Apollo Tyres: a tale of two contrasting markets
After a rather disappointing show by MRF Ltd a week ago, Apollo Tyres Ltd fared well in comparison.
What helped its cause was a robust performance on its home turf, which helped offset the drag from its European operations.
To begin with, there was not much to complain on the revenue front. The Asia Pacific, Middle East and Africa (APMEA) region that accounts for about two-third the consolidated revenue, clocked a 19% jump in net sales on a year-on-year basis. Apollo’s stronghold in the commercial vehicle tyres paid off well. Meanwhile, the replacement market for tyres has been buoyant, thanks to strong vehicle sales of both passenger cars and two-wheelers.
Higher volume helped offset rising cost pressures. Crude has risen by nearly 40% during the period, and crude derivatives are significant inputs in the manufacture of tyres.
Luckily, the average cost of natural rubber eased by Rs20 per kg to Rs133 per kg over a year.
Therefore, high sales volume and lower rubber prices lifted Ebit (earnings before interest and tax) margins up for the APMEA region.
Unfortunately, this was not the case in Europe. The 22% y-o-y jump in revenue failed to lift profitability. The management, in the analysts’ call explained that margins were lower due to the drag from its acquisition of Reifencom. Ebit margin narrowed by 220 basis points (bps) to a wafer-thin 1.7%. One basis point is one hundredth of a percentage point.
At the consolidated level, Apollo Tyres’ Ebitda (earnings before interest, tax, depreciation and amortization) margin of 12.8% was in-line with what 11 Bloomberg analysts had forecast. It was also 160bps higher y-o-y.
Even the net profit of Rs250 crore that was 10% higher from the year-ago period, although it just met the Street’s expectation. It’s hardly surprising then that investors didn’t give the performance a thumbs-up.
Fears of rising cost pressures on account of soaring crude prices are weighing down the stock.
Then, there is the capacity ramp up in the industry that could lead to stiff competition in the medium term. Apollo Tyres’ increase in capacity both in India and Hungary and rising share in the truck and bus radial tyres will aid strong revenue growth, according to Emkay Global Financial Services Ltd.
Indeed, the Apollo stock has done better than peers, rising 4% this year in a market that’s marginally down.
Yet, although analysts are bullish on the firm’s prospects, the challenge will be for overseas operations to pick up in the coming quarters and stop being a drag on overall performance.