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Apollo Tyres' proposed acquisition of Cooper Tires is in rough waters, but if it does happen, it will mark the climax of a globalisation drive that began with the purchase of Dunlop South Africa in 2006. Apollo followed it by acquiring Dutch speciality tyre maker Vredestein BV in 2009 for an undisclosed sum.
The result has been India's largest and most globalised tyre company. During the year ended March this year, international operations accounted for 35 per cent of Apollo Tyres' revenue, a rare distinction in an industry where globalisation still means bulk exports that at best contributes 10 per cent to industry's revenues.
For Apollo Tyres' management, being global is a matter of achievement and the company flaunts this in its brand campaigns asking consumers to buy tyres that are manufactured and tested in three continents. This way it hopes to attract top-end customers who increasingly drive global brands that have set up shops in India in recent years. This has surely raised the profile of Apollo Tyres, but has not set the cash registers ringing as yet. Rather it seems to be losing the battle for the supremacy of the lucrative domestic market to an unlikely competitor MRF. Apollo wants to be among the world's top-10 tyre makers in the next three years. MRF is not willing to share its plans for next year and refused to talk despite repeated phone calls and emails.
The reticence, however, betrays its aggression on ground. The Chennai-based tyre maker is now India's fastest growing and most profitable tyre maker, beating its peers on almost all financial parameters. In the last five years, MRF revenues have grown at compounded annual rate of 20.2 per cent, faster than closest rival Apollo Tyres, which grew at 17 per during the period on a standalone basis. MRF's profit growth has been even faster. From FY08 to FY13, MRF's operating profit (on standalone basis) expanded at an annualised rate of 26 per cent, against 15.7 per cent growth reported by Apollo Tyres during the period. MRF's net profit during the period expanded at a rate of 29.6 per cent against 8.4 per cent growth recorded by Apollo Tyres. MRF is not only growing faster but widening its lead over Apollo Tyres. (See chart)
He also highlights the difference in their product portfolio. "(Unlike MRF) we are not present in the two and three-wheeler category, which is a sizeable chunk of the market; hence this comparison would be unjustified. In many other categories, we have leadership position, which we are looking at consolidating further," says Satish.
For analysts however MRF's diversified product portfolio with presence across the vehicle category is one of its biggest competitive strength besides its brand equity in the replacement market. "MRF has a strong brand loyalty in the replacement market that enables it to charge a premium over peers. It gets nearly three-fourth of its revenues from the replacement market that is more profitable," says G Chokkalingam, managing director & chief investment officer, Centrum Wealth Management.
A strong foothold in the aftermarket helped MRF to make the most of the automotive boom in India. A passenger car require new set of tyres every three to four years while commercial vehicles sales need a new set almost every year. A boom in new vehicle sales translates into a boom in aftermarket with a lag of few quarters. MRF made the most of it with its calibrated investment in branding and sales & distribution. "MRF is one the most recognised brands in the industry and has one the widest distribution network in the industry," says Devang Mehta, senior vice president and head equity sales at Anand Rathi Financial Services.
In last three years, MRF has steadily stepped its brand spend and is now the biggest advertiser in the industry. During its latest fiscal year ending September 2012, MRF spend Rs 120 crore on advertisements, two and half times jump over three years. In contrast, Apollo's advertising budget shrunk to Rs 95 crore in FY13 from Rs 154 crore in FY09. It complemented this by stepping up brand visibility on the ground by opening a chain of exclusive MRF T&S (tyre and sales) stores across all cities. Designed like a modern store with all creature comforts, T&S stocks the entire range of MRF tyres and employ company trained technicians to provide the entire gamut of tyre and wheel related services that the owners of modern cars require. Set-up under franchisee model, the company now has nearly 400 T&S nationally and over two-dozen in Delhi NCR region itself, the country's largest passenger car market.
Competitors are finding it tough to copy the MRF model given its diverse product portfolio. "MRF can assure higher volumes and revenues as it has strong presence in the two and three-wheeler segment besides its large presence in cars and commercial vehicle tyres," says a senior executive at a competing tyre company.
"The two and three-wheeler segment has grown the fastest in last three years and MRF controls over a quarter of that market. This provides it with steady revenues and profits," says Chokkalingam. Strong presence in the two-wheeler market also enables MRF to lock-in customers for life. "If a customer likes the brand and the service, she may start by using MRF two-wheeler tyre and stick with the brand when she upgrades to cars and SUVs. This luxury is not there for many of its competitors such as Apollo, JK and Bridgestone who only make four-wheeler tyres," says a tyre dealer who runs a multi-brand outlet in Delhi.
MRF's biggest competitive edge however seems to be its superior balance sheet and the best credit rating in the industry. Apollo however doesn't find this to be of any significance to its growth plans in India. "Apollo is comfortably placed, in terms of capacity, to service the demands from all three market segments - OEs, replacement market and exports. We have added market shares consecutively for the last three quarters," says Apollo's Satish.
But the stock market seems to be more bullish on MRF, with its market capitalisation nearly twice that of Apollo despite the latter having a larger revenue globally.
