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Edited Transcript of APLO.NS earnings conference call or presentation 20-May-20 4:30am GMT

Q4 2020 Apollo Tyres Limited Earnings Call

Kochi,Kerala Jun 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Apollo Tyres Limited earnings conference call or presentation Wednesday, May 20, 2020 at 4:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gaurav Kumar

Apollo Tyres Limited - CFO & Member of Management Board

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Conference Call Participants

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* Ashutosh Tiwari

Equirus Securities Private Limited, Research Division - Research Analyst

* Bharat Gianani

Sharekhan Limited, Research Division - Analyst

* Jay Kale

Elara Securities (India) Private Limited, Research Division - VP & Auto Sector Equity Analyst

* Nishit Jalan

Axis Capital Limited, Research Division - Executive Director of Auto

* Raghunandhan N. L.

Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst

* Ronak Sarda

Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary

* Siddhartha Bera

Nomura Securities Co. Ltd., Research Division - Associate

* Sonal Gupta

UBS Investment Bank, Research Division - Director and Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day and welcome to the Apollo Tyres Fiscal FY '20 Results Conference Call hosted by Axis Capital. (Operator Instructions)

I now hand the conference over to Mr. Nishit Jalan from Axis Capital.

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Nishit Jalan, Axis Capital Limited, Research Division - Executive Director of Auto [2]

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Thank you. Good morning, everyone. Welcome to 4Q FY '20 Results Conference Call of Apollo Tyres. From management team today, we have Gaurav Kumar, the CFO, and other senior members of the management.

So we will start the call with a brief introduction from Gaurav, then we will start Q&A. So Gaurav, over to you.

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [3]

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Good morning, everyone. And first of all, best wishes for you and your family’s health and safety as we live in this extremely challenging and unprecedented time.

So let's go through the opening comments. The consolidated net sales for the quarter stood at INR 35.5 billion, a decline of 50% over the same quarter last year and 18% on a sequential basis, clearly impacted by COVID-19 in the month of March. The Indian operations registered a decline of 20% on a Y-on-Y basis, whereas Europe was much lower at just a 3.5% decline. The consolidated sales for the full year were INR 161 billion, a decline of 6.8% year-on-year, contributed by a revenue decline of 10% for the Indian operation but a growth in spite of these times of 3% in the European operation.

The EBITDA for the quarter stood at INR 4.8 billion, a margin of 13.2% compared to slightly under 10% in the same period last year and 12% in the preceding quarter. The margin improvement was driven by favorable RM prices and cost control across operations in spite of operating leverage being adversely impacted. For the full year, the EBITDA margin stood at 11.7% against 11.2% last year, again showing an improvement. The raw material cost for Q4 was around INR 120 a kg, a decline of about 3% on a sequential basis. Our net debt increased to INR 60 billion from INR 55.5 billion from the previous quarter as we continue to spend and the cash flows across operations came down. The net debt-to-EBITDA for the consolidated operations was at 3.15.

Moving on to India operations. The sales for the quarter was INR 23.7 billion, a decline of 20%, as I mentioned, over the same period last year and a 12% decline on a sequential basis. We probably lost about INR 500 crores of sales in March due to the crisis. All of this was essentially a volume impact. The prices have held fairly stable. The OEM segment is the one which has been under pressure. While in Q4, for the first time through the year, the replacement volumes were also down 6%. But if we dissect it further and look at just January, February alone, we were growing at 10%. And then the March impact where the replacement volumes were down nearly 35% resulted in a 6% decline. OEM, which has been sluggish through the year, was the same in this quarter. It was down nearly 40% plus. For the Indian operations, the EBITDA for the quarter stood at INR 3.5 billion, a margin of 14.4% as compared to 11.5% for the same period last year and 13% in the preceding quarter, again, a similar favorable impact coming through on raw material and cost control. The net debt increased from INR 43 billion to INR 47.7 billion, and the net debt-to-EBITDA was 3.4, within the covenant but clearly impacted by the crisis.

In terms of what do we see looking ahead, while we'll probably have a sales decline in FY '21 compared to FY '20 because the OE business is still looking fairly weak, and there is not a promising outlook, but the fact that the majority of our business is replacement is a significant plus and a cushion for us. We've seen a very sharp, and I would say, more-than-expected recovery on the replacement side. Barring passengers or tire segment on all of the product segments, truck tires, (inaudible) tires, 2-wheeler tires, we have seen a very good recovery in the replacement segment. All our plants in India have started operations under the state government guidelines. We are at lower levels of utilization, as expected, but they build up gradually, and they are ramping up.

