Apollo Tyres will expand capacity by 10 per cent from the current 850 tonnes a day, Sunam Sarkar, head of corporate strategy and marketing, said in a phone interview on Tuesday. Seventy-eight per cent of Apollo's sales come from drivers replacing worn-out tyres, Sarkar added.
The domestic passenger car sales doubled in the past six years as economic growth boosted the demand in Asia's fourth largest vehicle market. Demand for new and replacement tyres may gain further as General Motors, Nissan and other automakers plan to invest a combined $6 billion (Rs 24,000 crore) in setting up Indian facilities.
"We will get the benefit of the last four-five years of high growth as vehicle owners replace tyres," Sarkar said. Sales in the year started April 1 will grow 16 per cent from the Rs 4,700 crore achieved in the year ended March 2008, Sarkar said. A year earlier sales increased 9 per cent. Sarkar declined to project net income for this year.
Apollo will generate most of the cash for investment internally, while some will be raised through debt, Sarkar said. The factories located in Gujarat and Kerala will be expanded as the company expects sales to rise faster this year than a year earlier, Sarkar said.
Sales of cars, buses and trucks in India totaled more than 2 million last year as the country's economy has grown at an average 8.7 per cent a year since 2003, the fastest pace since Independence. That growth has enticed truckmakers such Daimler, Volvo, MAN and Navistar International to set up ventures in the country.
Still, the country's economy may post its slowest pace of expansion in four years in this financial year as a global slowdown hurts foreign investments and exports. Inflation, that's accelerated to a 3 and 1/2 years high, and rising interest rates is also likely to dampen demand. Industrial output in March rose by 3 per cent, the slowest since 2002.
"Even if there is a slowdown in demand for new tyres, the demand for replacements will continue to grow,'' said S Ramnath, director of research at IDFC Securities, which has a "buy'' rating on the Apollo stock.
Apollo Tyres, which has dropped 21 per cent this year, rose 0.2 per cent to Rs 42.5 on the Bombay Stock Exchange yesterday. Michelin, the world's second largest tyremaker, owns 11.7 per cent of Apollo, according to Bloomberg data.
Apollo will be able to maintain its profit margin in this quarter if natural rubber prices hold at current levels, Sarkar said. Raw materials account for about 70 per cent of the price of a tyre.
Natural rubber has gained about 27 per cent this year till May 12 to Rs 118 a kg for ribbed, smoked sheet 4 grade in Kerala, the southern state that produces more than 90 per cent of the commodity in India.
The commodity's price is expected to fall as much as 9 per cent in the next six months, Sandana Dass, managing director of R1 International, the world's largest natural rubber trader, said on May 9.
"In April, we increased our tyre prices by about 5 per cent,'' Sarkar said. "That should help us offset the increase in raw material prices.''
The company is also setting up a new tyre plant in Hungary and another in Chennai.
