Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and outstanding debt instruments of Apollo Tyres Ltd (Apollo). CRISIL Ratings has withdrawn its rating on the company’s non-convertible debentures (NCDs) of Rs 255 crore (see ‘Annexure: Details of rating withdrawn') as these were completely redeemed. This is in line with the CRISIL Ratings policy on withdrawal of rating on debt instruments.

 

The ratings continue to reflect the company’s healthy operating performance, in line with expectations, and its strong financial risk profile. The revenue stood at Rs 25,318 crore with operating margin of 17.7% in fiscal 2024, compared with revenue of Rs 24,538 crore and operating margin of 13.5% in the previous fiscal. The revenue growth in the near term will be supported by growth in the domestic replacement market, while the demand from the original equipment manufacturer (OEM) segment remains sluggish. Furthermore, there has been a recovery in demand for the European operations after being subdued recently. However, the operating margin of the company moderated to ~14% in the first half of fiscal 2025 compared with ~17.7% for the last fiscal due to increase in raw material prices, mainly of natural rubber. Raw material prices are expected to ease and lead to operating margin recovery over the medium term, and will remain monitorable.

 

Apollo’s net debt increased to ~Rs 3,000 crore as on September 30, 2024, from ~Rs 2,500 crore as on March 31, 2024, due to temporary increase in the working capital. However, it has reduced from ~Rs 4,300 crore as on March 31, 2023. The reported return on capital employed (RoCE) also improved significantly to ~16% in fiscal 2024 compared with ~9% in the previous fiscal. However, RoCE is expected to moderate in fiscal 2025 due to subdued profitability. Meanwhile, the ratio of net debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) is expected at below 1 time in fiscal 2025, backed by strong accrual and no significant, debt-funded capital expenditure (capex). However, any significant, debt-funded capex or acquisitions impacting the net debt to Ebitda ratio over the medium term will remain monitorable.

 

The ratings continue to reflect the robust business risk profile of Apollo, driven by its strong position in the domestic market, well-diversified revenue profile, comfortable financial risk profile and moderate capex plans. These strengths are partially offset by susceptibility to cyclicality in the tyre industry and to volatility in raw material prices, and exposure to intense competition leading to limited pricing power.

Analytical Approach

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:

• Strong position in the domestic tyre industry with substantial market share in the truck and bus (T&B) segment: Apollo is the leading manufacturer of radial tyres for the domestic T&B segment and has established its position in the light commercial vehicles, tractors and passenger car radial (PCR) divisions in India. Moreover, its market share remained stable across segments in fiscal 2024. A pan-India distribution network comprising 7,500 dealerships, including exclusive outlets that operate under the Apollo brand, strengthens the market position. Despite intense competition, the company will likely sustain its market share given its established brand, healthy operating efficiency and wide distribution network.

 

• Diversified revenue, driven by presence in different geographies and segments: Diversification in revenue streams will continue to shield the business from unfavourable conditions in any segment or geography and lend stability to cash flow. Besides its strong foothold in the domestic T&B segment, the company operates in the European PCR market under the Vredestein brand. In the first half of fiscal 2025, the APMEA (Asia Pacific, Middle East and Africa) operations accounted for around 69% of the consolidated revenue, followed by Europe (around 27%), with the remaining coming from other regions such as the US.

 

In terms of channel mix, the replacement market accounted for ~80% of the consolidated revenue in the first half of fiscal 2025, thereby assuring steady revenue flow. Revenue diversification across geographies, products and channels should continue to lend stability to the topline.

 

• Strong financial risk profile: Healthy cash accrual has led to significant improvement in the financial risk profile, with the net debt to Ebitda ratio estimated to have improved to ~0.6 time as on March 31, 2024, compared with 1.3 times as on March 31, 2023. Also, the consolidated gearing was healthy at 0.4 time as on March 31, 2024. Interest coverage ratio was strong at over 8 times in the first half of fiscal 2025 Expected capex of Rs 1,000 crore in fiscal 2025 will be towards maintenance and upkeep of the existing capacities. Given the expected healthy accrual and no significant, debt-funded capex, the interest coverage ratio should remain strong over 8 times in the medium term. Any debt-funded, inorganic expansion or large capex will remain a key rating sensitivity factor.

