AN ANALYSIS AND EVALUATION OF FINANCIAL AND

BUSINESS PERFORMANCE OF APOLLO TYRES LIMITED

01 APRIL 2016 – 31 MARCH 2019

BSc (Hons) in Applied Accounting

Oxford Brookes University

ACCA Registration No: 4098281

Submission period: 40

Word Count: 7497

Table of contents
Part 1 - Project objectives and overall research approach..........................................................................2
1.1 Rationale for choosing the topic........................................................................................................2
1.2 Rationale for choosing the industry and organization.......................................................................2
1.3 Project aims, objectives and research questions...............................................................................3
1.4 Overall research approach.................................................................................................................3
Part 2 – Information gathering and accounting / business techniques.......................................................4
2.1 Sources and methods of information gathering................................................................................4
2.2 Limitations of information gathering.................................................................................................4
2.3 Ethical issues......................................................................................................................................5
2.4 Accounting and business techniques used and their limitations.......................................................5
2.4.1 Ratio Analysis..............................................................................................................................5
2.4.3 SWOT Analysis............................................................................................................................6
2.4.5 Porter’s Five Forces.....................................................................................................................7
Part 3 - Results, analysis, conclusions and recommendations.....................................................................8
3.1 Analysis of financial performance......................................................................................................8
3.1.1 Profitability Ratios......................................................................................................................8
3.1.2 Liquidity Ratios.........................................................................................................................14
3.1.3 Risk Ratios.................................................................................................................................15
3.1.4 Efficiency Ratios........................................................................................................................16
3.1.5 Investors’ Ratios........................................................................................................................17
3.2 Analysis of Business Performance...................................................................................................19
3.2.1 SWOT Analysis..........................................................................................................................19
3.2.2 Porters’ Five Forces...................................................................................................................22
3.3 Conclusions and Recommendation..................................................................................................24
3.3.1 Financial Performance..............................................................................................................24
3.3.2 Business Performance..............................................................................................................24
3.3.3 Recommendation.....................................................................................................................25

Research ReportApollo Tyres Limited 1

Part 1 - Project objectives and overall research approach
1.1. Rationale for choosing the topic
The topic I have selected for my research is topic 8; an analysis and evaluation of business and financial
performance of an organization over a three year period.
This topic gives me the opportunity to apply the knowledge and skills gained through ACCA journey in a
real life scenario, which will assists me to further enhance my analytical and evaluation skills. In addition,
it gives me a platform to carry out detailed research within the limitation of the project without losing
focus on research objective and questions. Furthermore, it ensures the availability and convenience of
relevant data through different sources to carry out a suitable research. For the aforementioned reasons
I chose to go ahead with this topic.

1.2. Rationale for choosing the industry and organization

After careful analysis of the sectors, I have chosen to go ahead with Tyres from Automobiles & Parts.
Out of the sectors available, automobiles & parts is the only manufacturing based sector which would
enable me to conduct an effective research on the topic area selected, unlike a service based sector
which is more subjective to qualitative aspects. This is the key reason for my decision to go ahead with
this particular sector.
The process of selection of a suitable company is the most critical part of this research, hence tyre
industry of different countries were carefully analyzed. It was observed that tyre industry in India is
growing at a noticeable phase and contributes significantly to the overall auto sector, which grabbed my
attention. After thorough analysis of the key players in the Indian tyre industry, I have chosen to go
ahead with Apollo Tyres Limited hereinafter referred as “Apollo Tyres”.
Established in 1972, Apollo Tyre is one of the leading tyre manufacturers in the world which markets and
sells its product globally under the key brand names “Apollo” and “Vredestein”. The company is listed in
Bombay Stock Exchange and National Stock Exchange of India. At end of financial year 2019, company
employed 17,200 employees and recorded a revenue of $2.48bn (Apollo Tyres Ltd, n.d). Apollo Tyres
being a well-established publicly listed company with a dominant market presence both in India and
globally, this was an easy choice to make.
As a competitor JK Tyres & Industries Ltd is chosen, hereinafter referred as “ JK Tyres”. JK Tyre is part of
JK organization and is amongst top 25 manufacturers in the world (JK Tyre & Industries Ltd, n.d).

Research ReportApollo Tyres Limited 2

1.3. Project aims, objectives and research questions
The research project aims to answer the following questions at the end of the project.
1. How has Apollo Tyres performed financially over the past three financial years?
2. What is the current state of tyre market in India and where in the industry does Apollo Tyres fits
in?
3. What are the strengths and weakness of Apollo Tyres and how can Apollo Tyres overcome its
weaknesses in future?
4. What are the opportunities available and threats faced by the company and what can the
company do to exploit opportunities and mitigate the threats?
The overall objective of the research project is to use suitable financial and business models to evaluate
the financial and business performance of Apollo Tyres over the past three years. In order to achieve
this, the overall objective is broken down into the following specific objectives.
1. Analyze the financial performance of the Apollo Tyres to determine the areas of financial
weaknesses and strengths over the years and against the competition
2. Analyze the current state of the Indian tyre industry and determine the competitive position of
Apollo Tyres
3. Evaluate the strengths and weaknesses of the Apollo Tyres and propose recommendation for
possible improvements
4. Evaluate the opportunities available for exploitation and threats faced and give recommendation
to exploit the opportunities and mitigate the threats.
1.4. Overall research approach
After going through all the available topics, for the reasons discussed above the topic, industry and the
company was selected. Research questions were then developed based on which specific research
objectives were set.
This research is solely based on secondary sources of information due to the nature of the topic chosen,
time constraints and difficulty in obtaining the primary source of information. Secondary sources of
information such as annual reports, company website, online articles, newspapers, magazines etc. has
been used to gather information. In gathering information from various sources, the reliability of
information has been closely monitored.
By selecting appropriate ratios, quantitative analysis is carried out for key financial aspect of the Apollo
Tyres to evaluate the performance over the period and against the competitor. Porter’s Five Forces were
used to determine the state of tyre industry in India and together SWOT qualitative analysis was carried
out to evaluate the business performance of the company. Results from analysis is used to draw suitable
conclusions and give recommendation at the end of the project. These were carried out in order to meet
the objectives set above.
Throughout the research project, greater importance has been given for proper citation and referencing
to credit other peoples’ ideas and work.

