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Dec 23, 2011, 04.03 PM IST
Tyre maker, Apollo Tyres expects to clock better margins in the Q3 quarter than seen earlier. Neeraj Kanwar, vice chairman and managing director of Apollo Tyres in an interview to CNBC-TV18 said that the company will post better profit margins in Q3, but its bottomline and margins are still under pressure.
Further, the company is seeing good growth for winter tyres in the European market. “Those healthy margins are also coming into the bottomline as far as Apollo is concerned in Q3,” he said. It expects to see healthier topline for European business.
Below is the edited transcript of Kanwar’s interview with CNBC-TV18. Also watch the accompanying video.
Q: We have seen a fairly sharp fall in rubber prices this year maybe some of it has been taken away by rupee depreciation. Outline for us what this means to a company like yours in terms of the percentage of raw material cost and the pressure or otherwise on margins?
A: The rubber prices have not sharply gone down, they have come down from Rs 230 to around Rs 200 a kilo. Two years ago we were at Rs 110 per kilo, so the gap is still very wide and needs to go further down. It has had a positive impact on all the tyre companies. As far as Apollo is concerned, in Q3 we will have better profit margins, though there is still challenge on the bottomline and margins are still very much under pressure.
We will also see a huge growth on the topline and that is on the back of our Chennai plant which has just come and running. It is running to its peak terminal capacity by the end of this year. One will see huge turnover growth like in Q2 there was nearly 47% growth in the turnover, there also will be double digit growth as far as Q3 and Q4 are concerned. But, margins will be better than Q2. Due to rubber prices coming down and the rupee weakening has had an impact on the company, but we will be able to offset it with slightly depressed prices as far as commodities and raw materials are concerned.
Q: Can you give us some numbers on the margin front; you did OPMs of 8% if I remember right from the last numbers that we have. How much could those margins go up by?
A: I cannot give you numbers for obvious reasons, but I can tell you that from our 8% OPM of Q2, one will see better margins coming through in Q3. The product launches that we are doing in Europe are benefiting our bottomline.
We have seen good growth as far as winter tyres are concerned in the European market especially for the Apollo branded products that going from here to the European market. So those healthy margins are also coming into the bottomline as far as Apollo is concerned in Q3.
Q: Let us focus on demand scenario a bit more, if in Q2 one of the conference call extract was that basically domestic demand is expected to pick-up October onwards. Give us a sense of what is happening on the domestic front and what we could expect in terms of demand going through FY12?
A: In Q2 and Q3 in October, as far as passenger car is concerned vehicle growth has been minus 7%. In November it has come up by another 7-8%, so in Q3 passenger vehicles growth according to us will be flat. On the other side, the commercial vehicles have seen a good hefty growth in October-November.
It has been upwards of nearly 20%, so that is going to come into demand cycle as far as the replacement market is concerned Apollo is going to increase its market share in the truck, bus radial segment and passenger car radial segment. One will see huge topline growth coming in from us. This is happening because of our new greenfield project which has come on stream and is reaching terminal capacities.
Q: How much would you expect for FY13 in terms of increase in volume or even for that matter value how much can your revenues increase by?
A: Next year, one is looking at double digit growth. Our vision is very clear to be in top ten in the next five years. So a growth of nearly 20% or upwards of that is required in various markets and new markets that we have launched into other than India are the European market and Africa.
We have also entered Latin America as a very big market and we have started operations in Brazil. Growth will come in from Europe for our winter tyre sales and summer tyre sales. We will also see good growth coming in from truck, bus radial tyres in Brazilian market. So, all put together ’12-13 is going to be a good turnover growth for Apollo.
Q: Taking European market forward, last quarter was very strong for you all in terms of the European business; revenues were up around 42% on year on year basis, profitability was up around 84%. Going forward do you expect a higher contribution from the European market, is that something which is going to be a key driver for you going forward and if so how?
A: When we took over in 2009 after one year the board had approved a project investment of 6 million euro as far as the factory expansion was concerned in Holland. That expansion has come through. Therefore one million extra tyres are coming into the market from Europe of the Vredestein brand. As far as Apollo brand is concerned, we started 12 months ago. We are already at around 60,000-70,000 tyres per month.
We are getting into Europe from the Apollo brand basket those figures are going up and they will keep going up as far as the Apollo branded tyres are concerned. As far as Europe is concerned you are going to see healthier topline figures, margins will come under pressure as we go along, but they will be much healthier than what we have already shown.
Q: You had some pressures of overcapacity in the industry because of demand shortfall some months back. The tyre industry itself is installing more capacity and I understand that you capacity increases from 122 million tyres in FY10 to about 180 million tyres by FY13, do you foresee this to be a bit of a drag in terms of margins?
A: The capacity increases have come in the radial technology side. India is moving in the commercial segment to the radialisation very fast. Last year it was only at 10%, today it is at around 18-20%, so it is growing 100% year on year. So, capacities are coming up in the truck, bus radial tyres and in the passenger car side.
But, needless to say the capacity of India which we are putting up we will also have to look at export markets. Today there is a good demand as far as developing nations are concerned. There is a demand for our branded tyres. So 60-70% of the capacity will be for the domestic consumption and the remainder of 20-30% should be for the export markets.
Q: How much of your book comes from exports?
A: Around 20%.
Q: It might be more in FY13?
Q: Any number?
A: I would look at anyway between 20-25%
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