Coincidentally, in Q3, the quantum of imported rubber was substantially high due to reduced acreage and output in domestic markets post the Kerala floods
Even though net revenue rose on the back of decent sales, operating performance bore the brunt of raw material price volatility throughout 2018
Input cost pressures are normally experienced with a lag in manufacturing companies. This trend has played out in Apollo Tyres Ltd’s December quarter (Q3 FY19) results. Even though net revenue rose on the back of decent sales, operating performance bore the brunt of raw material price volatility throughout 2018.
Crude oil price, which scaled a peak of $86 per barrel in October, fuelled the cost of crude derivatives that are used in tyre production. To top it, a falling rupee made imported rubber costlier. Coincidentally, in Q3, the quantum of imported rubber was substantially high due to reduced acreage and output in domestic markets post the Kerala floods.
All these headwinds pushed up raw material costs. The stand-alone domestic entity’s raw material cost spiralled 550 basis points (bps) year-on-year to 67.1% in Q3. The same rose on a consolidated basis too, albeit by a lesser degree (320 bps) to 59%. On the whole, input costs took a major toll on profitability at operations in Asia-Pacific, Middle East, Africa and Europe.
Consolidated Ebitda (earnings before interest, tax, depreciation and amortization) margin fell by 110 bps from a year earlier. According to Jefferies India Pvt. Ltd, “Apollo Tyres’ Ebitda margin at 11.2% missed our estimate by 90 bps, mainly on account of continued pressure from commodity price, which was up ~2% QoQ and could not be offset completely from price hike taken during the quarter."
So, despite a 16.5% jump in net revenue to ₹4,718.3 crore, Ebitda grew at a lower 6.2%.
As if there weren’t enough pressures on profits, Apollo Tyres also provided for a ₹60 crore loss on an inter-corporate deposit with beleaguered Infrastructure Leasing and Financial Services Ltd. Including this loss, net profit fell 19% year-on-year to ₹198 crore.
Amid all these challenges, the company’s stabilizing European operations mainly with respect to its Hungarian plant were heartening. It is reportedly gaining market share in the region and growing at a faster pace than the overall industry in Hungary.
On the home turf too, Apollo Tyres is expanding operations to tap a growing market. However, the moot question is whether the timing will misfire, given the new Andhra Pradesh plant will open in FY20, a period when analysts expect a slowdown.
Meanwhile, Apollo—like all tyre makers—will get respite from falling raw material prices. Headwinds like crude oil, rubber and the rupee have receded in recent months, and are likely to stay soft in the near term.
Surely, the road ahead looks less intimidating for tyre makers, who seem to have steered clear of challenging times. Yet, uncertainty on demand in both the original equipment and replacement market segments have made investors cautious. At ₹198.85 apiece, shares of Apollo Tyres trade at about nine times one-year forward.