While April was hardly any sales as we continue through various phases of lockdown. The May sales are looking promising. We expect to be around 50% of normal. And if things of the business climate continue to move towards more and more normalcy, then June should be even better. In fact, we are making sure that within the guidelines, our plants are able to produce enough tires, and supply chain is able to deliver the tires across the country to service the customers and benefit from the strong replacement demand. We are also probably benefiting from the fact that imports have come down and are likely to remain down for quite some time. We are fairly comfortable on the liquidity position, given the team's efforts on both sales collection and the borrowings that we have done in recent times, including the equity wave. The raw material prices continue to be stopped, which should provide a further tailwind to the margin. We've taken steps on the cost side to control and cut costs as much as possible. We range from announcing no increment for the year; top management taking salary cuts; cutting down on sales promotion, advertising and promotion expenses; improvements that were visible last year on the working capital side, and we will continue to monitor that very actively. Similarly, given the overall demand situation, we've cut back on CapEx to the tune of another INR 400 crores in FY '21 to make sure that we are not stressed from a cash flow or a liquidity perspective.

Moving on to Europe. Sales for the quarter were EUR 123 million, a decline of 3.5% over the same period last year. This was largely driven by volume, whereas on the price and mix, we in fact had improvement. Our CCR volume declined 14% for the same period last year in the current quarter, though, on a full year, they were flat. This is against a market decline of 6% on passenger car tires, so we've continued to outperform the market through the year across all 4 quarters.

In March alone, the European passenger car market declined by as much as 30% due to the COVID-19 impact. Within that, the performance of the European operations is creditable. Not only are we outperforming the market on volume, we even continue to improve our mix. Our UHP proportion improved to 30% vis-à-vis 26% last year, and we a had double-digit growth on the UHP volume. The EBITDA for the quarter at EUR 11.6 million was 9.4% compared to 5.4% for the same period last year.

Similarly, right on operations, while for the quarter at EUR 26 million were down 2% for the same period last year, but for full year at EUR 164 million were up by 3% over the same period last year. So even in the rights and operations where the margins are thin, we continue to have growth, and we continue to make improvements.

In terms of outlook on the European operation, again, we expect the sales decline given the situation and as Europe recovers, but there is a possibility that sales could recover sharply. Both our plants in Europe are operating and going up in capacity utilization in Hungary and Netherlands. Like in India operation, all costs are looked at with a microscope. They are being controlled or cut as much as possible, whether it's any kind of consultant costs, hiring is on a complete freeze and extremely tight control on the working capital. Even as we have begun the year, we continue to outperform the market on the passenger car tire side and we will continue to look to -- continue with that performance to have an improvement across our operations.

Thank you. We would be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Ashutosh Tiwari from Equirus.

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [2]

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Yes, sir. Congrats on the (inaudible). I hope that everyone is safe with their family and also in the company. Firstly, the European operation, I think margins are extremely good compared to the sales number that we reported. So what that is, is it completely related to RM cost benefit or some of the initiatives that have also been taken? And how do you see the margin trend going ahead, at least in terms of gross margin, certainly, obviously, Q1 will [be hit by] the volume loss?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [3]

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No. Ashutosh, it's a combination of various factors, and RM plays lesser of a role in the European operations vis-à-vis the Indian operation. So yes, RM is a factor, no doubt. But [key] which has been an effort over the last year plus is a very sharp focus on margin. It's not just focusing on volumes alone. But within that, the mix and, as I mentioned, the proportion of our UHP, the ultra high-performance, trials continues to improve. I mentioned a figure of 26% to 30% for FY '19 to FY '20, but over the last 2, 3 years, that number has increased from early 20s to 30. And we are beginning to get where -- in the range where global majors operate, which is around the mid-30s. That is a big driver of margin, cost control, working capital release, et cetera. It's the whole series of holistic steps taken in an effort that we have to get our European margins up to levels which are satisfactory to not just the financial stakeholders but even within the company.

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [4]

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Okay. And secondly, in terms of CapEx, you talked about INR 450 crores (inaudible). So -- but overall, how would be the number for full year '21, what we are planning right now?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [5]

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We would have thought, if I remember correctly, the figure in India of INR 100 crores to INR 1,500 crores. That number for the current year would be about somewhere between INR 1,000 crores INR 1,100 crores. And similarly, we have taken a part in the European operations (inaudible).

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [6]

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But considering the current market scenario, given this also a high number because I think that on -- obviously, it's recovering, but it's still a little lower than last year. So is it really cost of CapEx for '21.

