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Apollo Tyres Vs Michelin

In a move that will have wide ranging implications on the Indian tyre industry, Apollo Tyres, Indias largest manufacturer of bus

and truck tyres, joined hands with Michelin, a transnational player, to manufacture tyres for the truck and the passenger car

industry. Against this backdrop, let us compare the two companies across key financial parameters.

Apollo Tyres: It is one of Indias leading tyre brands and has a leadership in the truck tyre replacement market. Besides

having a strong presence in the commercial vehicle OEM segment, the company also supplies to car and tractor OEM majors.

Michelin: Michelin, on the other hand, is a global behemoth and the worlds largest tyre maker commanding a near 20%

market share. It manufactures tyres for all the business segments viz cars, trucks and two-wheelers and even aircraft radial

tyres. Besides tyres, the company is also into the manufacturing of suspension systems and has travel and tourism oriented

publication services.

Since we are comparing two companies, which do not

cater to the same market, it becomes imperative for us to

have a look at the dynamics of the market that each of the

two companies operate in.

Michelin is a market leader in a global tyre industry whose

size is pegged at close to US$ 70 bn and where almost

85% of the demand comes from the car and truck

segment. The world tyre industry is highly consolidated one and the top three players account for nearly 61% of the industry

market share. Close to 87% of Michelins revenue are generated from the mature markets of Europe and North America and

therefore if the company has to grow at a faster rate in the future, it will have to concentrate on developing regions such asChina and India.

Michelins Indian counterpart, Apollo Tyres, operates in an

industry whose size is estimated at US$ 2.7 bn (4% of

world market share). The industry is expected to grow at a

healthy rate of around 12% to 15% on account of

availability of cheap financing for vehicles and ever

improving road infrastructure. While the unorganized sector

accounts for nearly 50% market share in low value add

bicycle tyres, more than 70% of the market share in car, bus and truck tyres is constituted by top 5-6 players.

Let us have a look at how the two companies compare on various financial parameters:

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Parameter Units Apollo Tyres Michelin**

Operating ratios

Net Sales (Euro m) 303 15,645

CAGR-5 years (%) 14.8% 5.8%

OPM (%) 10.3% 14.9%

NPM (%) 5.9% 3.7%

Sales/NFA (x) 2.0 2.7

Working capital to sales (%) 13.1% 39.9%

R&D as a % of sales (%) 0.3% 4.5%

Return ratios

RONW (%) 29.0% 12.9%

ROIC (%) 20.9% 9.1%

ROA (%) 11.7% 3.6%

Valuation ratios

Current price (Rs)* 242 33

P/E (x) 7.3 8.1P/BV (x) 2.2 1.0

Market Cap/Sales (x) 0.6 0.3

EV/EBDITA (x) 7.9 6.5

*Michelin price in Euros, **December 2002 ending

Revenues of Apollo Tyres have grown at a faster clip than Michelin mainly on account of the fact that Apollo Tyres is present

in a developing country, which has seen a surge in the sales of automobiles owing to introduction of newer models and

relatively hassle free financing. Michelin, on the other hand, is present in mature and developed markets and as a result has

experienced modest growth rates in the past 5 years. Moreover, increased use of technologically superior tyres and better quality roads, help in ensuring the longevity of tyres, thus resulting in lower off take in the replacement market as well.

On the operating front, Michelin has proved to be more cost effective than its Indian counterpart mainly on account of its

diversification and huge size that helps it to leverage on the economies of scale and command bargaining power over its

suppliers. Apollo Tyres, however, steals the thunder from its counterpart by clocking higher returns at the net profit levels and

also various return ratios.

As far as the alliance between the two is concerned, we believe that it is a win-win situation for both the companies. The

alliance gives Michelin, an opportunity to gain a foothold in the Indian tyre market which is showing a lot of potential and it also

does away with the need to set up a marketing network of its own as Apollo Tyres has one of the best distribution network in

the country (around 4,000 dealers). Apollo Tyres, on the other hand, will benefit from the technical expertise of Michelin and

help it come out with better variants in bus and truck radial tyres and thus help it maintain its leadership in this segment. Not

only this, it will also help Apollo Tyres, make inroads into the car tyre market.

On the valuations front, the high valuation given to Michelin despite its presence in mature markets underscores thecompanys market leadership and the growing presence in emerging markets. The valuation of Apollo Tyres on theother hand, is likely to see an increase once the alliance with Michelin manifests itself in the bottomline growth of

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the company. However, the increase in rubber prices (major raw material for the tyre industry) and competitionfrom cheaper imports from China might prove to be a cog in the Apollo wheel.