Apollo Tyres: Muted topline dents performance

Worries of a further jump in Chinese imports would keep revenue growth in check in near term

Lower than expected performance in the June quarter and fears of higher imports from China have put pressure on the Apollo Tyres stock. While most tyre manufacturers saw a steep price correction, the Apollo Tyres stock shed the most among leading tyre makers, losing 12.5 per cent in trade on Tuesday. China devalued its currency, yuan, by two per cent which is expected to make exports of Chinese tyres more competitive. Imports of trucks and bus radials rose 60 per cent in FY15 and the market share of Chinese companies in the Indian replacement market has gone up by 66 per cent in FY15 to 25 per cent. Roughly half of Apollo’s revenues come from the commercial vehicle space and at 77 per cent of revenues from replacement segment, it is the highest among Indian companies.

The Chinese action could aggravate the market loss for Indian companies further, though the Indian tyre makers will be hoping that the government will impose anti-dumping duties as was done by the US and Brazil earlier this year. The domestic tyre sector has an inverted duty structure wherein the import duty on the finished product is lower than the duties on the raw materials.

While the Chinese threat is real and could impact the performance of the tyre companies such as Apollo, its June quarter performance was disappointing. Consolidated revenues in the quarter at Rs 2,845 crore was down 12 per cent over the year-ago quarter and lower than the consensus estimates of Rs 3,186 crore. Sales were down 10 per cent on a sequential basis as well. The muted top line due to lower sales in key geographies trickled down to its operating performance and dented net profits as well. While its European operations (27 per cent of revenues) which is carried out through its subsidiary Vredestein saw a 11.9 per cent fall in revenues on account of a weaker euro, domestic revenues, too, were subdued (due to price cuts, higher Chinese imports), registering a 7.4 per cent fall against expectation of a slight growth. About 75 per cent of the company’s revenues come from India.

As expected, the company saw huge gains due to the cheaper input costs (both from natural rubber and fall in crude oil derivatives) with raw material to sales down 600 basis points year-on-year to 50.5 per cent. This boosted its operating profit margins by 457 basis points to 17.7 per cent, which was in line with estimates. Operating profit at Rs 503 crore, up 19 per cent over the year-ago quarter, was also lower than estimates, which pegged the same at Rs 518 crore.

Although finance costs halved to Rs 24 crore over the year-ago period, a 63 per cent jump in taxes and a 24 per cent fall in other income limited the gains at the net level. The firm reported net profits at Rs 290 crore, up 27 per cent but lower than estimates, which had pegged it at Rs 319 crore.

While lower raw material costs are a comforting factor, demand problems compounded by imports and domestic competition will keep a lid on revenue growth. Although most analysts have a ‘buy’ on the stock, they are likely to revisit their estimates given the latest Chinese action and June quarter performance.