With skyrocketing prices of rubber, which accounts for two-thirds of the cost of making a tyre, the profitability of tyre makers was expected to fall.
Apollo Tyres Ltd, the country’s largest tyre maker, which also has a little over one-third of its consolidated revenue accruing from overseas subsidiaries, registered an operating margin of about 8.5%, 5.6 percentage points down year-on-year (y-o-y) and 3 percentage points sequentially. At Rs 230 crore, its consolidated operating profit, too, was down 22.5% from a year ago. In fact the margin for the stand-alone entity (Indian operations) was the lowest in the last eight quarters.
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The company’s management said rubber prices surged by around 70% during fiscal 2011 (FY11), making it impossible to protect profit margins. For the March quarter, the average rubber price was Rs230 a kg, compared with Rs140 a year ago.
At best, Apollo Tyres could offset a part of this increase in raw material costs by hiking tyre prices gradually through the year, thanks to the buoyancy in the Indian automotive market.
“The replacement market for tyres was robust in the second half of the year, which helped pass on the cost pressures,” managing director Neeraj Kanwar said. This is reflected by the 32% y-o-y jump in net sales during the quarter.
Although profit margins of overseas subsidiaries were hit by spiralling raw material costs, higher volumes translated into higher revenue compared with the year-ago period. Revenue from South Africa grew by 32%, while that of Europe rose by 10% during the quarter.
The company’s y-o-y dip in operating margin was steeper than MRF Ltd and Ceat Ltd. Analysts say that this is due to Apollo Tyres’ European operations where the fourth quarter is not as robust as the third quarter, when winter tyre sales register higher margins.
High interest costs also affected net profit during the quarter and FY11 (both stand-alone and consolidated). Two factors led to this—borrowing for its new Chennai facility and higher working capital to fund higher inventory levels.
What came to Apollo Tyres’ rescue was the accounting adjustment benefit to the tune of Rs90 crore in the consolidated profit during the quarter. This is on account of pension-related employee expenses and gain from inventory valuation due to foreign exchange translation (from euro to rupee balance sheet). As a result, the reported net profit was Rs193 crore for the March quarter.
Adjusting for this gain, the consolidated net profit stood at around Rs103 crore, a significant 41% lower than a year ago and 38% lower from the preceding quarter.
Apollo Tyres’ shares initially surged on the announcement of results, but as investors saw the true picture, the shares closed 2% lower at Rs71 apiece. Interestingly, the management is hopeful of a 20-25% expansion in revenue for FY12.
But then, nobody is sure about the trajectory of rubber prices, which is what matters for the company.
Graphic by Yogesh Kumar/Mint
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