New Delhi: Onkar Kanwar, Chairman of Apollo Tyres, had declared at the Annual General Meeting of the company last year that Apollo had no plans of setting up greenfield manufacturing facilities in India anymore. Instead, the idea was to consolidate existing facilities and tackle “bad” costs by maximising asset utilisation and minimising investments.
Kanwar’s thoughts have indeed been put into action, as ATL saved INR 400 crore or nearly INR 1.1 crore daily from the earmarked annual capital expenditure in 2023-24 through use of Machine Learning and Artificial Intelligence.
ML and AI in tyre manufacturing? Yes, you read right. As the demand scenario for various types of tyres fluctuated, Apollo decided to get smart about capital investments to not just save costs but also maximise bang for the buck. While the capex announced at the start of the fiscal year was INR 1100 crore, only INR 700 crore was actually deployed. The use of AI and ML helped Apollo remove manufacturing bottlenecks and achieve better efficiencies at lower spends.
Take the case of passenger vehicle tyre capacity, which was increased from 68,000 per day to 73,000 per day at no additional cost. Using IoT, the company has connected most of the production machines at its facilities to the cloud to create a data lake; this data is analysed using AI and ML. This single data lake, which is underpinning all of ATL’s AI and ML initiatives, together with a set of digital innovation centres in different locations is the key to maximising asset utilisation while minimising capex.
For 2024-25 too, ATL has a modest capex guidance of INR 1000 crore. Will this number again see a downward revision? Vice Chairman and MD Neeraj Kanwar has said during multiple investor calls that Apollo has had a heavy capital- intensive cycle in the last decade, setting up large manufacturing capacities in Chennai, Hungary and in Andhra Pradesh. As on date, the company has seven facilities in all, of which five are in India and one each in Hungary and the Netherlands.
According to analysts, Apollo is currently using about 75% of its installed capacity across all manufacturing facilities, which means about a quarter of the capacity is lying idle. The company is unlikely to spend substantially on capex unless capacity utilisation moves up further.
“Gradually, capex intensity has been moderating as the company has been focussing more on capacity utilisation, strong balance sheet and high levels of profitability. In the medium term, the company plans to cater to Indian markets through its Indian plants, European markets through Indian and Hungarian plants and the US market through Indian as well as European plants,” said a Mumbai-based brokerage. Judicious capex spending has received a thumbs-up from most analysts tracking the company.
So not only is it not contemplating any new facilities for now, Apollo will focus on profitable growth instead of overall market share, in a bid to achieve 15% RoCE (return on capital employed). In the Indian market, for example, the company is strategically moving away from lower rim sizes towards higher rim sizes in tyres since the latter are more profitable. During the call with analysts after the March quarter results last month, Kanwar also said that 10-15% higher productivity can be achieved from the existing equipment across ATL facilities through the use of AI and ML without fresh investments.
Apollo is being cautious on capex due to muted volume growth expectations, which have been “behind initial expectations with general market conditions being quite tough”. But having said that, Apollo is not averse to increase capacities where needed, with Chief Financial Officer Kumar pointing that the capacities for passenger vehicle tyres are already at about 80% utilisation and if current demand increase expectations come true, a small capacity addition would be done.
Cautious optimism on demand
Apollo retains a cautious optimism on demand for tyres this fiscal. In India, the company expects the demand to pick up post elections. In April, double digit growth has already been seen in demand for passenger car and commercial vehicle segments while demand for tyres from the agriculture sector is picking up. Kanwar said that even in Europe, there should be an improvement in demand this fiscal over the previous one.
The brokerage quoted earlier said that ATL has been constantly working on cost savings and the whole focus has been on enriching the product mix. Also, an ‘upsizing’ of the tyres in India and Europe is supporting ATL’s pursuit of profitability; ATL is a price leader in the domestic passenger vehicle tyre segment and has been competing with premium brands in the domestic market via the Vredestein range of products. The continuous increase in radialisation in the domestic commercial vehicle market also augurs well for ATL’s profitability.
