Falling rubber to lift Apollo Tyres

Lower raw material costs another hedge against imports

Tyre stocks have been major gainers over the last two sessions on falling international rubber prices as well as expectations of more price hikes by tyre companies. 

Global rubber prices (Bangkok RSS3) have shed 22 per cent since February 1. In India, the prices have fallen by a similar amount to Rs 164 a kg on higher supplies from Thailand.

Although most tyre companies stand to gain, analysts see more gains for Apollo Tyres.

Rubber accounted for 52 per cent of Apollo’s sales. The impact of raw material costs on margin is reflected in the 239 basis points’ loss in operating profit margin from a year ago to 14.6 per cent in the December quarter, when prices were firm. Apollo had indicated six-seven per cent price hike to absorb the costs. 

The company had effected a price hike of one-two per cent in January, and was able to increase sales volumes and prices as Chinese tyre imports had reduced 33 per cent after note ban. 

Despite the price hike and a strong December quarter performance of its European subsidiary, analysts were cautious on outlook due to higher raw material costs and increasing competition. If decline in raw material prices continues and demand improves, it could lead to brokerage upgrades. Near term could see some bump-up from commercial vehicles (CVs) given the new emission norms’ rollout from April 1. Over half of Apollo sales volumes and revenue comes from CVs. Analysts at JM Financial say the company, being one of the largest players in domestic CV, is well-placed to leverage recovery in CV demand. The company is also gaining traction in the passenger vehicles space and is increasing its sports utility vehicle (SUV) tyre capacity to tap uptick in that category.

Analysts believe the company could increase the 15 per cent margin for the nine-month period that ended December, by increasing the proportion of tyres for CVs and farm equipment, which enjoy higher margins. 

The uptick in rural demand will help agri-equipment as well as two-wheeler tyres. The company has recently entered two-wheeler tyres to widen its portfolio. 

The stock is trading at eight times the firm’s FY18 net profit. The near-term trigger, in addition to low raw material costs, is any decision to impose anti-dumping duty on Chinese imports.