In 2006, India’s number-two tyre producer saw its stock increase in value by 26%, and while the cost of materials have of late placed constraints upon profit margins, the long-term outlook for the company looks promising. The “softening of raw material prices would in my view result in an improvement of 50 basis points (0.5%) in Q3 margins,” claims Girish Solanki, senior research analyst at Angel Broking. “And, in the longer term, a 100 basis points improvement in the 2008 financial year looks quite possible,” he adds.
Furthermore, Apollo’s carefully thought out expansion plans and new product lines have ensured that the company looks set to meet its revenue target of US$2 billion by 2010. “We expect tyre demand growth of 10-12% over the next five years, driven by strong truck and bus replacement demand and (the) rising proportion of radials,” says Rishab Bageria, a research analyst with Pioneer Research.
Apollo is currently the third largest player in India’s replacement passenger car radial market, and the company is planning an ambitious foray in the truck and bus radial segment. As a first step, it is setting up a pilot project in the western state of Gujarat. This factory will possess a monthly capacity of 10,000 truck and bus radial tyres per month. It is also setting up a greenfield plant in Tamil Nadu, in the southwest of the country, for exclusive radial capacities across segments.
This project, with a first phase investment of £34.6 million over three years, is expected to be operational by 2008 and could significantly affect revenue from the 2009 financial year onwards. Analysts estimate that the proportion of trucks and buses running on radial tyres will increase from its current 2% to 10% by 2010. Apollo is also planning a sizeable expansion in its car radial capacity this year. By March, the company’s radial capacity will increase from 7,000 to 10,000 tyres per day.
Apollo also stands to benefit from its acquisition of South Africa’s Dunlop International. The acquisition of Dunlop International gives Apollo access to the South African tyremaker’s global distribution network, and it is thought that the utilisation of Dunlop’s European distribution channel will be of particular benefit to the company. Analysts expect Apollo’s export of radials to increase from 9% of sales (2006) to approximately 15% by the 2009 financial year.
“We see this trend continuing, with a focus on the European market,” stated Apollo’s strategy and marketing chief-corporate Sunam Sarkar. “Towards this end, we have recently launched two ultra-high performance products – the V-rated Apollo Acelere Sportz and the W-rated Aspire.”
With a globally competitive product lineup, global distribution channels and a focus on radial technology, it is likely that analysts will continue to promote Apollo Tyres as a good investment bet.
