| Apollo Tyres Limited | ||||||||||||
| Ratings Reaffirmed | ||||||||||||
| Rating Action | ||||||||||||
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| 1 crore = 10 million | ||||||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of Apollo Tyres Ltd (Apollo).
The reaffirmation factors in the strong recovery in operating performance in the second half of fiscal 2021 after the initial slowdown due to the Covid-19 pandemic. The strong demand across segments along with benign material prices led to a healthy operating performance in fiscal 2021. The demand should remain healthy over the medium term owing to the expected uptick in economic activity in fiscal 2022. Moreover, the company had undertaken various cost-saving measures in fiscal 2021 that have also led to better operating profitability.
The ratings continue to reflect a strong business risk profile, driven by a robust position in the domestic and European markets and a well-diversified revenue profile. The ratings also factor in a strong financial risk profile, despite large capital expenditure (capex) plans. These strengths are partially offset by exposure to cyclicality in the tyre industry, volatility in raw material prices, and risks related to implementation of capacity expansion. |
Analytical Approach For arriving at the ratings, 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. All these companies have been collectively referred to herein as Apollo.
Please refer to Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment. |
Key Rating Drivers & Detailed Description Strengths
The company is the leading manufacturer of radial tyres for the domestic T&B segment (around 30% market share), and has established its position in the light commercial vehicles (LCV), tractors, and passenger car radial (PCR) segments. Further, it is estimated to have gained market share in fiscal 2021 in various segments. A pan-India distribution network, comprising 6,800 dealerships, including exclusive outlets that operate under the Apollo brand, strengthen the market position. Despite intense competition, the company should sustain market share, given its leadership position, significant ramp-up in radial tyre capacity, healthy operating efficiency and a wide distribution network.
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, the company operates in the European PCR market under the Vredestein brand. In fiscal 2021, APMEA (Asia Pacific, Middle East and Africa) operations accounted for around 60% of the consolidated revenue and European operations for around 30%; the remaining came from operations in the US. In terms of overall segmental diversity, the replacement market accounts for over 70% of the consolidated revenue, thereby assuring steady revenue flow. Due to the modest ramp-up of Hungarian operations and high production cost, profitability in Europe has been declining since fiscal 2018. In fiscal 2021, the company has restructured operations: now the Netherlands plant will only manufacture specialised tyres while most of the other production will be shifted to the lower cost Hungarian plant. The restructuring is expected to result in improved profitability from fiscal 2022. Continued growth in consolidated revenue with sustenance of healthy operating profitability will be a key monitorable.
Strong operating profitability in fiscal 2021 has led to significant improvement in the financial risk profile, with the net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) ratio falling to 1.5 times as on March 31, 2021, from 3.2 times a year earlier.. Also, the consolidated gearing was less than 1 time as on March 31, 2021, and the interest coverage ratio healthy at around 7 times for fiscal 2021. The company undertook restructuring of the European operations in fiscal 2021 at a cost of around Rs 600 crore. This would help improve efficiency in European operations from fiscal 2022. Further, the company plans capex of around Rs 1,800 crore in fiscal 2022, most of which would be towards the Andhra Pradesh plant. Nonetheless, given the expected healthy cash accrual, the gearing and 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
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 global pandemic also impacted demand during the first half of fiscal 2021. 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. While benign material prices led to healthy operating efficiency in fiscal 2021, they have since risen by 10-12% quarter-on-quarter in the first quarter of fiscal 2022. The players are able to pass on only part of the increase to end customers due to intense competition. Exposure to risks related to cyclicality in the tyre industry and volatility in raw material prices is likely to persist over the medium term.