Research ReportApollo Tyres Limited 3

Part 2 – Information gathering and accounting / business techniques
2.1 Sources and methods of information gathering
Sources of information can be broadly classified into primary and secondary. Primary sources are original
documents of an event or discovery such as interviews, surveys etc. whereas secondary sources offer an
analysis or restatement of primary sources such as articles, textbooks etc. (University of Michigan-Flint ,
n.d)
Secondary sources described below are used in obtaining information for the project;
 Published Annual Reports: Annual reports of Apollo Tyres and JK Tyres obtained from Bombay
Stock Exchange were widely used in research process. Data from the audited financial statement
were used to calculate the ratios. Further, information from Chairman’s report and Director’s
report were particularly helpful in understanding the milestones achieved by the parties.

 Market Reports: Industry reports published by experts such as Seconded European

Standardization Expert for India and The European Automobile Manufacturers' Association are
used to determine the state of the Industry in the major markets.

 Company Website: This was particularly helpful to get an overview of the company, the
products offered and understanding the geographical presence of the Apollo Tyres and the
competitor. Further press releases published helped to understand the events occurred during
the periods and results of the performance in shorter time frame.

 Newspaper, magazines and online articles: Newspapers and articles available online helped to
understand the challenges faced by the industry, the interventions into the industry by
government and other external events affecting the players in the market.

2.2 Limitations of information gathering

As previously stated primary data were excluded, which itself is a limitation to the amount of and quality
of information gathered. In addition, using secondary sources of information has its’ own limitations,
some of which are described below;
 Reports from famous national industry bodies such as Automotive Tyre Manufacturers’
Association and Society of Indian Automobile Manufacturers, were not available accessible for
free. This limited availability of reliable information.
 Most of the industry reports on major markets were outdated and mostly includes projections
for the periods of the research rather than actuals.
 Contradicting information on similar events were observed which posed difficulty in obtaining
accurate information.
 Due to the abundance of information available a lot of time was consumed to get the specific
information required for the project.

Research ReportApollo Tyres Limited 4

 (Thompson, 2017)

2.3 Ethical issues

The sole dependency on the secondary sources of information limited the ethical issues faced to
falsification of data and plagiarism. In order to avoid falsification, the information were thoroughly
studied in the context of the research conducted by the authors and made sure information is accurately
presented. In order to avoid plagiarism, Harvard Referencing Guide was studied and made sure proper
referencing and citation is given wherever required. Throughout the research process ACCA code of
ethics and conduct is adhered to my best of ability.

2.4 Accounting and business techniques used and their limitations

2.4.1 Ratio Analysis
Ratio analysis is used for the purpose of determining the financial performance of Apollo Tyres over the
research period by identifying trends in ratios and comparing against the competitor. This a common
tool used by external analysts to analyze the various parts of financial information presented in the
financial statements of a company.
Financial ratios can be categorized as follows. The ratios used under each category for research
purposes of this project is included in the table below.
 Profitability ratio: Profitability ratios measure a business’ ability to earn profits compared to the
revenue, expenses, assets or capital invested.
 Efficiency ratios: Efficiency ratios indicates how well the company is utilizing its assets and
liabilities to generate revenue and profits.

 Liquidity ratios: These ratios measures the company’s capacity to pay its' debt commitments
when they fall due.

 Solvency ratios: These ratios compare the company’s financial viability in the long run.
 Investors’ ratios: These ratio helps Investor to estimate the growth of their investments.
(Corporate Finance Institute, n.d)

Profitability Ratios Investors’ Ratios

 Gross Profit Margin  Earnings Per Share
 Operating Profit Margin  Dividends Per Share
 Return on Equity  P/E Ratio
Liquidity Ratios Efficiency Ratios
 Current Ratio
 Inventory Days
 Quick Ratio
 Receivable Days
Solvency Ratios
 Payable Days
 Gearing (Debt/Total Debt & Equity)
 Cash Operating Cycle
 Interest Cover

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 Limitations of the ratio analysis
 Figures in a financial statements may be aggregated differently in different periods, hence
comparing ratio over the years may not show an accurate picture.
 Different accounting policies from company to company or period to period in recognizing
income and expenditures is not accounted in ratio analysis, making the comparison bias.
 Ratios do not reflect the effects of inflation meaning that numbers are not comparable across
the periods.
(Bragg, 2019)