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [7]

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So (inaudible), and this is a number which is as of today, it will continue to get monitored. There's a certain part of CapEx, which, given that we are on the road of the greenfield right down the line, a number of machinery, which are already on the high teens, et cetera, there's a certain amount of it which cannot be deferred, unfortunately. So the INR 400 crores cut is what could be deferred. There may be an incremental possibility, which we will continue to examine, but what was possible immediately has been cut. But it can be around to maybe CapEx of just a maintenance CapEx for the year, not possible given the state where we are on, on the greenfield.

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [8]

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And lastly, sir, on the RM, you said it declined 3% quarter-on-quarter in this quarter, Q4. How would you see the trend in Q1 internally?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [9]

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I didn't get the first part of your question.

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [10]

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So you mentioned that the RM cost has declined by 3% versus third quarter. How do you see the trend going ahead? How much decline it is still expected in Q1?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [11]

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Q1, maybe a small decline, but very little OpEx would come through because we would be sitting with some raw material inventory. And as of now, it is difficult to say what would be the kind of production in Q1. So really, the benefit of lower raw materials would start going in from Q2. It would still be slightly lower than Q4, but a better impact of the lower raw material prices will be felt from Q2.

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [12]

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Any content to that? What kind of decline can we can expect?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [13]

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At this time today, it could be another 3 or 4.

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Operator [14]

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The next question is from the line of Raghunandhan from Emkay Global.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [15]

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Two questions. Firstly, transporter. Profitability has been under pressure. Based on the initial purchases by transporter, is there a trend wherein instead of buying the domestic brands, transporters are either down-trading towards cheaper, imported brands or going for retrading? Can you share your thoughts on replacement demand outlook FY '21? Secondly, can you indicate compensation of support expected from governments in Europe? Netherlands government has announced compensation of the 90% of the salary cost depending upon (inaudible).

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [16]

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So in the current time, very difficult to give you an outlook for the full year. We've been just in a couple of weeks since partial lifting of the lockdown. And as I mentioned in my opening remarks, we've seen, and we've been surprised positively by the extent of recovery in the replacement market. We haven't seen any trading down to imported brands or cheaper brands as of now. If anything, the prices have held steady. There is strong demand for our replacement products, and in fact, that is putting pressure on the supply chain to ensure that we do not let go of any opportunity. So still early days, but as of now, we've not seen any trend which indicates customers moving to alternative brands.

On your second question, the schemes across Europe are different from country to country. For example, in Netherlands, which is one of our significant operations, for a quarter linked to the loss of revenue, they have announced that 90% of the wage bill would be subsidiary. And that comes graded down depending on what is the level of your sales. So we've received our first installment just a few days back on the partial aid on this salary bill in Netherlands. There is a variant of it in Hungary, which is linked to actually reduction in working hours. But from the date that it was announced, we applied for that but then actually saw, based on the demand coming back from Europe, because in Netherlands, it was announced earlier and in Hungary later, we actually needed the people back in the plant to produce at those higher levels. So we did not go ahead with our application. There are other schemes like deferment of certain amount of tax payments, et cetera, which we've applied for. Similarly in Hungary, there's a scheme where for future CapEx, they gave a subsidy. So the team in Europe is monitoring actively across geographies. Our 3 big operations are in Germany, Netherlands and Hungary. Netherlands, we've already received. Germany, we've made the necessary application. And in Hungary, as I told you, given what we need within the plant, we are not seeing any subsidy on the salary.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [17]

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That is helpful. Any configuration of what could be the amount?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [18]

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In Netherlands, we received just under EUR 2 million.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [19]

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Okay. Understood, sir. Like I just want to understand for Netherlands, subsidy is up to 31st of July. So I think the first quarter loss in revenue, to that extent, was the compensation of 90% employee costs happen in fact is my expectation?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [20]

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So just to clarify, the 90% of the employee cost is given if your loss in revenue is 100%. We do not have a loss of revenue of 100%. Our expected loss of revenue when we look at this was around 40-odd percent. And that also may have to be revised given how the recovery we are seeing to a lesser number. So 90% for the loss in revenue, but there also there are plus. So it's not a continuous grading scale.

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Operator [21]

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The next question is from the line of Ashutosh Tiwari from Equirus.

