Investors ignore Apollo Tyres’ strong operating performance on bleak global auto sector outlook

Apollo Tyres Ltd staged a decent operating performance for the March quarter (Q4FY20) in spite of covid-19 led challenges across its Indian and European operations. But, this did little to lift investor confidence. The stock trended lower as the management forecast a bleak near-term outlook across regions, in its analysts’ call.

Q4’s consolidated earnings before interest, tax, depreciation and amortisation(ebitda) margin at 13.2% zoomed 322 basis points (bps) year-on-year (yoy). One basis point is one hundredth of a percentage point. It even shot past Bloomberg’s consensus estimate of 9.8%.

However, this was mainly on the back of stringent cost control efforts in staff and promotional expenses. Of course, lower rubber (the main input) and crude oil prices gave a leg up to profitability.

Although cost benefits were visible in both Indian and European operations, sales drop due to the impact of covid-19 pandemic is a concern. Net revenue fell 15.5% yoy to ₹3,610 crore, which was a tad lower than forecasts.

The sales drop of 21% in Indian operations reflects weak original equipment manufacturers (OEM) demand. Sales in European operations was 3.5% lower yoy, although the company continued to outperform industry growth rates consistently.

Therefore, stringent cost management and improved profitability pushed up consolidated ebitda for the quarter. It rose by around 12% to Rs475 crore beating estimates on the street by about 33%.

In spite of a decent operating performance, investors chose to focus on the outlook ahead, which looks terse. Apollo Tyres’ stock was down 1.2% as the management indicated a sales decline in FY21 compared to FY20.

However, it painted a favourable outlook on replacement market sales, especially in India. “Growth in the replacement market for the full year in most of the product categories, led by a strong performance in the passenger vehicle segment, Industrial tyres and light commercial vehicle segment,” it stated. Further, after the lockdown was eased, May sales in the replacement market have improved and are at 50% the normal levels.

That’s not all. The company’s capacity addition is likely to see higher capital expenditure for the next few years. This will increase interest outgo and depreciation costs, at a time when sales will be tepid. According to a note by Emkay Global Financial Services Ltd, “we expect near term revenue performance to be muted owing to weakness in Europe market and domestic OEM segment. Any delay in demand pickup could impact margins (due to high fixed costs) and liquidity position (as current debt is large at over Rs6,500 crore).