Lower rubber prices in the December quarter prevented Apollo Tyres Ltd’s profit from skidding in spite of flat revenue growth. Average rubber price during the quarter was down around 14% from a year earlier and 10% from the preceding three months. Given that rubber accounts for nearly two-thirds of the cost of producing a tyre, it is not surprising that the lower material cost benefit translated into a 183 basis points expansion in operating margin from the year-ago period, to 11.9%.
A basis point is one-hundredth of a percentage point.
In fact, lower rubber prices along with productivity-improvement measures offset higher other expenses and staff costs. Profit margin grew significantly across geographies and, according to Emkay Global Financial Services Ltd, the company’s European operations threw a positive surprise registering a strong 150 basis points increase in profitability.
The margin expansion was commendable given the poor traction in tyre demand. Domestic revenue slipped by 2.7% from a year ago, as it did in Europe, while rising 6% in the African region. The December quarter’s net consolidated revenue was flat at Rs.3,217.3 crore, pulled down by sluggishness in the original equipment supplies and commercial vehicles, where Apollo Tyres has a reasonably strong presence. Besides, there was disruption of work for 19 days at its Vadodara plant caused by a group of workers.
Poor revenue traction translated into lower-than-expected operating profit of Rs.382.2 crore, which though was 17.8% higher than a year ago. Net profit (adjusted for exceptional items in the year-ago period) grew by around 42% to Rs.180.6 crore—a tad higher than Bloomberg’s consensus estimates. Note that a huge 700% jump in non-operating other income fuelled net profit, along with a relatively lower tax rate.
The company management hopes to see recovery in the passenger vehicle segment in the next couple of quarters, although the commercial vehicle segment may take longer. Therefore, going forward, higher operating leverage should lift profitability, too.
Apollo Tyres’ shares, which have outperformed benchmark indices significantly over the last one year, have also been volatile, perhaps on account of a wobbly outlook on the automotive sector still. At Rs.84.85 apiece, the stock trades at a price-to-earnings multiple of six to its estimated fiscal 2014 earnings, leaving room for appreciation.