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [22]

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Firstly, the differences, as you rightly said, replacement demand, still the mix has only increased because of the benign OEM scenario. And in fiscal '21, the replacement mix is only going to increase further ideally for your India business. So as typically, your replacement margins are far superior than OE margins, so any internal assessment you have done that how much of this margin, led by mix improvement, can compensate for operating leverage loss for your business? That's on one side.

And secondly, do you see the subdued demand even in replacement? Because of COVID, especially in the trucks, maybe first month of winter demand as the last 2 months lockdown, but maybe down the line with very continued growth freight industry scenario, even if there is subdued influx in demand in (inaudible), do you see pricing pressure to pass on the [road] benefits. How do we look at this, please?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [23]

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Sure. At margin guidance, we anyway don't give, and there will be a lot of parameters playing into the mix. Yes, the higher proportion of replacement will definitely be a plus, and that could aid the margins. But how much impact, et cetera, is something which is a constantly changing thing. But besides that, we do not give out margin guidance.

To your second point, still, as I mentioned, that it's just a few weeks in the business has resumed, and that's also on a slow scale. So to be able to say whether this is the pent-up demand, which is currently coming through and then it will taper out, could be a possibility that this is the pent-up demand which we are seeing coming back so strongly. But very difficult at this time for us or for anybody across industries to give out an outlook. Nobody knows for sure as to how the situation would ease up, how quickly will it get back to normal or will it be a start-stop kind of a scenario.

Pricing pressure, whether it will come through or not, will, of course, depend on demand/supply but still be a factor on both sides. There's a certain amount of margins that we need. We also have equal pressures, given the lower level of utilization. So right now, the key challenge, I would say, is to make sure that we ensure the safety of all our people and, with that, ensuring that our plants continue to operate. One of our competitors, after starting a plant, had a plant which had to be closed. So we are taking all steps to ensure, and that doesn't happen to us and then ensuring that we do not make out on sales opportunity. It has to be an evolving situation. Very difficult to give out a full year guidance as of now.

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [24]

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You typically give the quarterly key raw mat is printing for your India business. So can you give that?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [25]

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Sure. So natural rubber was at INR 140; in (inaudible) rubber at INR 110; (inaudible), INR 240; carbon black, INR 85.

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [26]

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Okay. And sir, any logistical challenge in terms of production now because of very few trucks available and even in (inaudible) pricing have increased freight rate to any cost escalation because of logistical challenges in India?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [27]

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There are challenges. There are certain routes from which the challenges are greater. So that's a very operational-level thing, which the supply chain team of India operations and even the global supply chain team because India feeds not just the Indian operations but other geographies. So I would not have details on exact routes where the challenges are greater or not. I know they are working around the clock to ensure that things move and that challenges are far greater than in mind.

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [28]

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Just trying to understand because the part of your (inaudible) also imported and changing the logistic rate for such imports during this (inaudible) time.

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [29]

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They have been taken into account. Overall, still, we feel that we will have the benefit of lower raw material prices given the current situation, including a weaker rupee.

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [30]

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And last question, sir. You said (inaudible). Your EBITDA margin, you said 9.2 this quarter. How much was it last quarter, sir, Q3?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [31]

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Europe, Africa margin?

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [32]

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(inaudible) Q3?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [33]

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Q3?

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Ashutosh Tiwari, Equirus Securities Private Limited, Research Division - Research Analyst [34]

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Yes. FY '20.

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [35]

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Yes. Q3 of 9.3%.

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Operator [36]

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The next question is from the line of Jay Kale from Elara Capital.

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Jay Kale, Elara Securities (India) Private Limited, Research Division - VP & Auto Sector Equity Analyst [37]

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So my first question was regarding your other expenses. So you've seen sharp control on your other expenses. And if you could just give a flavor of how your fixed cost was pre-COVID. And how are you looking at your fixed costs coming in this year or within the first couple of quarters, what kind of measures you would have taken to control that? And if you could give a broader range of your fixed cost as a percent of sales, what does it range?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [38]

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So pre-COVID levels or normal levels, you would have seen up to Q3, and I would say they would be at normal levels. The general guideline is that we would like to reduce our fixed cost by about 20% in the current year. Things like travel is an obvious and easy one for any one region. If we wanted to travel, we cannot. But obviously, as all of us have got used to this to the extent we can get used to and find new ways of working, clearly, travel costs will come down. We are looking at options of virtual launches of product rather than participating in trade here. We are looking at conducting online training programs rather than people going across and spending time and money in those travel. That's the reduction. Recruitment is more or less at a free. The increase in salary costs will not come through. Barring any very critical item, all consultant engagements, et cetera, have been stopped. Advertisement and promotion expenses, selling expenses reduced sharply. So all of that have been -- we are still in the process of doing our revised budget, and it will continue to evolve given the fuel situation. But as we stand today, we are looking at cutting it down 20%. What is a normal level is a difficult one to say until we have a certain level of knowing what is the normal level of sales.

