Raw material, interest costs hit Apollo Tyres’ net in June quarter

Raw material, interest costs hit Apollo Tyres’ net in June quarter

A month before the announcement of its earnings, shares of Apollo Tyres Ltd gained, triggered by falling rubber prices. But the meagre 4% growth in net profit was a big disappointment for the Street, and was also lower than analysts’ consensus estimates.

This was in spite of the fact that the firm beat revenue estimates with a 55% jump from the year-ago period. Most of this was from the Indian operations, which account for a major portion of its consolidated revenue; Revenue from the Indian business clocked a 74% jump from a year ago.

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Given the troubled industry scenario that has been plagued by high rubber prices, the hit on operating profitability was not surprising. Analysts say that for Apollo Tyres, the average price of rubber during the quarter was 48% higher than a year ago and 6.5% higher than the preceding quarter.

Reports suggest that the rise in costs outstripped the rise in realizations (on a per kg basis). Consolidated operating profit margin consequently fell by around 240 basis points from a year before. However, strong volume growth helped register 21% growth in operating profit. One basis point is one-hundredth of a percentage point.

On a geographical basis, Apollo Tyres’ profit took a beating mainly from its South African operations. They posted a loss, as competition from imports continues to threaten sales there, even as the cost of manufacturing is high. Profit in Europe, however, was flat compared with a year ago, although sales grew by around 44%. Indian operations were more stable, registering a 38% jump in profit.

Meanwhile, interest costs rose 84%—a combination of interest expenses charged as the firm’s Chennai plant was commissioned, and high inventory levels of finished goods. Concerns on outlook have cropped up because of the slowdown. Whether lower rubber prices (10-15% down in the current quarter) will improve profitability remains to be seen.

However, the firm has announced the purchase of about 10,000 hectares of rubber plantation in Cambodia, adding that it intends securing 20-25% of its rubber needs from its own plantations going forward.

Apollo Tyres’ shares closed 6% lower at 67 apiece, discounting estimated fiscal 2013 earnings about seven times. The stock is sensitive to rubber price movements and a sustained fall could improve investor sentiment.

The silver lining is that the firm’s profit performance has been relatively better than most peers, whose net profits largely fell during the quarter.

Graphic by Ahmed Raza Khan/Mint

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