Enough research to show road infra's huge multiplier effect: Onkar S Kanwar

In a Q&A, the chairman of Apollo Tyres sees multiple growth triggers for the domestic industry ahead, but notes that relentless commodity inflation is the biggest pain point for companies

Onkar S Kanwar, chairman, Apollo Tyres tells Shally Seth Mohile that the domestic tyre industry will have multiple growth triggers in the years to come, the most notable being the government’s flagship infrastructure project. Relentless commodity inflation is the biggest pain point for companies, he adds. Edited excerpts:

With the majority of the benefits from the curbs on imports from Chins already having played out, what could the additional triggers for the Indian tyre companies be?

I think that the growth triggers will result from the multiplier effect from the National Infrastructure Pipeline for FY 2019-25. The government has allocated Rs 111 trillion for this initiative. There is enough research to indicate the huge multiplier effect which happens due to creation of road infrastructure in a country. It leads to positive impact on employment, especially in rural India and the country’s manufacturing growth. Movement of goods and people taking up road travel increases significantly. And this is certainly beneficial for the growth of the tyre industry.

How do you see the demand from the CV segment panning out? Is it the beginning of an upcycle?

We are seeing revival in the truck OEM side, which is definitely positive for us, as this would result in repeat demand in the replacement segment as well going forward. Growth in the replacement segment is a mixed bag, between bias and radial tyres, with some months witnessing growth in bias demand, while in others, there is growth in radials.

We are hoping that the push on infrastructure development, along with increased consumer spending, will drive the demand in the CV segment further.

In addition to the pandemic induced factors, what could be the potential challenges in meeting the Vision 2026 laid by the company?

The only challenge that we face as of now, is the relentless inflationary trend in commodities, which has been and will be a pain point in near future as well. While price corrections have been undertaken, they lag raw material inflation, putting pressure on our margins. We are committed to use every possible challenge and opportunity to emerge as a much more efficient organisation. We continue to see opportunity in our key markets over the medium- to long-term.

If you can touch upon the restructuring of the European operations…

We took the decision to specialise the Enschede plant, in The Netherlands to be cost competitive, as far as European manufacturing operations is concerned. We shuffled the manufacturing mix so that SKUs (stock keeping units) which were loss-making due to high cost of manufacturing in the Netherlands, were allocated to Hungary and India, resulting in margin expansion. Helped by the successful execution of Dutch plant specialisation, we have already witnessed significant improvement in European Operations’ performance. The share of high margin in passenger car sales mix has increased now to late 30s, and we expect it to further increase to above 40 per cent in the next 2-3 years.

Are you likely to stay clear of acquisitions and be sharply focused on consolidation?

As a growth-oriented organisation, we have always looked at all opportunities to grow. Our current focus is on ramping up our AP facility, which along with Chennai and Hungary facility is servicing the demands of all geographies. Currently, we are not looking at any acquisitions.

How are you looking to de-leverage the balance sheet over the next 5 years?

We have clear focus towards having a stronger balance sheet. The strategy going forward is to sweat our assets and get our utilisation levels to reach 90-95 per cent in all our plants. We have made significant progress on strengthening our balance sheet in the last fiscal. We will continue to focus on controlled capital allocation to ensure free cash flows and balance sheet leveraging at reasonable levels. Increased sweating of our existing assets and expanded capacity will ensure that we keep our balance sheet healthy.

How do you see the commodity super cycle panning out, how are you battling it out?

Inputs costs have been on an upward trend from the last several months, and as you have rightly mentioned, have been putting pressure on our margins. To negate the rise in input costs, we have already taken few price corrections, in addition to several cost control measures internally, which are an ongoing process.

What has been the biggest learning from the pandemic?

A year of Covid-19 pandemic changed the way we worked. While most saw this as a challenge, we created opportunities for ourselves in this crisis and continued to drive ahead. Our focus on cost and cashflows led to the company managing with lower levels of inventory and liquidation of ageing stocks. A strong focus on controlling of costs by bifurcating them into good and bad costs, helped us ride the pandemic. Investments behind R&D, brand building and on employees, along with their training, was classified as good costs and we continued with them. Unnecessary infrastructure, large-scale product launches and facility inaugurations and business travel was grouped into bad costs, and we avoided them to the extent possible.

There was a clear focus on digitalisation, which helped enhance productivity and efficiency while helping significantly in our journey to become a paperless company. As we speak, we continue to increase our capabilities in digitalisation and further streamline our processes to become agile. We created several new touchpoints, especially in the rural areas, during the pandemic, which helped drive our volumes in all product categories.

Do you expect consumer spending to revive from the current downturn?

I am bullish of the consumer spending to be back to the pre-Covid levels in the near to mid-term. Having said that, the emergence of the new variant, can hamper this revival.

Some are of the view that the estimated 9.5 per cent GDP growth may not be achieved and it may not grow beyond 7-7.5 per cent by the real measurement criteria Your views.

While we can deliberate on the numbers, I think one has to see the big India story. With the pandemic and the subsequent strong bounceback by the economy, it is imperative to look at a decadal story for India. Short term volatility might continue, but any company will commit investments only if it believes the long term growth story. We have been bullish on the India growth journey and have been investing in the country.