2.4.3 SWOT Analysis

For the purpose of analyzing the business performance of Apollo Tyres SWOT analysis used. SWOT is an
acronym for Strengths, Weaknesses, Opportunities and Threat. This technique analyses the
aforementioned four aspects of the business to help reduce the odds of failures by identifying
weaknesses within the organizations and eliminating external threats. A brief description of each aspect
is included below;
 Strength: These are the factors that the organization has clear advantages over its’ competitors
such as competent workforce, cost-efficient manufacturing process, access to supply chains
etc.
 Weakness: Weaknesses are the internal factors within the organization that prevents achieving
the organizations’ aims and objectives. This may include outdated systems, poorly written
procedures etc.
 Opportunities: These are external situations which can arise in the form of developments in
the market or development in technologies.
 Threats: These are external factors beyond the control of the organization which can adversely
affect the performance such shortages in supply of raw materials, shift in consumer demand
etc.
(Emerald Works, n.d)

Limitations of the SWOT analysis

 The quality of a SWOT analysis depends on the quality of information used. For instance analysis
based on the views of already existing people within the organization may not be fully accurate
and many aspects may be overlooked.
 SWOT analysis tend to oversimplify the type and extent of strengths, weaknesses, opportunities
and threats faced by the company. Sometimes it’s difficult to classify a situation into one
category for example depending on circumstances a strength sometimes can be viewed as a
weakness. Further, it provides no mechanism to identify complexity and seriousness of a
situation and rank them accordingly.

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 (Magloff, n.d)

2.4.5 Porter’s Five Forces

In order to analyze the state of tyre industry in India and position of Apollo Tyres in the market, Porters’
five forces is used. This model was originally developed by Michael E. Porter in 1979 which helps to
understand the position of a business in relation to competition by analyzing five forces of the market
described below:
 Bargaining power of customers: This force determines the power and influence of the buyer
over the price and quality of the product or a services offered. Factors such as larger customer
base, differentiate products, high switching cost lowers the power in customers.
 Bargaining power of suppliers: This force examines the number of suppliers and level of control
they have over the future prices of raw materials and other resources that could put pressure on
the profitability of the company.
 Competitive Rivalry: This force examines intensity of the competition in the market by
considering the existing number of competitors and the power they can exercise.
 Threat of new entrants: This forces examines the barriers to entry into the industry such as level
economies of scale, access to raw materials, strong brand identity etc. Low barriers to entry
leads to high competition.
 Threat of substitutes: The level of this threat is analyzed through customer preference to
change and cost of switching to the competitors product or services in short-term as well as long
term.

(Martin, 2019)

Limitations of the Porter’s Five Forces

 Although quantitative analysis can be integrated into the model, it doesn’t have a built in
mechanism to do so, hence the model tend to ignore the quantitative aspects of the market.
Further, there is no guidance in ranking the factors in terms of their importance.
 Porters’ five forces model cannot be applied generally for companies with a diversified portfolio
operating in different industries and market. This would mean that the model needs to be
applied to individual market separately which can be a time consuming and costly exercise.
 Further, the model is viewed as too general analytical framework which simply provides a list of
factors for and against an organization and gives a starting point for a deeper investigation of
organizational performance.
(Konsyse, 2019)

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Part 3 - Results, analysis, conclusions and recommendations:
3.1 Analysis of financial performance
Consolidated financial statements of Apollo Tyres and JK Tyres for the Financial Year 2016/17, 2017/18
and 2018/19 hereinafter referred as “FY2016/17”, “FY2017/18”and “FY2018/19” respectively is used for
the ratio analysis. The financial year of both companies starts from 01 st April and ends on 31st March.
Adjustments done to the financial classifications for the purpose of ratio calculations are included in the
Appendix 1

3.1.1 Profitability Ratios

Revenue

FY2016/17

Economic growth in India resulted a 6.8% growth in auto industry particularly due to growth in
Passenger Vehicle (PV) and Two Wheeler segment (Society of Indian Automobile Manufacturers (SIAM)
cited in Apollo Tyres Ltd, 2017). The trend is reflected in tyre industry with a higher volume growth of
12% (Automotive Tyre Manufacturers’ Association (ATMA) cited Apollo Tyres Ltd, 2017). Tyre market in
Europe segment too reflected gains of the automobile industry which showed an increase of 14.6 million
new passenger car registrations (Apollo Tyres Ltd, 2017). The company achived an 11% growth which in
reflection of postive trends in the tyre markets.

FY2017/18

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Automobile industry of India grew by 14.8% during period reaching an annual production of 29.08
million (Seconded European Standerdisation Expert in India (SESEI), 2018). The Indian tire industry
showed a similar trend, for instance Commercial Vehicle (CV) tyre segment grew by 19% compared to
19.9% CV auto segment. (Apollo Tyres Ltd, 2018) Revenue of Apollo Tyres increased by 12% for the
period on the back on positive industry growth.