The company is undertaking large capacity expansion with a capex of around Rs 4,000 crore in Andhra Pradesh, of which around Rs 2,500 crore has already been incurred. The remaining would be funded through a mix of cash accrual and debt. While the capex is likely to be completed in fiscal 2022, the company will face risks related to stabilisation of operations in the new capacity. Timely commissioning and stabilisation of the capacity will be closely monitored. |
Liquidity: Strong Cash accrual is expected at Rs 1,500-2,000 crore, against debt repayment obligation of Rs 1,000-1,300 crore, per fiscal over the medium term. The company had earlier entered into an investment agreement with Emerald Sage Investment Ltd (an affiliate of the US-based private equity player, Warburg Pincus) for issuance of cumulative, participating, and compulsorily convertible preference shares of Rs 1,080 crore, which was infused in fiscal 2021. On account of healthy cash accrual and infusion of funds, cash equivalents and unutilised bank lines stood at around Rs 2,200 crore and over Rs 1000 crore, respectively, as on March 31, 2021, thus supporting liquidity. |
Outlook: Stable Apollo should maintain a healthy operating performance, leading to a steady financial risk profile despite the large capex plans. |
Rating Sensitivity factors Upside factors
Downside factors
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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), Chennai (Tamil Nadu) and Chittoor (Andhra Pradesh). 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 subsidiary of Amtel-Vredestein NV, incorporated in the Netherlands, for EUR 40 million. Amtel-Vredestein NV, Russia’s largest tyre manufacturer, was declared bankrupt in April 2009 by a court in the Netherlands. 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 manufacturing 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 acquired, Reifencom GmbH, a distributor that operates 37 stores in Germany, for EUR 45.6 million. |
Key Financial Indicators (Consolidated; CRISIL adjusted numbers)
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
**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
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Name of Lender | Amount (Rs.Crore) | Rating |
| Cash Credit** | Axis Bank Limited | 159 | CRISIL AA+/Stable |
| Cash Credit** | Bank of India | 40 | CRISIL AA+/Stable |
| Cash Credit** | BNP Paribas Bank | 115 | CRISIL AA+/Stable |
| Cash Credit** | Canara Bank | 78 | CRISIL AA+/Stable |
| Cash Credit** | ICICI Bank Limited | 131 | CRISIL AA+/Stable |
| Cash Credit** | IDBI Bank Limited | 7 | CRISIL AA+/Stable |
| Cash Credit** | Kotak Mahindra Bank Limited | 103 | CRISIL AA+/Stable |
| Cash Credit** | Standard Chartered Bank Limited | 111 | CRISIL AA+/Stable |
| Cash Credit** | State Bank of India | 110 | CRISIL AA+/Stable |
| Cash Credit** | Union Bank of India | 146 | CRISIL AA+/Stable |
| Letter of Credit^ | Axis Bank Limited | 50 | CRISIL A1+ |
| Letter of Credit^ | Bank of India | 19 | CRISIL A1+ |
| Letter of Credit^ | BNP Paribas Bank | 33 | CRISIL A1+ |
| Letter of Credit^ | Canara Bank | 36 | CRISIL A1+ |
| Letter of Credit^ | ICICI Bank Limited | 150 | CRISIL A1+ |
| Letter of Credit^ | ICICI Bank Limited | 48 | CRISIL A1+ |
| Letter of Credit^ | IDBI Bank Limited | 21 | CRISIL A1+ |
| Letter of Credit^ | Kotak Mahindra Bank Limited | 54 | CRISIL A1+ |
| Letter of Credit^ | Standard Chartered Bank Limited | 45 | CRISIL A1+ |
| Letter of Credit^ | State Bank of India | 90 | CRISIL A1+ |
| Letter of Credit^ | Union Bank of India | 54 | CRISIL A1+ |
| Proposed Long Term Bank Loan Facility | Not Applicable | 500 | CRISIL AA+/Stable |
| Term Loan | Axis Bank Limited | 250 | CRISIL AA+/Stable |
| Term Loan | Axis Bank Limited | 250 | CRISIL AA+/Stable |
| Term Loan | ICICI Bank Limited | 300 | CRISIL AA+/Stable |
| Term Loan | Kotak Mahindra Bank Limited | 100 | 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
This Annexure has been updated on 25-Sep-2021 in line with the lender-wise facility details as on 17-Aug-2021 received from the rated entity.
Criteria Details
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