Muted volumes in India may put Apollo Tyres' revenue growth on slow gear

Weak demand from domestic auto makers dented Apollo Tyres’ September quarter performance. The firm posted lower-than-estimated revenues at Rs 3,926 crore, down 6 per cent year-on-year. India operations, which accounted for 70 per cent of consolidated revenues, dropped 11 per cent.

This was driven by a 12.5 per cent fall in volumes, especially in the commercial vehicle (CV) segment (down 14 per cent), which was hit the hardest among all auto segments.

The firm’s supply to passenger vehicles also registered a decline of 11 per cent. What helped restrict the decline was the higher quantum of replacement and exports.

The share of replacement segment rose, while supplies to automakers as a proportion of revenues saw a fall. Automakers now account for 20 per cent of revenues, compared to 30 per cent earlier. While domestic operations were muted, the company posted a 5 per cent growth in the European market, outperforming the sector and gaining market share.

It expects margin performance in Europe to improve from mid-single digits to double digits, over the next couple of years.

The Street will now focus on volume growth trends in India, on the demand front. 

While there was some uptick during the festival season, the CV segment continues to see volume pressure.

For October, the segment registered a decline of 25 per cent; medium and heavy CVs fell by half. 

This will weigh on volumes and revenues in the current quarter.

While revenue growth was below expectations, lower raw material costs helped the firm report margins of 10.8 per cent, down about 20 basis points over the year-ago quarter.

Among key raw materials, natural rubber prices have remained steady over the last quarter, with prices at Rs 130 per kg. Given the muted demand scenario in India, as well as globally, prices are unlikely to see a major uptick in the near term. Rubber accounts for 40 per cent of raw material costs.

Prices of other raw materials like crude oil derivatives are expected to be lower in the near term, too. This should help the company maintain its margins.

Given the muted volume outlook, there could be further pressure on revenues, which could weigh on the stock.