'We want to see profitable growth'

SMART TALK/ Neeraj Kanwar & Sunam Sarkar, Apollo Tyres

Fiscal 2006 has been a historic year for Apollo Tyres with revenues touching a billion dollar.

Thanks to the acquisition of Dunlop Tyres, South Africa last year, the company recorded consolidated sales of Rs 4299 crore, up 63.46 per cent y-o-y. Consolidated net profits went up 31.63 per cent at Rs 117 crore, however, earnings were largely driven by Indian operations which exhibited a growth of 45 per cent. Overall, the performance looks commendable given that last year was not a particularly good year for the tyre industry with rubber prices hitting an all-time high.

With a keen eye on its profitability, Apollo is now readying itself to address foreign markets to double revenues in the next three years. Neeraj Kanwar, joint managing director and chief operating officer, and Sunam Sarkar, chief of corporate strategy talked about the company's future plans. Edited excerpts:

Overall, the numbers for this year have been encouraging. What next?

Neeraj Kanwar: It is a milestone achievement for us in our journey to becoming a global organisation.

It gives us a great motivation to achieve the next billion, which we target to do within the next three years. Our performance has been powered by our Research and Development (R&D) efforts which has helped us launch new products like high speed tyre, high performance tyres, fuel saving tyres and so on.

Since these products enjoy better margins, we have been able to achieve better realisations. Last fiscal, revenues grew by 25 per cent, of which, nine per cent came from volumes growth and 16 per cent from realisations, much of which is due to a richer product mix.

Just to give you a flavour of the pace of our growth, on the car radial side, the industry grew at seven per cent while we grew at double the rate at 15 per cent. In our own pie, earlier car radials constituted about five per cent of revenues, and now it is about nine per cent.

In this segment, we are the second largest in terms of volumes and also the largest exporter. We have launched bus and truck radials only a few months back so it is still very small. But this again is growing fast and will easily double itself every year.

Looking ahead, we are on course to achieve sales of two billion dollars by 2010. To put that in perspective, we took 30 years to achieve the first billion dollar and we are targeting the next billion in three years.

How do you plan to achieve this target?

Kanwar: We know two activities well "� manufacturing tyres and marketing them. And we will continue to do that well. We are a billion dollar company and if we need to grow we obviously need to look outside India.

Our focus is predominantly the replacement market. So we have identified the markets where we want to be in, which includes South-east Asia, South Africa, India and Europe.

Meanwhile, good performance is coming out of South Africa. Currently, Europe constitutes 16 per cent of revenues for our South African operations. So far, all our efforts have been centered around entering the European market.

We are a R&D led company. Our approach is to focus on product technology, and then build a robust distribution network, and then create a customer base.

Currently, we are working on product offerings for the European market. We are setting up separate competency centres for various product segments which will cater to the entire organisation across plant locations and markets. Currently, we are spending about one per cent of sales on R&D and we will increase it in future.

The other thrust area is global OEMs (original equipment manufacturers). In India, we are partners with all the major auto manufacturers. Recently, General Motors chose us as their sole supplier for their small car Chevy Spark which also happens to be the first small car to be launched with tubeless tyres. General Motors has also asked us to quote for other markets like South Africa and South Korea.

Do you see a huge global outsourcing opportunity for tyres, like in auto ancillaries?

Sunam Sarkar: There is one critical difference between tyres and auto ancillaries.

Typically, about 80 per cent of the revenues for the tyre industry comes from the replacement market, unlike auto ancillaries which have to supply mainly to OEMs beacuse they seldom have their own brands. So is not such a big attraction for us to service OEMs since we can get better margins by selling in the replacement market.

Besides, tyre manufacturing in our country is not as competitive as auto ancillaries. Two factors govern this; one is that ancillaries are much more engineering-oriented where our low labour cost helps and the second thing is that we have an unfavourable duty structure for tyres. Thus, if there is a need, we can always look at putting up plants outside India.

Given that we are now comfortable running a manufacturing operation even outside the country, we see no reason why we should not be able to service a global customer from any global location.

Kanwar: In India, we are the leaders in topline and bottomline. In terms of profitability, we are better than our nearest competitor by at least by 250 basis points.

Among global payers, we are in the top 85 per centile as far as profitability goes. The fact remains that globally there are large volume players while we are still very small. But one thing we keep in mind, and that is why we are the most profitable company, is that whoever we attack we need profits in the balance-sheet. We want to see profitable growth, then, expansion will follow.

What is your strategy to counter imports?

Sarkar: Import of second hand tyres has not impacted new tyre sales. That is because the Indian consumer has become more conscious of the safety and quality standards over the past few years.

But in new tyres, imports from China are increasing. They continue to be prevalent in the low-quality-low-value segment and account for nine per cent new tyre sales in the commecial vehicles segment. While Chinese manufacturers sell tyres at attractive prices in their local market, their selling price in India does not even cover the cost of raw material.

Essentially, they use their domestic sales as subsidy to letting off their excess capacities. In the passenger car segment, imports are at the higher-end of the market. We would continue to focus on the product side to protect our turf.

How much growth do you expect this year?

Kanwar: Our plants are currently running at 98 per cent capacity. So we are spending about Rs 70 crore for capacity enhancement and de-bottlenecking.

We have been growing at 18 per cent in the past five years and you will see similar growth coming in this year also. We will achieve this growth rate, otherwise, we will not be able to achieve our two billion dollar by 2010.

How about raw material prices?

We have seen a huge rise in raw material prices. I don't see it is going as high as in the first quarter of last year. Two years ago rubber was at Rs 60 per kg and now it is at Rs 95 per kg. But we derive solace from the fact that it has declined from the peak of 120 per kg last year.

Do you see good opportunities for a large take-over in the overseas market?

While we are ambitious, we have to see what we can digest. Considering that margins in the industry are not too high, we would not like to bet the house on something that is risky.

Having said that, there has been significant consolidation in the tyre industry globally. The top three players Bridgestone, Michelin and Goodyear command a 70 per cent market share. So big acquisitions may be difficult to come by.