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Jay Kale, Elara Securities (India) Private Limited, Research Division - VP & Auto Sector Equity Analyst [39]

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Right. Great. Sir, one question. So you mentioned that your raw materials in Q4 was 3% reduction versus Q3. And this should -- I assume would be predominantly for India. How was it for Europe? And if I may, you have your raw materials in Europe largely dependent higher contribution of crude linked derivatives in Europe than, say, in India raw material market. So is it fair to assume that 2 quarters down the line, the benefit in Europe raw material basket would be higher than in India?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [40]

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So the raw material reduction in Europe would have been lower than in India, you're right. And yes, raw material benefits flowing through to Europe could be sharper in the current year on account of crude.

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Jay Kale, Elara Securities (India) Private Limited, Research Division - VP & Auto Sector Equity Analyst [41]

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And any broad range? So you mentioned 3% reduction for India. And you...

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [42]

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Europe was about 1-something, 1%.

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Jay Kale, Elara Securities (India) Private Limited, Research Division - VP & Auto Sector Equity Analyst [43]

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Okay. And going forward, also, I think you mentioned 3% for India going forward. What could be the...

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [44]

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What I mentioned in immediate future, which is Q2. Again, right now, in the current scenario, I would predicate to this longer-term guidance, but Europe could be a few percentage points higher than that. But it's something that is constantly evolving. And hence, at this stage, to give out -- unlike in the previous quarters where we have contracted quantities for the quarter that I'm speaking in, it's not the case currently given the lower levels of production.

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Operator [45]

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The next question is from the line of Siddhartha Bera from Nomura.

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Siddhartha Bera, Nomura Securities Co. Ltd., Research Division - Associate [46]

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Yes. And congrats on set of margins in the quarter. So my first question is on the commodity side again. You have indicated up close to 3%-odd benefit over the last 2 quarters. But when we see the commodity prices like down 10%, (inaudible) down nearly 50%, so are we building in some pass-on of benefits in the replacement market because of the actually the benefit should have been much higher than what we have guided.

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [47]

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So A, I'm talking about the raw material prices. Whether that is passed on or not is a separate question. So that doesn't get netted off from the raw material prices. B, as I had mentioned that we still need to contract quantities for Q2. What you are seeing today, there is very little buying happening on this today given the uncertainty on the production and the demand. As started production, we are still mostly using raw materials that were in stock from the previous quarter. And hence, all of the benefit of what we are seeing in current prices will not flow through. And (inaudible), we've got to also take into account the depreciation.

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Siddhartha Bera, Nomura Securities Co. Ltd., Research Division - Associate [48]

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Okay. And today, there was some news on government considering a 15% COVID (inaudible) for imports of various (inaudible) rubber. So do you think -- I mean if that comes, that will additionally impact your monitor costs in the (inaudible).

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [49]

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If there's a tax imposed on rubber, it will impact us because inevitably, what would happen is the domestic producer would also increase the price of it. So let's see, but it will also benefit us on the output finished good side. So where all our tax is imposed is to be seen before we can make a comment whether it's beneficial to us or not.

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Siddhartha Bera, Nomura Securities Co. Ltd., Research Division - Associate [50]

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Okay. Okay. Got it. On the, sir, demand side. Just wanted to understand that assuming that replacement demand picks up gradually, and currently, it is much lower than the last year level. So how does the competitive dynamics here? I mean is it fair to assume that a market leader like yourself in the TBR can gain market share when the overall industry is weak? Or is it that these smaller players do aggressive pricing and gain share? How does the dynamics work?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [51]

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See on the TBR side, the fact that we were selling the highest volume and at the highest prices, barring [them this year], vis-à-vis all the domestic players and some of the global ones, we were still pricing our (inaudible). Now someone at the lower end drop prices, yes, it does put a certain amount of pressure, but there's a certain amount of brand equity, product quality that is well established in the market. And hence, we're not unduly worried about how things will pan out. And frankly, at least as of now, based on what things seen, we are fairly comfortable with the placement demand dynamics to not receiving any price pressure.

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Siddhartha Bera, Nomura Securities Co. Ltd., Research Division - Associate [52]

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Okay. Okay. And sir, lastly, on the depreciation and interest costs, they have risen sharply in the quarter. So can you throw some light on that? What was the driver? And taxes also have been negative in the quarter.