 

Weaknesses:

• Susceptibility to cyclicality in the tyre industry and to volatility in raw material prices: The business remains susceptible to cyclicality in the tyre industry, driven by fluctuating demand from end-user commercial vehicle players, especially in the T&B segment. Demand for tyres depends on economic growth and infrastructure development. For instance, subdued economic growth in Europe had impacted the volume in the first half of fiscal 2024. Furthermore, raw material cost forms majority of the operating costs, including the prices of natural rubber and carbon black. While the price of natural rubber depends on global demand, area under cultivation and yield, the prices of carbon black and other raw materials are based on crude oil prices. Hence, the profitability of tyre manufacturers is exposed to volatility in raw material prices.

 

• Exposure to intense competition and limited pricing power in the tyre industry: Apollo faces intense competition from other established domestic players such as MRF Ltd, CEAT Ltd and JK Tyre & Industries. In the European operations, Apollo is a market follower, and the pricing is determined by market dynamics. The competitive intensity limits the ability to fully pass on any raw material price increases to the customers.

Liquidity: Strong

Cash and equivalents stood at ~Rs 800 crore and fund-based bank limits of over Rs 1,000 crore were unutilised as on September 30, 2024. Annual cash accrual is expected to be healthy at Rs 2,200-2,700 crore against yearly debt obligation of Rs 1,000-1,300 crore, over the medium term. This is sufficient to cover incremental working capital and moderate capex requirement in the near term.

Outlook: Stable

Apollo will likely sustain its healthy operating performance and strong financial risk profile over the medium term.

Rating sensitivity factors

Upward factors:

• Growth in revenue and healthy operating profitability, leading to sustenance of RoCE above 15%
• Significant deleveraging resulting in steady improvement in the net debt to Ebitda ratio

 

Downward factors:

• Weakening of the net debt to Ebitda ratio to over 2 times
• Steep decline in profitability

 

Environment, social and governance (ESG) profile

The ESG profile of Apollo supports its already strong credit risk profile.

 

The tyre sector has a significant impact on the environment because of high greenhouse gas emission of core operations and waste generation. The sector has a social impact because of its large workforce. Apollo has continuously focused on mitigating its environmental and social impact.

 

Key ESG highlights

• Apollo has deployed strategies to reduce the carbon footprint in its processes. It aims to be carbon neutral by 2050. The company has been focusing on increasing renewable energy usage for its operations.
• Apollo strives to improve its environmental performance by reducing pollution, including through water management, waste management, usage/disposal of toxic and hazardous chemicals and other identifiable forms of pollution. Of the company’s total power requirement, ~12% was met through renewable sources in fiscal 2024.
• Apollo is committed to ensuring safety and security of its employees. There were no fatalities during fiscal 2024 and the lost time injury frequency rate (LTIFR) ratio improved to 0.38 time in fiscal 2024 from 0.58 time in the previous fiscal.
• As part of its corporate social responsibility (CSR) initiatives, Apollo reached out to nearly 11 million beneficiaries under its healthcare programme till fiscal 2024, with a target of 15 million by fiscal 2026.
• The company’s governance structure is reflected in more than 50% of its board comprising independent directors and its extensive disclosures.

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), Chittoor (Andhra Pradesh) 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 OEMs and the replacement market. In February 2013, the company sold its South African operations to Sumitomo Tire for $ 60 million.

 

In May 2009, Apollo acquired Vredestein, a subsidiary of Amtel-Vredestein NV, incorporated in the Netherlands, for € 40 million. Amtel-Vredestein NV, Russia’s largest tyre manufacturer, was declared bankrupt by a court in the Netherlands in April 2009. 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 tyres 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 had acquired Reifencom GmbH, a distributor that operates 37 stores in Germany, for € 45.6 million.

 

The revenue was Rs 12,772 crore with net profit of Rs 599 crore in the first half of fiscal 2025, compared with revenue of Rs 12,524 crore and net profit of Rs 871 crore, for the corresponding period of the previous fiscal.

Any other information: Not Applicable