FY2018/19

During the period Apollo Tyres achieved an 18% growth compared to industry growth of nearly 11%. CV
tyre segment which accounts the highest value in the industry recorded growth rate of 16%. (ATMA
cited in Apollo Tyres Ltd, 2019). In the later part of financial year range of fuel-efficient tyres for CV
segment first of its’ kind in the industry was introduced by Apollo Tyres. In addition to doubling its’ CV
zones, the company conducted over 100 engagement activities with fleet owners and strengthened its
relationship with large- and medium-fleet operators. The focus on this segment contributed largely to
the above industry growth rate. (Apollo Tyres Ltd, 2019)

Comparison to JK Tyre

Revenue growth of Apollo Tyres in FY2016/17 and FY2017/18 is higher compared to JK Tyres. However
in FY2018/19, JK Tyres achieved a higher growth compared to Apollo Tyres. The principal factor for the
performance is the significant increase in capacity utilization in the acquired subsidiary Cavendish
industries which resulted 39% increase in revenue. (JK Tyre & Industries Ltd, 2019)

Gross Profit Margin

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Raw materials cost accounts for 60% to 65% of the revenue in the industry, out of which natural rubber,
synthetic rubber and crude derivatives contributes to 80% to 85% of the total raw material cost (Sajita,
n.d).

FY2016/17 to FY2017/18

The Organization of the Petroleum Exporting Countries (OPEC) came to an agreement to limit the
production of oil in an attempt to increase the price. The initial agreement came into effect from January
2017 which secured a cut in production to 32.5 million barrels per day from 33.8 million barrels per day
(Meredith, 2016). The production cuts continued among OPEC and non-OPEC members which lead the
Brent oil prices crossed the psychological mark of $70 per barrel in the month of January 2018. (Apollo
Tyres Ltd, 2018).

The natural rubber production shortage in India caused the prices to remain consistently high
throughout the period. Further, in an attempt to shore up the prices major rubber producing countries
of Thailand, Indonesia and Malaysia moderated the exports which lead the prices of rubber to increase.
(Apollo Tyres Ltd, 2018).

The overall raw material cost during the period increased by 22% compared to the revenue growth 12%
which lead to lower gross profit margin in FY2017/18 compared to FY2016/17 (Figure 3)

FY2017/18 to FY2018/19

The production-consumption gap of natural rubber in India stood at 3.16 lakh tonnes in the first 10
months of FY2017/18 which spiked to 4.63 lakh tonnes in the same period of FY2018/19. As a result, the
domestic rubber production was able cater 55% of the industry requirement with the rest met by
imports which has gone up by 30%. (ATMA cited in Mishra, 2019).

The state of Kerala which contributed to 80% of the India’s natural rubber production suffered a
destructive flood with an expected 15% deduction in production for the period. This has added pressure
on the existing supply shortage which lead to the price of the commodity to rise by 20%. The shortage in
supply are met by the imports which attracts 25% custom duties (Money Control, 2018).

On average the oil prices have gone up by 39% and crossed the $80 per Barrel mark. Further, rupees
depreciated against dollars reaching as high as ₹73 per USD which impacted the import prices of raw
materials (JK Tyre & Industries Ltd, 2019).

The GP margin continued to decline but at a slower pace with a 1.4% drop during the period. The overall
cost of sales grew by 21% compared to revenue growth of 18%. (Figure 3)

Comparison to JK Tyres

Gross profit margins for both entities are falling due to a greater increase cost of sales compared to
revenue (Figure 3) but in comparison to JK Tyres Apollo Tyres has achieved higher margins in all the
periods.

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Research ReportApollo Tyres Limited 11
Operating Profit Margin

Operational costs contribution analysis under Figure 5 and the trend in both profit margins shown under
Figure 4 shows that effects described under gross profit is extended to the operating profit margins.

The gap in margins between two entities at gross profit level deteriorated at the operating profit level
which lead Apollo Tyres’ margins to fall at the same level as JK Tyres particularly due to the significant
differences in employee benefit expenses between the entities.
Operating Cost Employee benefit Expenses Depreciation & amortizations Other expenses
Financial Year 2016/17 2017/18 2018/19 2016/17 2017/18 2018/19 2016/17 2017/18 2018/19
Apollo Tyres 31% 34% 34% 7% 9% 11% 41% 42% 42%
JK Tyres 27% 28% 26% 9% 10% 9% 44% 51% 47%

Figure 5: Operating cost to Gross Profit (Data source: Apollo Tyres and JK Tyres Annual Report 2016/17, 2017/18, 2018/19)

JK Tyres is more efficient in managing the employee related cost and has successfully implemented its’
first-ever labour restructuring in its’ Mexican operation in FY2017/18 reduced the labour cost by a third.
In the same period increase in median remuneration of employees of JK Tyres was 9.69% compared to
16.59% of Apollo Tyres (Apollo Tyres Ltd, 2018) (JK Tyre & Industries Ltd, 2018). Adding to the problem
for Apollo Tyres is increasing labour cost in Europe segment due to the tightening labour market.

Research ReportApollo Tyres Limited 12

Return on Equity (ROE)

ROE of Apollo Tyres dropped from 15.1% in the FY2016/17 to 7.4% in the FY2017/18. This is as a result
fall in profit before exceptional items as shown in Figure 7 and share issue which lead a 34% increase in
total equity for the period compared to FY2016/17. With a 22% increase of growth in profits the ROE has
improved by 2% in FY2018/19.
In comparison to JK Tyres, Apollo Tyres performed better in FY2016/17 and 2017/18. The trend in ROE is
reflected in the growth in the earnings as shown below.

