Apollo Tyres’ focus on debt reduction is reassuring investors
PremiumAnalysts say while the near-term challenge on cost inflation remains, efforts to pare debt bode well for investor sentiment towards the stock
Apollo Tyres Ltd has increased focus on deleveraging its balance sheet. This is a key takeaway for investors from the company’s March quarter results. Last fiscal, Apollo Tyres managed to reduce debt meaningfully using internal accruals and an equity fundraise. However, further debt reduction may play out after a short while as capital expenditure (capex) is expected to peak this fiscal and will reduce only from fiscal 2023 onwards.
For FY22, the management has guided for a capex of ₹1,800 crore. From FY23 onwards, it would incur only maintenance capex, and it aims to reduce debt by ₹500 crore annually over a three-year period.
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As capex intensity reduces, free cash-flow generation is likely to improve further.
In a post-earnings call, the management highlighted that the company generated free cash flow of ₹700 crore in FY21. That along with ₹1,700 crore of new equity was used to pare debt. Net debt at the end of FY21 fell to ₹4,100 crore from ₹6,000 crore in FY20. Consequently, the net debt/Ebitda improved from little over 3 times in FY20 to 1.5 times in FY21. Ebitda is short for earnings before interest, taxes, depreciation and amortization.
As far as input cost inflation is concerned, the management said blended raw material price has increased sequentially by around 12% in Q4FY21. At the end of the March quarter, the cost of natural rubber stood at ₹140/kilogram, up from ₹115/kilogram in the previous quarter. Price of carbon black also rose sequentially from ₹65/kilogram to ₹75/kilogram. Further, the management expects the raw material basket to increase in high single-digits in Q1FY22.
In a bid to tackle the increase in input costs in the past six months, the company has taken a 4.5% price increase in the replacement tyre segment across product categories. Since its peers have also raised prices, Apollo Tyres is contemplating another round of price hikes this quarter. The management said that in Europe as well, the tyre industry has started to increase prices on improved demand environment and increased cost pressures.
So, the company also intends to hike prices in Europe going ahead. Apart from price hikes, Apollo Tyres is also taking cost-saving measures and product mix change to protect margins.
In the March quarter, consolidated margins got a boost from lower manufacturing and employee costs in the European operations.
Meanwhile, the management cautioned that given the covid-led lockdown in several states across India, the current demand scenario looks weak. It, however, believes that uptick in OEM volume and recovery in replacement demand from Q2FY22 onwards will help to achieve revenue growth of more than 20% this fiscal.
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