BackSteady revenue perks up shares of Apollo Tyres, margins remain weak
The tyre maker’s Ebitda margin shrunk to 11.1% in the June quarter, compared with 12.4% in the year-ago periodRevenue for June quarter saw subdued growth of about 0.5% year-on-year
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Shares of Apollo Tyres Ltd took off after its first-quarter (Q1) results were announced, despite the below par numbers on most counts. As it turns out, the Street was enthused that the company could maintain revenue growth in an otherwise subdued auto market.
Besides, the Apollo Tyres stock has been on a downturn, falling about 33% this year. That’s perhaps why it saw a pullback of about 5.2% in trading on Wednesday.
Revenue for June quarter saw subdued growth of about 0.5% year-on-year. Even compared to the preceding quarter, revenue growth inched up marginally by 2.2%. But that seemed to be good enough for the Street, which expected a sharp slump in the original equipment market to impact revenue growth.
As it turns out, the replacement market was the saving grace for the company. The management noted in a release that while demand from automakers remained subdued, there was growth in the replacement market.
Domestic and international business conditions, though, continued to remain weak. Operations in Europe declined by 1.2% year-on-year. The European businesses’ Ebit (earnings before interest and tax) loss came in at -2.4% year-on-year. Analysts were, however, expecting a break-even from its European operations. Sustained pricing pressure amid rising competition has impacted the operating metrics in both domestic and overseas operations.
Naturally, the Ebitda (Ebit plus depreciation and amortization) margin has been constrained. There has been marginal increase in raw material costs. As compared to sales, raw material costs were up about 40 basis points year-on-year. Tyre makers also faced cost pressures from rising crude oil prices and its derivatives. However, rubber prices have remained soft. Most tyre firms also faced a challenge in terms of receivables due to the liquidity squeeze.
No surprise then, Ebitda margin shrunk to 11.1% in the June quarter, compared to 12.4% in the year-ago period. The management has maintained that it is focusing on a differentiated product mix and looking at lowering costs to improve margins.
Besides, the adoption of new accounting standards has also hit Apollo Tyres’ profit before tax by about ₹10 crore. This has resulted in net profit plunging by 44% to ₹141.6 crore year-on-year for Q1. Here, too, the numbers were below analysts’ estimates.
Much of the speed breakers that are slowing the tyre industry still remain. A broad market auto industry pickup is critical for tyre makers to sustain improvement in operations. All these could weigh on the pullback seen in the Apollo Tyres stock lately.
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