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [53]

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I didn't get the first part of the question. Which costs have risen?

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Siddhartha Bera, Nomura Securities Co. Ltd., Research Division - Associate [54]

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Depreciation interest costs have gone up in the quarter.

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [55]

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Sure. So depreciation is part of our AP CapEx, which was going on, which is begin to come through. And similarly in Europe, the Hungary operations continue to come in. Borrowings have gone up, so that's going through to the interest cost. On the tax side of things, when we paid advanced tax pre-COVID, a certain higher level of profitability was assumed. And that is why there is a negative tax. [Ravi], if you are there, would you want to elaborate on the tax side?

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Unidentified Company Representative, [56]

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Yes. Yes, Gaurav. So as you rightly said, Gaurav, it was eventually, for 3Q, the tax expense was calculated based on our higher profitability and also lower capitalization, which is why you also see an increase in depreciation of 4Q. And because of both the factors, one, the profitability come down on an annual basis; and secondly, because of increased capitalization, there is an additional tax benefit, onetime benefit, which we get because of which the -- we had to -- we have a negative tax impact to 4Q.

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Siddhartha Bera, Nomura Securities Co. Ltd., Research Division - Associate [57]

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Okay. So the cost for the full year, the tax...

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Operator [58]

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Siddhartha, I'm sorry to interrupt. May I request you to come back in queue for follow-up questions. (Operator Instructions) The next question is from the line of Ronak Sarda from Systematix.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [59]

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Yes. Sir, firstly, I mean if you can educate in India, how much of our retail points are now open. When you say 50% of -- we are operating at 50% of the normalized demand, where are we in terms of retail outlets open? And how do you see that panning out?

And second part of the question is on the supply side. So in terms of production capability, given the new norms, when do we see reaching the normalized production capabilities? Will it be in July or August or we will be operating for the full year at a lower level, given the new norms?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [60]

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So Ronak, I do not have the data on the number of retail outlets because that also, to a certain extent, is changing as different regions going to red zone or and so on, et cetera. But if you can reach out to Himanshu, we can get that specific data point latest and give to you.

In terms of your second question, again, it will depend from plant to plant. For example, in (inaudible), we are already up to about 70% utilization on the plant, given where the state is. Gujarat and Chennai are more impacted where our utilization levels are lower. It's difficult to say when they will come back to the high levels. So Baroda plant is at about 40%. And clearly is the case for Chennai. We are ramping up again within the 2 weeks itself like it has happened to all of us from the day we started working from home. We will use to something and then you improve on efficiency (inaudible) started from a lower level, and we are ramping up. When will they be flat out? If the demand was there, [difficult for me].

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [61]

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Okay. Okay. And just a clarification on your working capital. I mean we have seen very sharp improvement in working capital. How sustainable is this? And secondly, I mean do we do build discounting, and hence, some part of interest cost is sitting in the P&L due to that?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [62]

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So A, there's a certain amount of reduction, particularly in India operations with revenue itself coming down. But the current levels are fairly sustainable. There's no great one-off step taken because of the situation. And frankly, for March, not much would have been done given that this COVID situation really suddenly came upon us, Europe maybe 3 to 4 weeks; and then in India, (inaudible) 10 days. So it's not a sudden dramatic extent could be taken on the inventory side. So these are fairly sustainable levels. We've been working on it. There may be one-offs where they go off because there's a sudden fall in demand or there's a strategic sourcing of inventory, but nothing too exceptional that this can't be working.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [63]

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Great. And if I can squeeze in one last question. You mentioned in Hungary, we are not opted for the wage region absorption. What kind of demand recovery are you seeing? How big was that in the month of April or May? And which leases are contributing to it? And which are the major suppliers from the Hungary?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [64]

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So Hungary supplies to all over, can then the Hungary because the European ad why we sort of classified it as a broad level. It varies from country to country because individual governments announced it, while in Netherlands, it was linked to loss of revenue. Can help not dependent on what was being produced at the plant. By the time Hungary plant when started shutdown taken at the peak of the corona situation in Europe, Hungary announced the package a little later, and it had a criteria that you're working on should be reduced by at least 30% for you to apply for the sale. And the plant took a call that they rather needed people to be producing because they had already depleted own inventory and taken a shutdown in April for a number of weeks. So that's why we did not apply.

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Operator [65]

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The next question is from (inaudible).