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3.1.2 Liquidity Ratios
Current Ratio and Quick Ratio

FY2016/17 to FY2017/18
During the FY2017/18 Apollo Tyres increased the investment in inter-corporate bonds to ₹9,750 million
with an additional investment of ₹9,250 million, which make up of 19% of the total current assets. The
increase in quick and current ration in FY2017/18 by 0.26x is mainly due to this additional investment.
(Apollo Tyres Ltd, 2018)
FY2017/18 to FY2018/19
During FY2018/19 ₹7,750 million of the inter-corporate bonds was matured and the balance ₹2,000
million with IL&FS Financial Services Ltd were written off. (Apollo Tyres Ltd, 2019). This lead to quick
ratio to fell to the same level of FY2016/17.
Inventory levels increased by 18% and while total current liabilities for the period dropped by 15%. As a
result, despite 100% fall in inter-corporate bonds current ratio dropped only by 0.03x
Comparison to JK Tyres
Current ratio of Apollo Tyres is higher compared to JK Tyres in all the periods. Notwithstanding to the
effects of investment made in inter-corporate bonds in FY2017/18 by Apollo Tyres, JK Tyres current
assets consists of more liquid assets which is reflected in the levels of inventory held by the parties as
shown in Figure 9.

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3.1.3 Risk Ratios

Apollo Tyres maintained a 31% gearing level in all the periods in comparison to average gearing levels of
70% by JK Tyres. In the FY2016/17 Apollo Tyres achieved a sound interest cover of 15x suggesting
interest is comfortability covered. Due to the fall in the operating profits in FY2017/18 the interest
covers dropped more than 50% to 7.2x. This however is much higher than the ratio of JK Tyres in the
same period which stood at 1.3x
The slower than expected deleveraging, low returns and coverage lead to increase in financial risk for JK
Tyres. As a result the credit rating agency CARE downgraded the rating on long term facilities to A
Negative from A+ Negative and short term facilities to A1 from A1+ (Jani , 2019)

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3.1.4 Efficiency Ratios

With cash operating cycle reaching its’ lowest of 57 days in FY2017/18 Apollo Tyres has managed its
working capital more efficiently compared to the competitor in all the periods. Contributing to this
performance is the significantly lower receivable days enjoyed by Apollo Tyres in which stood on
average at 31 days in comparison to 76 days by JK Tyres. This is the result of the strong distribution
network of the company and the control on it through forward vertical integration.
Short term demand/production forecast on weekly, monthly or fortnightly basis helped JK Tyres to make
decisions on real time inventory and to maintain optimum level of inventory at each location (Gupta,
2020). The sound inventory management system in place enabled JK Tyres to achieve a lower inventory
days compared to Apollo Tyres. On average inventory days were 30 days lower which helped to mitigate
the cash gap between the entities.
On the other hand, the gap in in the payable days between the entities is smaller in the FY2016/17 and
FY2018/19. This is as the result of higher bargaining power of the suppliers which limited the efficiencies
between the entities (Self-developed). With a 41% increase in trade payables by Apollo Tyres and a 4%
fall in trade payables by JK Tyres in the same period the payable days gap between the entities have
widened in FY2017/18.

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3.1.5 Investors’ Ratios

FY2016/17 to FY2017/18
On 10th October 2017, Apollo Tyres issued additional 63,025,210 shares of ₹1 each at a premium of ₹237
raising ₹14,844 million net of share issue expenses (Apollo Tyres Ltd, 2018). The issue resulted an
increase of weighted average number of shares to increase by 29,872,223 shares. In the same period
profit attributable to ordinary shareholder decline by 34% resulting 38% drop in EPS. Regardless of the
significant drop in EPS, Apollo Tyres declared the same rate of dividends declared in FY2016/17. As a
result the share price of showed a 35.68% increase at the closing date (Figure 14). The fall in EPS and
increase in share price lead P/E ratio to increase from 9.1x to 19.7x (Figure 15)
FY2017/18 to FY2018/19
The share issue above, resulted weighted average share capital to increase by 33,152,987 shares during
the period. The profit attributable to ordinary shareholder continued to decline but at slower rate,
resulting in EPS to further decline by 12%. Apollo Tyres increased the dividends by ₹0.25 per share
compared to the previous year, at the same time share price showed a negative growth of 15.93%

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(Figure 14). The result of greater fall in share price compared to EPS resulted P/E ratio to drop by 5%.
The share price and P/E ratio has nevertheless compared to FY2016/17.
Comparison to JK Tyres
In all the period under consideration, EPS and DPS of Apollo Tyres is higher compared to JK Tyres. The
shares of JK Tyres in the FY2017/18 are trading 50x more than it’s’ earnings and is observed to be over-
priced at the closing date as the price continued to fell throughout FY2018/19 despite the improvements
in earnings. Taken into account the above factor, Apollo Tyres has performed better in comparison to JK
Tyres.

