Apollo Tyres Ltd’s results for the September quarter were rather paradoxical. Although the euro zone is battling a crisis, it was the European operations that boosted the company’s sales and profit for the quarter. Profitability of local operations was a tad below expectations.
Consolidated revenue at Rs 2,871.24 crore was in line with analysts’ expectations, 47.3% higher year-on-year (y-o-y) from a year ago and marginally up from the June quarter. The management, in its conference call with analysts, said this was the culmination of volume growth (about 31% y-o-y), price revisions and favourable product mix.
Although revenue grew across locations, it was led by the 56.9% y-o-y growth in domestic sales, which now account for almost two-thirds of the total revenue.
Europe was the sweet spot; sales there jumped 42.8%, driven by the appreciation of the euro and higher realizations as bookings for higher-value winter tyres rose. What’s more, the region clocked a 83.9% jump in profit before interest and tax (PBIT).
In spite of higher rubber prices against a year ago, PBIT margins rose around 240 basis points (bps) y-o-y. One basis point is one-hundredth of a percentage point. Higher volumes, along with better realizations, provided the leverage to offset costs. The South African market, too, did well with 14.9% y-o-y growth in revenue and marginal profit; the location had posted a loss in the year-before quarter.
What played spoilsport in spite of strong revenue growth in Indian operations was the drag on profitability. Led by higher sales from the passenger car and truck segments, along with a rise in radialization (where value-addition is more), one would have expected profitability to improve.
On the contrary, PBIT margin fell 340 bps from the year-ago period. According to the management, rubber prices did not fall as sharply in India as in international markets.
Moreover, the average cost of rubber for the quarter was Rs 236 per kg against Rs 174 a year ago. And, in spite of the fall in rubber prices, high-cost inventory hit profitability.
A cost analysis given by the company’s management implies that for every 10% hike in rubber prices, international firms need to take a 4% hike in tyre prices. But in the domestic market, higher labour costs necessitate a 7.5% hike. Perhaps with the slowdown anticipated in the automotive sector, aggressive price hikes to fully offset raw material cost hikes could not be taken during the quarter.
Consolidated operating margins, therefore, fell by 148 bps y-o-y and about 49 bps from the June quarter to around 8%. Apollp Tyres deftly managed this by a severe cut in other expenses, which fell around 300 bps from the year-ago period due to lower operating and marketing expenses. Net profit at Rs 77.8 crore was 46.7% higher than the year-before period.
The stock price, which has an inverse relation with rubber prices, has been rising in the last few weeks in response to softer rubber prices. Indeed, they are likely to remain stagnant or soften in the medium term.
But the key question is whether auto volumes in domestic markets will also moderate, which in turn could arrest upsides in the scrip.