Apollo Tyres (APL) has circulated an investor PPT setting performance goals for FY 26.
- $5bn Revenues
- 15% EBITDA
- 12-15% ROCE
- Net debt/ EBITDA < 2
Headline numbers definitely seems exciting. Reasons –
- Revenue target of $5bn (i.e., approx Rs 40,000 crore) is twice of FY 22 revenues i.e., double within 4 years.
- EBITDA target of 15% is a significant improvement compared to 12% reported in FY 22.
- 12-15% ROCE is excellent compared with 6% of FY 22 and within a good range of ROCE targeted by investors.
- Debt servicing is predicted to remain comfortable (Net Debt/ EBITDA was 1.8x in FY 22)
How Company plans to achieve these improvements?
Above enablers to me are broad. One would expect any Company to focus on these.
What I was looking for was something more concrete.
Yes, committing to targets is important and it does help in putting things in correct perspective both internally and externally.
However, for these kind of significant targeted improvements, I would have expected more focused actionables.
- Doubling of revenues in 4 years implies a CAGR of 19% p.a. Compared to this, the Company grew at a CAGR of 6% in the last 10 years and 10% in the last 5 years. With current tailwinds in the auto sector, expected growth will possibly be good in the short term. However, continuously growing at 19% for 4 years might need something more drastic – especially given the aggressive competition in the tyre segment.
- ATL’s average EBITDA margins in the last 5 years varied between 11-12%. Targeted levels of 15% is not going to be easy given the inflationary pressures in the short term. Inflation does allow companies to increase selling prices. However, unlike a typical consumer company, lot of that increase is reversed for companies like ATL when inflation subsides. Sustained improvement in margins therefore might need shift towards higher value added products and/ or getting into lesser price sensitive markets.
ROCE and debt servicing would mostly depend upon revenues and margins and hence no point in separately speculating around the same.
Should I buy based on the announced targets?
To me, announced targets is only an effort by the Company to keep the interest alive in an otherwise muted market environment.
From ATL’s perspective, it helps to make itself accountable.
However, as an investor it doesn’t add much to my analysis about the business.