Apollo Tyres JK Tyres

Description
FY2016/17 FY2017/18 FY2018/19 FY2016/17 FY2017/18 FY2018/19
Closing- High (₹) 213.00 279.50 235.70 136.95 163.50 99.70
Closing- Low (₹) 178.00 251.00 210.30 116.45 139.00 86.25
Average (₹) 195.50 265.25 223.00 126.70 151.25 92.98
Change YOY (%) 35.68% 15.93% 19.38% 38.53%
Figure 14: Share Price on BSE (Data Source: Apollo Tyres & JK Tyres Annual Reports 2016/17, 2017/18, 2018/19)

Research ReportApollo Tyres Limited 18

3.2 Analysis of Business Performance
3.2.1 SWOT Analysis
Strengths
 Strong Brand Name: After completing three years regional association with Manchester United
football club which helped to build brand visibility in more than 100 countries, the parties has
signed global sponsorship agreement for the next three years during FY2016/17 (The Hindu
Business Line, 2016). Further, in the FY2018/19 Apollo Tyres appointed the famous Indian
cricketer Sachin Tendulkar as the brand ambassador for a period of five years. (Tire Review,
2018)
 Extensive Distribution Networks: Apollo Tyres acquired one of the largest tyre distributors in
Germany Reifencom GmbH for €45.6 million. Reifencom GmbH operates 37 stores and service
centers across Germany and has online presence in Germany, France, Italy, Austria, Switzerland
and Denmark which will enable to improve mix of distribution channels across European
Segment (Bhargava, 2015). Apollo Tyres has 5,300 and 5,800 third-party dealers in India and
Europe respectively and a further 1,700 exclusive dealers in India (Live Mint, 2018)
 Continuous innovation through Research and Development (R&D): With two global research
and development centers in India and Netherlands, Apollo Tyre spends almost 2.5% of its’
revenue on Research and Development in line with spending by international companies
(Bhargav , 2019). Apollo Tyres introduced India’s first Zero Degree Steel Belted Motorcycle
Radial tyre for premium bikes which won the prestigious ‘Golden Peacock award’ in innovation
and service category. In addition to introducing 21 Truck-Bus tyre designs, the company has six
patent application in process during FY2018/19 alone (Apollo Tyres Ltd, 2019).
 Diversified portfolio: With a vision for 2020 ‘To be a premier tyre company with a diversified
and multinational presence’ the company added new territories in its’ key regions and entered
two-wheeler segment to become a full range tyre manufacturer. (Apollo Tyres Ltd, 2019)
Weaknesses
 Shortage of skilled labour and increasing labour cost: The decision to base the manufacturing
plant in Hungary is largely based on lower wage rates compared to other counties in Western
Europe. The significant brain drain led by the lower wage cost caused challenges in talent
acquisition in the country (Kanwar, 2016). The changing dynamics of the Hungarian labour
market would create further problems in terms of higher labour cost.
 No presence in the Three-Wheeler segment: With an increase in exports by 49%, Three-
Wheeler segment reported a growth of 24% in sales in FY2018/19. This is an increase by 2.46
lakh units compared to FY2017/18 which stood at 10.22 lakh units (Ravichandran, 2019)

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  Inability to pass the increasing raw materials cost to customers: Chairman of ATMA and
President of Asia Pacific Middle East Asia (APMEA) segment at Apollo Tyres stated that
companies tried to pass the increase in raw material prices on to customers but were not fully
observed (Narasimhan, 2017) Hence, despite the increase in revenue over the periods, the
margin of the Apollo Tyres showed a downward trend by company having to absorb the raw
material price increases.
Opportunities
 Economic growth in major market reflecting positive trends in auto and tyre industry: The
Indian average household income of middle class group is expected to increase by 3 times in the
next 20 years (Elearnmarkets, 2019). As a result automobile industry in India is expected to
reach 404 million by the end of 2028 from 162.31 million in April 2018 (SESEI, 2018). On the
other hand Europe tyre market which stood at $31.5 billion in 2017 is projected to reach $41.8
billion by 2023 (Techsci Research, 2018).
 Implementation of Good and Services Tax (GST) in India: Studies indicates 70% of the tyre
imports are conducted by large and small traders and independent traders with unfair trade
practices such as under-invoicing and misclassification of products to avoid taxes. The proper
GST implementation will bring these importers to tax net and help to reduce the unfair trade
practices. Further, with a significant part of GST reforms being facilitating unified movement of
goods across India, a study conducted by government of India indicates a 60% increase in truck
distance per day compared to present day mileage (The Economic Times, 2017)
 Anti-dumping duties on cheap Chinese imports: Regulation published by EU imposed anti-
dumping duties ranging from €52.85 per tyre for Chongqing Hankook Tire Company to €82.17
per tyre for Xinguan Tire Group and all other companies from china exporting from china into
EU. Further, €62.79 per tyre duty is applied for tyres made by “co-operating Chinese exporting
producers” (Blakemore, 2018). The duties imposed by two major market Europe and India will
give the opportunity to expand its’ market share.
 Growth potential in Two-wheelers market segment: In terms production units, Two Wheelers
segment accounted for 80% market share of the Indian Automobiles (SESEI, 2018). With a
forecasted combined annual growth rate of 7.33%, the sales are expected to reach a volume of
24.89 million by 2024 from 21.19 million in 2019 (Research and Markets, 2020). Apollo Tyres
Two-Wheeler tyre products are widely accepted by the market, hence potential further expand
the profitable segment. (Apollo Tyres Ltd, 2019)
 Increased radialisation: Radialisation in tyres has emerged in the recent years and still has an
immense scope to growth in the tyre industry. Currently 98% passenger car, 36% buses and
truck and 40% of light commercial vehicles uses radialised tyres. (Elearnmarkets, 2019)