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Unidentified Analyst, [66]

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Two questions. One, when you are looking at the demand situation, when I say replacement, which subsegments of replacements are behaving better than your expectation or that can the other subsegment?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [67]

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So I mentioned the slowest out of the block is the passenger car replacement. We are seeing fairly strong demand in truck tires, farm tires, 2-wheeler tires.

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Unidentified Analyst, [68]

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Okay. But considering that the (inaudible) levels in trucks are pretty low, do you think this onetime recovery is more sustainable in the -- especially truck one where the larger volume and profitability center?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [69]

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Again, a similar question was asked earlier. So difficult to say how much of this is pent-up demand and how much of this is increased market share by us. We do believe we've been able to capitalize on this opportunity a little more than others and also given our strong leadership position in the truck tire domain. It may ease back to a more normalized situation. Whether that's in terms of market share or demand itself coming down, it's difficult to say because it's not as if demand has recovered when you say (inaudible), and it's beyond last year level. It's still below last year level, but the pace of recovery has been a very, very positive one for us.

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Unidentified Analyst, [70]

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And what is the absolute net debt level now for (inaudible)? And do you see any risk for the (inaudible) deal cash flow coming through or terms there?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [71]

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So your voice was breaking. I got the first part of the question, which was the net debt.

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Unidentified Analyst, [72]

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Basically, I was asking what is the -- what is the absolute net debt level? And do you see any risk to all these terms or cash increase?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [73]

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So the current net debt levels as of March is INR 60 billion or INR 6,000 crores. We do not see a risk to the (inaudible) deal. The first tranche of funds were received on April 22, so well into the COVID thing, and the terms are also signed at (inaudible) 12.

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Operator [74]

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The next question is from the line of (inaudible) from CLSA.

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Unidentified Analyst, [75]

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Yes. So my first question was on the working capital. So if I look at the receivables, and assuming that you are getting and would be getting your payments from the OEMs on time, but what about the bigger part, which is the relation and the dealers? How is their position? And are you seeing any issues in payment? Are you expecting any longer payment terms to them? And how do you expect this to play out in the coming weeks or months?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [76]

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So I mean we have not seen any delays in payments on the replacement side. You would remember that we anyway have a scheme where there is a deposit with the company. But dealers, dealers have been paying more or less in time because also, in the replacement segment, the line has been for about a month plus, and then it's come back to normal. So even as things would have slowed down, which again started picking up, so we've not seen any concerns on the replacement side. We had a few delays or lengthening of the payment cycles impact on the OE side. No concerns about them getting settled, but obviously, the OEMs were hard hit. But that also has corrected back, and we are fairly confident. So no concerns on the receivable side for us.

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Unidentified Analyst, [77]

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Okay. And my second question is on the leverage and the funding. So the leverage that you mentioned on net debt-to-EBITDA, that is before accounting for the (inaudible) money coming in?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [78]

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That's correct. And these are leverage levels as of March 30.

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Unidentified Analyst, [79]

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Okay. Okay. And you said that the covenant are at around 3.5x net debt-to-EBITDA. if I'm not wrong.

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [80]

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That's correct.

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Unidentified Analyst, [81]

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So you will comfort it within this quarter, you should comfortably be below the covenants. And I think your recent debt gain also been happening at a very reasonable way given the environment. So from a funding point of view, we should not expect anything significant that we would need to do in the coming few months at least.

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [82]

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That's correct. We've -- as this situation came up, we reacted fairly quickly, and the corporate finance team did a great job in raising funding and raising funding at fairly, what I would say, in normal terms. So we've got the necessary long-term money in to be comfortable on liquidity and should not be needing any further borrowing in near term.

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Operator [83]

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The next question is from the line of (inaudible).

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Unidentified Analyst, [84]

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A couple of things. One is on your split between the exclusive states, store sales and in the multi-brand outlet sales because I think I guess at the moment, you have a more exclusive store sales than -- this time, you can have a slightly higher market share in that case. And your pressure on real estate margin, et cetera, will also be lower. So if you can throw some light on that?

And second is on -- you have mentioned in the results press release that you have liquidity at around 12 months -- comfortable liquidity for 12 months. So at what assumption you have made that in a lower sales level, this 12-month period is valued.

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [85]

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So that -- to the answer to your second point of the question, there's a fairly standard analysis that auditors have to run today in today's time to assess the going confirm basis. I would not be at liberty to share those kind of assumptions. To the first part of your question, while I don't recall the exact number, but I think about 30% to 40% of our dealerships in India are exclusive. But probably later, Himanshu can reconfirm the number to you.

