Rising rubber prices hit Apollo Tyres stock
Rising rubber prices hit Apollo Tyres stock
After robust sales and profit growth during the September quarter, Apollo Tyres Ltd is all set to produce 14,000 additional tyres by the middle of next year. Despite this, even as the Nifty gained 102 points in Monday’s trading session, Apollo shares shed around 7% to close at Rs53.60. This reflects the concerns about rising rubber prices, which could depress operating profit margins and the resultant earnings for the December quarter. As the chart shows, however, the stock has comfortably outperformed the Nifty in the past month.
Input cost for tyres accounts for 70% of sales. An incremental 10% in raw material costs could result in 6-7% fall in operating profit margins, although, of course, this could be partly offset by a rise in tyre prices.
But apart from the pressure on margins, Apollo’s operations continue to be impressive. It has around 65% share in the replacement market, which accounts for around 75% of its revenues. During 2008-09, the company operated at around 85-75% capacity producing tyres of around 830 tonnes per day. The company is now working at near full capacity, with an additional 300-plus tonnes per day coming from the new facility in the next six-eight months.
For the September quarter, Apollo had surprised markets with a 62% rise in consolidated revenues. Operating profit margins (OPM) had gone up to 16.4% from 5.2% in the year-ago period. It revised revenue guidance from 11% to 15% for fiscal 2010, given that its overseas subsidiaries too are faring well, besides domestic market sales. However, future earnings hinge on the behaviour of rubber prices.
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