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Threats
 Cheap imports from China: Due to the removal of Anti-Dumping Duty (ADD) in 2015, Chinese
tyre imports has increased rapidly over the years. Especially Truck and Bus Radial (TBR) tyres
which is nearly 25-30% cheaper than the domestic products, has increased by 10 times over the
past five to six years. Imported TBR Tyres nearly accounts for 25% total replacement market for
TBRs. As a result of the surge in imports the government has re-imposed ADD of $245 to $453
per tonne for the next five years which expected to result in prices of imports to go up by 9% to
14% (Kamat, 2017)
 Increasing raw material prices: The widening production consumption gap in Indian tyre
market, export cut by major rubber producers, continued production cut among major oil
producers has lead the raw material prices to remain consistently high and increasing over the
years.
 Trade tension between US and China and Brexit: The increase in trade tension between US and
China resulted the economic growth in major economies to slow down. Domestic demand in
Asia reduced further and adversely affected the Euro-area economies which already is
recovering from loss of consumer and business confidence due to the Brexit (Apollo Tyres Ltd,
2019). As a consequence of trade war between two of the world’s largest economy the
exchange rate of India has depreciated against US dollars by 9% in 2018 and further 4% in 2019
(Menghani, 2019). This has led to increase in prices rubber and crude oil imports.
 Tight Labour Markets in Europe: In the second quarter of 2019, The Hungarian employment
rate was at 75.2% compared to EU average of 73.9%. This surpasses the 75% target indicator set
for Hungarian economy by European Employment Strategy. The improving labor market
conditions lead to increase in gross wages by 11.5% in August 2019 compared to the same
period in the previous year (China-CEE Institutue, 2019)

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3.2.2 Porters’ Five Forces

In terms of geographical segmentation, India and Europe accounts to 93% of the consolidated revenue.
Porters’ five forces model is applied to the Indian Tyre Market which is the most significant market of
the company.

Industry Rivalry (High): Replacement Market accounts for 70% of the demand in Indian Tyre Market,
with the rest 30% from Original Equipment Manufacturers (OEM) and Exports. The dynamics differ in
terms of volume with 60% by replacement segment and 40% by OEM and exports, indicating realization
in the replacement market in higher. The contribution to overall sales unit by Two & Three-Wheelers,
Passenger Cars, Commercial Vehicles, are 51%, 24% and 21% respectively. The industry is highly
concentrated with MRF, Apollo Tyres and JK Tyres having 60% market share of the entire tyre industry
(Elearnmarkets, 2019). Truck & Bus tyres generates bulk of the revenue with 55% share of the Indian
tyre market (Sajita, n.d)
Tyre market in India is growing in size and at the same established players in the market are expanding
capacity at a faster rate, having to compete with each other for the same customers in the market (Self-
developed)
Bargaining power of customers: Bargaining power of the customers differ from the replacement market
to OEM.
 Replacement Market (Moderate): Although the tyre market is highly concentrated, Indian Tyre
market consists of 39 manufacturers operating 60 plants. (Patil & Babu, 2016) This together with
low cost imported tyres, this gives the customers in replacement market enough options to
choose from giving the customers more bargaining power. This is further supported by
companies having to absorb the increasing in material costs. Replacement market demand is
largely dependent on the demand for automobiles, hence the OEMs working closely with
different tyre manufacturers to develop specific requirements/ technologies can lead to

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 weakening bargaining power. For instance Apollo Tyre is the sole supplier for some large selling
vehicles in India and sole supplier of Renault, Ford, Suzuki, Skoda, Fiat and other prestigious
brands in their many ongoing projects. (Apollo Tyres Ltd, 2018)
 OEM (High): The Indian automobile industry is dominated by few large players. Maruti Suzuki,
Hyundai Motor India, Mahindra & Mahindra, Tata Motors, Honda Cars India, Toyota Kirloskar,
Renault India and Ford India combined market share in FY2017/18 accounts for 95.5%. Maruti
Suzuki, being the largest automaker accounts close to 50% of the total market. (Shah, 2018)
With few large customers in the segment, the bargaining power of customers in this segment is
observed to be high.
Threat of New Entrants (Low): The threat of new entrants are observed to be low based on the
following factors
 The capital intensive production nature of the industry requires huge capital investment:
Apollo Tyres Hungarian manufacturing facility with a production capacity of 5.5million Passenger
Car and Light Truck tyres and 675,000 Heavy Commercial Vehicle tyres per annum costs the
company ₤475 million (Apollo Tyres Ltd, 2017). To double the production capacity in Chennai,
India plant from 6,000 units to 12,000 units per day will cost Apollo Tyres ₹2,700 crore (Projects
Today, 2016). The requirement for huge start-up costs will create a barrier to entry into the
industry.
 Shortage in availability of raw materials: Shortage in domestic production natural rubber,
supply cut by major rubber producing countries, high duties on rubber imports, supply cut by
major oil producing countries will create lead to difficulties to access raw materials.
 Continuous capacity additions by the established players: India has spent ₹27,800 crore in the
last 10 years for capacity building of which 60% was spent in the last six years. An additional
₹20,000 crore is anticipated to be spent in the next five years (ICRA Limited cited in The Hindu,
2019)
 Established brands and continued brand building: Players in the market such as Apollo Tyres
partnered up with prestigious football clubs and Cricketers to create the strong brand image
making it difficult to make a visibility in the market by new entrants.
Bargaining Power of Supplier (High): The domestic rubber production in India do not meet the industry
demand making it a scare resource in the market. In addition, the high import duties imposed to support
the local rubber producers gives higher bargaining power to suppliers of rubber. Further, the major oil
exporters and rubber exporters cutting the production to surge the prices shows the power in the hand
of the suppliers to control the market.
Threat of Substitutes (High): The industry is highly technology driven, which has led to multiple product
developments in every year. For instance, JK Tyres added 93 new products to their portfolio in the
FY2018/19 (JK Tyre & Industries Ltd, 2019). The fear of losing market share resulted companies such as
MRF Limited spending massively on research and development which increased over 250% in FY2016/17
to ₹200 crore (Narasimhan , 2017).