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Unidentified Analyst, [86]

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Understood. And in terms of your overall, I mean, the -- I mean OE side, how do you see any kind of guidance or any kind of feedback you are getting from OE side on different segments, how the things are going to move up in terms of volume offtake?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [87]

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Right now, no, and OEs would be better placed to answer that. They are facing a fair bit of uncertainty. There are also news that once things settle down, particularly at the lower end or the entry level of cars, actually, the demand will go up because a lot of people for safety, hygiene factors would start shifting towards the personal vehicle a trend which was going on. And that's actually been seen in China. So we are predicting that the recovery could again surprise. But in near term, nobody is giving out a positive outlook. The truck industry part similarly i looking at demand being fairly weak and are taking (inaudible) a long outstanding point and the CapEx policy, et cetera, saying that, that is needed to boost up demand. So in a way, an interaction and the outlook also taken by the government and the auto industry.

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Unidentified Analyst, [88]

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Lastly, on the -- I mean there were some news on, say, tires or even replacement of farm tires were actually lacking in terms of production. So I mean it was much higher than the production level. So have we actually moved to that level? I mean where we have making the demand in the power mix.

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [89]

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We're meeting 100% demand, et cetera, I can't say for sure. There may be some opportunities, which might have been mixed, but more due to supply chain issues and production issues. I haven't heard that because of lack of production, we've missed anything. That's also because it's been a few weeks. And we did have enough inventory even as plants were getting ready to produce, and they are ramping up. Also, a large number of farm tires for us come out of Kerala, where as I mentioned, the plants are already up to nearly 70% production. So it should not be a concern.

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Operator [90]

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The next question is from the line of Sonal Gupta from UBS Securities.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [91]

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So just a couple of things. One, I mean, so in this quarter, we've not received any sort of government support in Europe, right?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [92]

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We have received government support in Europe. What was the question, Sonal?

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [93]

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Yes. So I mean like is there any sort of benefit because of which your wage bill in Europe is lower and margins better in this quarter? Is there any benefit or something that happened?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [94]

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Nothing. Nothing in this quarter. As the first one is what we've received is in Netherlands, which has just received last week.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [95]

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Okay. And could you give me a sense of what is the sort of raw material cost as a percentage of sales in Europe?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [96]

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Just 1 minute. Broadly in the region of 40%, Sonal.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [97]

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40%. And lastly, I mean like what is the CapEx that you're looking for Europe for this year?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [98]

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About EUR 50 million.

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Operator [99]

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We will take the last question from the line of Bharat Bhagnani from Sharekhan.

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Bharat Gianani, Sharekhan Limited, Research Division - Analyst [100]

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So my question would be mostly on the European side, whereas in your earlier comments pointed out that the operations would see a decline in FY '21. But I was trying to get more flavor on while the OEM industry in Europe might take time to recover, but I was trying to get a sense on your reading of the replacement demand in Europe. How will it behave? So ideally, replacement demand would be less impacted, and we primarily supply more replacement market at this point of time. So any thoughts on the replacement how would it move would be helpful.

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [101]

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I missed the second part of your question, but broadly, and then tell me if I missed out anything. In Europe, yes, a larger part of our business is replacement as compared to India, but there are OE parts of the business in agri and a specific category called Space Master. But for the largest portion, yes, the replacement recovery could be faster and quicker. So to that extent, that's favorable for us. Also, the talk in Europe is that there is a strong chance that as people -- as economies open up, as people start to travel, including as early as for the coming holiday season, people will start driving across more rather than use public transport or flying even if men reasonably longer distances. And obviously, the amount of traffic and the road conditions there play a role. So in fact, the replacement demand in Europe could see even a better recovery if that situation was to pan out and it will benefit them.

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Bharat Gianani, Sharekhan Limited, Research Division - Analyst [102]

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So what is the current mix in Europe between replacement and OE?

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [103]

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At an overall operation level, it's about 80% replacement and 20% OEM. But if you look within the passengers, or normal category, it will be 99%, 98% replacement and 1% or 2% OE.

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Operator [104]

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I now hand the conference over to the management for the closing comments.

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Gaurav Kumar, Apollo Tyres Limited - CFO & Member of Management Board [105]

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Thank you, and thanks, everyone. Once again, best wishes for all of you. You and your families stay safe. Stay healthy. Hopefully, things in India would continue to recover, and we move to normalcy at the earliest possible. Thank you.

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Operator [106]

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Thank you very much. Ladies and gentlemen, on behalf of Axis Capital, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.