For Apollo Tyres, pricing pressures ahead

Higher volumes and lower raw material costs help company beat estimates in June quarter

Apollo Tyres reported a better than expected performance in the June quarter, despite the weakness in the business environment. Led by strong volume growth, the company reported a 16 per cent year-on-year jump in consolidated net revenues to Rs 3,284 crore for the quarter, ahead of Bloomberg consensus estimate of Rs 3,026 crore. While volumes for the Indian operations, which accounts for two-thirds of Apollo’s overall revenues, grew by 13 per cent, its Dutch subsidiary Vredestein’s volumes were up 7 per cent, over the year ago quarter. Vredestein contributes about 26 per cent to Apollo’s top line.

Revenues in the Indian operations, however, were up 6 per cent (lower than volume growth) indicating that there has been pricing pressure brought on by increased Chinese imports and heightened domestic competition. Chinese bus and truck radial imports, which are priced at a 25 per cent discount to products of domestic players, have doubled in FY16.

Truck and bus radials accounts for nearly half of Apollo Tyres’ revenues. Operating margins for the Indian unit thus were down about 70 basis points for the quarter. What has helped however are higher realisations at Vredestein where revenue grew 10 per cent while volumes were up 6 per cent.

Although there is pricing pressure, volume growth and the subsequent operating leverage (capacity utilisation in India is at 85 per cent and in Europe at 90 per cent, are close to peak levels) helped. Operating profit for the consolidated entity was up 6.6 per cent over the year ago period helped by lower raw material costs, which as a percentage of sales were down 148 basis points.

However, other expenses (promotions), which were up 28 per cent year-on-year, limited the gains. Although overall margins at 16.3 per cent were down 143 basis points year-on-year, it was better that expectations. Apollo’s operating profit at Rs 539 crore was reasonably ahead of Bloomberg consensus estimate of Rs 467 crore.

Aided by higher other income and lower taxes, the company reported a 10.9 per cent growth in net profit at Rs 315 crore as compared to the consensus estimates of Rs 243 crore. The company will face twin headwinds from higher raw material costs as well as increased Chinese imports. Natural rubber prices are up over 45 per cent from February lows. Given the lag impact, this could play out in the current quarter.

The company has diversified into two wheeler tyres in the current financial and expects good traction from the new vertical especially in the replacement market. Given the high margins the tyre industry is enjoying currently, it will be difficult to pass on the raw material costs to automobile makers, while cheaper alternatives in the replacement market (74 per cent of Apollo’s revenues) limits its ability to effect price hikes.

Not surprisingly, Apollo Tyres’ stock jumped initially, but settled with gains of 0.4 per cent on a day markets were down by a similar number.