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

* Diversified revenue profile, driven by a presence in different geographies and segments
The diversified profiles 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 also operates in the European PCR market through Vredestein. In fiscal 2019, Indian operations accounted for around 70% of the consolidated revenue, while Vredestein operations accounted for 25%. The remaining contribution came from various subsidiaries in the United Arab Emirates, Thailand, and South Africa etc. In terms of segmental diversity, the replacement market accounts for around 70% of the consolidated revenue, thereby providing revenue stability. Due to gradual ramp up of the Hungarian operations, the European profitability has been declining since 2018; however the healthy performance in India led the consolidated EBITDA margin to remain stable at 11.5% in fiscal 2019, against 11.6% in fiscal 2018.

* Healthy financial risk profile, despite large capex plans
The consolidated gearing was low at about 0.5 time as on March 31, 2019, and the interest coverage ratio healthy at 10 times for fiscal 2019. Apollo is undertaking a substantial capex of around Rs 7,000 crore between fiscals 2019 and 2021, including the Rs 3,800 crore capex in Andhra Pradesh. Around half of the capex is expected to be funded by debt. Nonetheless, given the healthy cash accrual over this period, gearing should remain below 0.7 time and interest coverage above 6 times. Timely completion and stabilisation of the ongoing expansion, and 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 volatility in raw material prices
Revenue and profitability remain vulnerable to the cyclicality in the tyre industry, primarily driven by fluctuating demand from end-user CV players, especially in the T&B segment. Demand in the tyre industry is also dependent on economic growth and infrastructure development. Furthermore, raw material costs account for more than 60% of the operating costs. While the price of natural rubber is dependent on global demand, area under cultivation, and yield factor, the prices of carbon black and other 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 as well as decline in profitability of the European operations as the Hungarian plant ramps up. Operating performance is likely to remain susceptible to cyclicality in the tyre industry and volatility in raw material prices over the medium term.

* 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. . It has also recently commissioned a new facility in Hungary. This exposes it to risks related to project implementation, particularly in Hungary, which is a new geography for the company and is taking time to ramp up, impacting profitability. Timely commissioning and stabilisation of these capacities will be closely monitored.