Research say Apollo Tyres gets 35 per cent of its revenues from the over 18-inch tyre segment and, hence, should benefit. What should add to realisations in the European market is that the pricing environment remains strong with upto 6 per cent hikes till date in 2021 and more in the offing in July.

In the near term, the company is focussing on improving business fundamentals, controlling costs, increasing digitisation, reducing capex intensity and improving balance sheet. With expansions largely through debottlenecking and brownfield capacity and sweating of assets, return ratios are expected to improve 12-15 per cent from 8 per cent currently.

ICICI Securities believes the company’s plans, while ambitious, are largely achievable if stringent focus on profitable growth, capital allocation and deleveraging are maintained. While growth is expected to improve, the stock has been under pressure over the last couple of months given the spike in raw material costs. Investors should await consistent revenue performance and margin expansion before considering the stock.