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3.3 Conclusions and Recommendation
3.3.1 Financial Performance
The jump in raw material cost lead to fall in gross profit margins of Apollo Tyres, despite the increase in
revenue over the periods. Operating profit margins dropped to the level of JK Tyres regardless of the
company having a higher gross profit margins in all the periods due comparatively higher employee
related costs. At operating profit level JK Tyres takes the lead by managing the operational expenses
more efficiently.
Apollo Tyres maintained an acceptable level of liquidity which has shown improvement over the years.
JK Tyres on the other hand, showed liquidity issues with current ratio falling below 1.0. In comparison to
Apollo Tyres JK Tyres has more liquid assets in their balance sheet.
In terms of efficiency the parties showed mixed performance. Apollo Tyres is observed to be more
efficient in managing receivables, while JK Tyres is more efficient in managing the inventories. Overall,
with a lower cash operating cycle Apollo Tyres performed better compared to the competitor. The cash
operating cycle has improved compared to the FY2016/17.
Apollo Tyres has maintained gearing ratio of 31% in all the period in comparison to JK Tyres with an
average gearing of 70%. Interest coverage of Apollo Tyres fell to an average of 7.1x which still is a
healthy position and much higher compared to JK Tyres.
In terms of Investors’ ratio, Apollo Tyres maintained a track record of dividends which has led to
increase in investors’ confidence despite fall in earnings over the periods. Investors showed more
confidence in the stocks of Apollo Tyres in comparison to JK Tyres.
To conclude, Apollo Tyres showed a mixed performance over the period. The profitability over the
period has decline due to unprecedented events which lead to the increase in raw material costs.
Liquidity, efficiency and investors’ showed improvements over the years. Gearing was maintained at the
same level while the fall in profitability negatively affected the interest coverage. In comparison to JK
Tyres, Apollo Tyres outperformed in almost all the key areas. Labour related costs were identified as an
area of particular concern which was relatively higher compared to JK Tyres.
3.3.2 Business Performance
State of Indian tyre Industry
The competition in tyre industry is immense with few firms dominating the market. The high bargaining
power in the hand of supplier and customer continued to threaten the profitability of the firms in the
industry. Though the threat on new entrants is low, existing firms spent massive amount into capacity
expansions to quickly capture the growing customer base. Expenditure on R&D and marketing are huge
in the fear of losing the market share to the competition.
Position of Apollo Tyres in the market
In the FY2018/19 Apollo Tyres’ revenue from replacement market and OEM are 73% and 27%
respectively Truck and Bus segment generated the highest level of revenue at 45%. (Apollo Tyres Ltd,
2019)

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The largest tyre manufacturer in India, MRF Limited leads the replacement segment, whereas Apollo
Tyres sells the largest quantity of tyres to OEM segment (Tyremarket.com, 2020)
In the Passenger Vehicles segment Apollo Tyres has close to 20% market share and in the Commercial
Vehicle segment including TBR has around 30% (Press Trust of India (PTI), 2019). In both Passenger
Vehicles and Commercial Vehicle segment Apollo Tyres is the market leader. It further has a dominant
market position in overall TBR segment. (Apollo Tyres Ltd, 2019)
Overall business Performance
The low costs imports, increasing raw materials cost and changing dynamics of labour market in Europe
continued to threaten the performance of the company. The failure to pass the increase in cost to
consumers, inefficiency in managing the labor related costs were identified as major area of weakness
which has negatively affected the profitability of the company. Despite that, on the back of its strengths
of diversified portfolio, innovations through R&D, brand building and continuous capacity expansions,
Apollo Tyres has maintained its leadership in key markets.
In addition, with the anticipated growths in overall industry, growth in Two and Three-Wheeler
segments in particular, government interventions such as re-imposition of ADD on imports and increase
in radialisation, Apollo Tyres has opportunity to grow further and improve on its competitive position.

3.3.3 Recommendation
Apollo Tyres generates 45% of its’ revenue from Truck and Bus segments compared to industry total of
55%, hence has scope to penetrate into segment. Further with only 36% radialisation, this segment
present growth opportunities in a time of industry moving towards radialised tyres. Hence the company
should continue to invest in this segment to expand its dominant position.
Three-Wheeler segment has strong growth prospects, hence Apollo Tyres should enter into the market
in addition to continuing expansion in Two Wheelers segment to take over MRF as the leader in
aftermarket.
Currently the usage of natural rubber accounts to 72% and 52% of total rubber usage in APMEA segment
and Europe respectively (Apollo Tyres Ltd, 2019). The proportion of natural to synthetic rubber used in
products can be changed with careful consideration to price of each and effects on quality to reduce the
effects of raw material price increase. Further, the company can explore use of alternative materials
such as vegetable-based processing oils and silica which is more environmental friendly.
In addition to continuing its’ R&D activities, brand building and capacity expansion, focus should be
given to reduce the employee related costs to maintain its’ competitive position and on overall to create
better value for the shareholders.

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