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Apollo’s plan to widen global footprint faces headwinds

Analysts cite rising natural rubber prices and emissions scandal at Volkswagen as adverse headwinds

Mumbai/New Delhi: Nearly five years after a failed deal to acquire Ohio-based Cooper Tire and Rubber Co. that would have catapulted India’s second-largest tyre maker by revenue into the global league, Apollo Tyres Ltd is closer to becoming India’s first global tyre company as envisioned by its promoters but is not quite there yet.

In April last year, the company opened a €475 million (about 4,021 crore) greenfield plant in Hungary. It is Apollo’s second facility in Europe and its sixth outside India.

Production at the factory is being ramped up to reach the goal of 5.5 million car and light truck tyres and 675,000 commercial vehicle tyres in the first phase by the end of March next year.

The Hungarian facility is reflective of Apollo’s tall ambitions of turning into a leading player in the difficult but lucrative European market where it now has a 2% share. Apollo wants to break into the ranks of the top 10 tyre producers globally and become a $6 billion (about 43,200 crore) company by 2020.

After the Cooper deal fell through in December 2013, Apollo started sales and marketing operations in Hungary, Slovakia and Poland. It also entered Thailand and West Asia through imports from India and Europe. However, plans to build plants in Thailand and Malaysia did not materialize.

Sales in the US began last year, in addition to Malaysia, the Philippines, Iran, Iraq and Saudi Arabia, from plants in Europe and India. Overall, the company claims to sell about 2 million units of Apollo and Vredestein brand of tyres each year in more than 100 countries.

Apollo aims to establish Hungary as a second domestic market, managing director and vice-chairman Neeraj Kanwar said in August, adding he expects the next wave of growth to come from new markets such as Poland, Hungary and broadly, eastern Europe.

However, such aggressive expansion plans have taken their toll as net profit fell to 723.9 crore in FY18, from 1,005.1 crore in FY14. Revenue has not grown linearly, falling to 11,707.8 crore in FY16 from 13,310.3 crore in FY14, but rising to nearly 15,000 crore in FY18. Hence, the $6 billion mark is still a long way off.

Globally, Apollo is ranked 16th by revenue, according to Tyrepress, an industry-specific journal.

An Apollo spokesperson denied having a specific revenue target.

The company’s 2020 vision is to become the “clear leader in every segment" in the domestic market and to develop a “premium proposition" in Europe, the spokesperson said in an e-mailed response to queries.

To be sure, analysts cite rising natural rubber prices and the emissions scandal at Volkswagen AG as adverse headwinds. The European market contributes about 20% of Apollo’s revenue. India, where the ride has been smoother, contributes about 60% of consolidated revenues.

“Going by the operating performance, Apollo has done well, especially given the challenges it faced over the years," said Mohammad Shaukat Ali, an analyst with Quantum Securities Ltd.

Having set up a global team in the UK and the Netherlands, Apollo is now building a “dedicated" team for the north American market, with an R&D function in mind as well, said the spokesperson, adding overseas operations India are “vital" to “long-term growth and represent a major investment in Apollo’s future".

Closer home, things seem to have never looked better for Apollo. With six plants running at full capacity, Kanwar cites limited production capacity as the only issue.

It has therefore earmarked 3,800 crore over the next three years to build a new factory in Andhra Pradesh starting 2020. Overall, it is planning a total capital expenditure of 6,500 crore during this period, including to expand capacity at its plants in Hungary and Chennai.

“We are confident with our current trajectory, and convinced that we will climb the global rankings as we drive the business forward," the spokesperson said. “The last five years have seen sales growth, a stronger product offering and the development of an international footprint. What is clear is that investment in the business and in the brand since 2013 has ensured that Apollo is at a strong place to enjoy further success".

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