Apollo Tyres: Volume push

While the Indian and South African operations show good results, those in Europe require more work.

A growth rate of 24 per cent in volumes as well as revenues year-on-year helped Apollo Tyres, India’s largest commercial vehicle (CV) tyre maker, top revenues of Rs 1,220 crore on a standalone basis for the September 2009 quarter. Consolidated revenues were higher by 62 per cent year-on-year to Rs 2,046 crore, but about 44 per cent of this growth is on account of the May 2009 acquisition of the Dutch tyre company, Vredestein. Strong replacement demand (almost three-fourth of sales) and a pickup in sales of new CVs should help the company record 8-10 per cent volume growth in the standalone operations, going ahead.

While its Indian and South African operations are likely to record good growth, the pain points will be its European operations,where the company recorded sales of about Rs 550 crore, which are flat vis-à-vis last year, with net profit margins of just two per cent.

At the operating profit level, despite increase in other expenditure (primarily sales and marketing expenses) by half, a 10 per cent dip in raw material (rubber) prices year-on-year and lower inventory costs helped improve profit margins by a little over three-fold to 16.5 per cent. While operational efficiency and higher volumes have helped the company improve its profit margins, the road ahead is likely to be difficult.

Rubber prices, which have risen sequentially by three per cent, are currently at Rs 110 per kg as compared to the average price of Rs 100 per kg the company paid during the September 2009 quarter. The company believes expenditure under this head alone would increase by 10 per cent for the December quarter. However, it expects higher volumes in the replacement segment, the improvement in new CV production and price hikes (effective October 1) already undertaken, to help it maintain margins at around 12-13 per cent levels.

Despite the looming pressure on margins due to a spike in raw material costs, the markets were pleased with the September 2009 quarter’s performance and the volume growth expected from a recovery in the auto sector. The stock was up 5.5 per cent to Rs 54.55, after making a new 52-week high of Rs 56.90. It has outperformed the BSE Sensex since mid-July this year. And, at current levels, it trades at a PE of 8.26 times its estimated 2009-10 earnings, leaving limited room for further upside in the near term.

With inputs Ram Prasad Sahu & Sarath Chelluri