Apollo Tyres Ltd has bounced back after battling with problems at some of its units in the preceding quarter. Operating profit rose by 47% quarter-on-quarter (q-o-q) on the back of both rising volumes and improved profitability.
The company’s Kerala unit was under a lockout between June and end-August, affecting its performance in the three months ended 30 September. In the December quarter, the unit operated under normal conditions, leading to an improvement in production.
Besides, Apollo Tyres ramped up the production of both passenger and commercial vehicle tyres at its new Chennai facility.
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These two factors contributed to a 20% sequential growth in volumes last quarter. Coupled with price hikes, this led to a 22% sequential growth in Apollo’s stand-alone sales. On a year-on-year (y-o-y) basis, sales grew by 8%.
The company’s European operations benefited from strong sales of winter tyres. Besides, the South African operations were back to full capacity after being hampered by a strike at the port in the preceding quarter. Consolidated net sales, therefore, moved up 22% q-o-q and 3% y-o-y.
The increase in volumes along with price hikes across markets paid off well during the quarter. The company also resorted to a higher proportion of rubber imports, which worked to its advantage, as rubber prices were volatile in the domestic market.
Based on the consolidated results, the company maintained raw material costs at about 59% of sales despite an increase in rubber prices. A report by Prabhudas Lilladher Pvt. Ltd points out that despite a 15% q-o-q rise in natural rubber prices, the cost of all inputs on a per kg basis rose only marginally.
Meanwhile, the operating leverage, with its plants operating at near 95% utilization, resulted in scale benefits for other expenses such as staff and administration costs.
The above factors, therefore, trickled down to improved operating profit margin. Though lower on a y-o-y basis, the consolidated margin improved by 200 basis points, or 2 percentage points, from the preceding quarter to 11.5%. This was a key positive for Apollo given that peers such as Ceat Ltd and JK Tyre and Industries Ltd registered a sequential drop in their already wafer-thin margins during the December quarter.
Even so, it must be noted that the rise in rubber prices hasn’t abated. At the current price of Rs240 per kg, it is already 30% higher than the average cost of Rs185 per kg during the December quarter. Analysts expect this pressure to continue for at least two more quarters. Given these cost pressures, the company’s net profit may not see a y-o-y growth in the near term. However, thanks to higher volumes and gradual price increases, the profit should rise on a sequential basis.
The stock’s current market price of Rs58 discounts estimated fiscal 2011-12 earnings by about seven times. Though valuations are reasonable, investors may show interest only when rubber prices start softening.
Graphic by Naveen Kumar Saini/Mint
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