By Shruti Saboo

This announcement corrects the version published on 10 November 2017 to correctly state that the rubber prices achieved their peak in February 2017 rather than February 2018. An amended version is as follows:

India Ratings and Research (Ind-Ra) has affirmed Apollo Tyres Ltd’s (Apollo) Long-Term Issuer Rating at ‘IND AA+’. The Outlook is Stable. The instrument-wise rating actions are as follows:
 

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

Non-convertible debentures (NCDs)*

-

-

-

INR6,250

IND AA+/Stable

Affirmed

NCDs*#

-

-

-

INR4,500

IND AA+/Stable

Assigned

Commercial paper (CP)

-

-

Three months

INR9,000

IND A1+

Assigned

 * Details of the NCDs are provided in Annexure.
# The assignment of final rating is based on the receipt of transaction documents.
The CP proceeds will be used for the meeting working capital requirements.

Ind-Ra continues to take a consolidated view of Apollo and its subsidiaries (100% owned) for the ratings, due to operational and strategic linkages among them, driven by similar business profiles, and a common treasury and management team.

KEY RATING DRIVERS

Established Market Position: Apollo is the second largest tyre manufacturer in India. It commands a prominent position in the domestic truck and bus radial (TBR), truck and bus bias, and passenger car tyre segments. Moreover, it has established presence in India and Europe, backed by strong distribution networks in both regions and longstanding relationships with original equipment manufacturers (OEMs). 

Decline in Performance in 1HFY18, Positives Emerging:
Apollo’s financial performance declined in 1HFY18 with consolidated EBITDA margins falling around 584bp yoy to 9.4% (FY17: 14.1%). However, this could be attributed to the following one-off events in the June 2017 quarter: 1) the decline in the sales of commercial vehicles due to BSIV implementation and 2) lower offtake by OEMs and dealers due to GST implementation from July 2017. Moreover, a higher procurement price of natural rubber during 1HFY18 impacted the profitability. Lower profitability in European operations due to initial stabilisation costs related to the greenfield expansion in Hungary also impacted the overall profitability in 1HFY18. However, profitability would be boosted in 2HFY18 due to a decline in rubber prices from their peak in February 2017 and the recent imposition of anti-dumping duty on imported Chinese TBR tyres. The latter is likely to result in a 10%-15% increase in prices of imported Chinese TBR tyres. The TB segment accounted for around 41% of Apollo’s revenue in FY17. However, EBITDA margin would remain sensitive to any volatility in input prices, including those of rubber and crude oil, considering raw material costs stood at about 58% as a percentage of revenue in 1HFY18. 

Geographically Diversified Revenue Base:
Apollo’s European operations contributed about 30% to the consolidated revenue and 23% to consolidated EBITDA in FY17. This, along with exports from the domestic market (around 10% of domestic revenue in FY17), indicate a diversified revenue base, improving the company’ ability to withstand a slowdown in the domestic market. Ind-Ra expects revenue contribution from overseas operations to increase after the completion of the capex in Hungary. 

Replacement Market Major Contributor to Revenue:
In FY17, the replacement market contributed about 63% to the standalone revenue, followed by OEMs (26%) and exports (11%). The majority of the company’s sales in Europe are made in the replacement market. The high contribution of replacement segment provides some cushion to the company against the cyclical nature of OEM sales. 

Capex over FY18-FY19 to Delay Improvement in Credit Profile:
Apollo will spend INR40 billion-45 billion over FY18-FY19 to augment its production capacity levels in India and Europe. About INR8 billion of the capex will be incurred to increase the existing TBR capacity to 12,000 tyres/day in Chennai and around INR15 billion to increase its passenger car radial tyre capacity in Andhra Pradesh as domestic capacities in these segments have reached near optimum utilisation levels. About INR8 billion of capex would be incurred on a greenfield capacity in Hungary for passenger car radial tyres and TBR tyres. Apollo’s consolidated net adjusted debt/EBITDA deteriorated to 2x in FY17 (FY16: 0.7x), in line with Ind-Ra’s expectation, due to the debt-led capex. Ind-Ra expects the consolidated credit profile to remain at similar levels over FY18-FY19 and free cash flow to remain negative as a result of the capex, before showing improvements with the ramping up of the expanded capacities. Apollo has raised INR15 billion in equity in October 2017 to fund its capex plans which supports its current credit profile.


RATING SENSITIVITIES

Positive: The strengthening of Apollo’s market position in key segments, stability in EBITDA margin amid rising input costs and increasing competition, and a sustained improvement in the credit metrics could lead to a positive rating action. 

Negative: 
The weakening of Apollo’s market position in key segments, weaker-than-expected EBITDA margin due to delays in deriving benefits from the upcoming projects and/or higher input costs and/or pricing pressures due to a weak demand environment leading to net leverage exceeding 2x on a sustained basis could result in a negative rating action.


COMPANY PROFILE

Incorporated in 1972, Apollo manufactures and sells tyres. It has five manufacturing facilities across Asia and Europe. Its key brands are Apollo and Vredestein. It has three other brands: Regal, Kaizen and Maloya. 

Apollo has a domestic capacity of 5.3 million tyres/day and a European capacity of 1.7 million/day. In FY17, Apollo’s consolidated revenue was INR131.8 billion (FY16: INR118.5 billion) and net income was INR8.1 billion (INR13.2 billion). 

FINANCIAL SUMMARY
 

Particulars

FY17

FY16

Revenue (INR million)

131,800

118,466

EBITDA (INR million)

18,612

20,059

EBITDA margin (%)

14.1

16.9

Gross interest expense (INR million)

1,176

1,010

Profit before tax (INR million)

11,459

17,384

Net income (INR million)

8,090

13,157

Source: Apollo, Ind-Ra

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

23 May 217

6 October 2016

Issuer rating

Long-term

-

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

NCDs

Long-term

INR10,750

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

CP

Short-term

INR9,000

IND A1+

-

-

ANNEXURE

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

NCDs

INE438A07086

30 May 2016

8.65

30 April 2024

INR1,050

IND AA+/Stable

NCDs

INE438A07094

30 May 2016

8.65

30 April 2025

INR1,050

IND AA+/Stable

NCDs

INE438A07102

30 May 2016

8.65

30 April 2026

INR1,150

IND AA+/Stable

NCDs

INE438A07110

21 October 2016

7.50

21 October 2021

INR1,050

IND AA+/Stable

NCDs

INE438A07128

21 October 2016

7.50

21 October 2022

INR1,050

IND AA+/Stable

NCDs

INE438A07136

21 October 2016

7.50

21 October 2023

INR900

IND AA+/Stable

NCDs

INE438A07144

31 May 2017

7.80

29 April 2022

INR1,500

IND AA+/Stable

NCDs

INE438A07151

31 May 2017

7.80

28 April 2023

INR1,500

IND AA+/Stable

NCDs

INE438A07169

31 May 2017

7.80

30 April 2024

INR1,500

IND AA+/Stable

Total NCDs

INR10,750


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

Ind-Ra is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Applicable Criteria

Analyst Names

  • Primary Analyst

    Shruti Saboo

    Associate Director
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687265

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121