Apollo Tyres: Margin squeeze persists - Views on News from Equitymaster

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Apollo Tyres: Margin squeeze persists

Feb 12, 2011

Apollo Tyres has announced its December quarter results. The company has reported a 3% growth in topline and 36% YoY fall in net profits for the quarter ended December 2010 on a consolidated basis. Here is our analysis of the results.

Performance summary
  • Consolidated topline registers a 3% growth during the quarter.
  • Contraction in operating margins leads to a 29% fall in operating profits.
  • Bottomline declines at an even greater rate of 36% YoY on account of adverse interest and depreciation charges.
  • Standalone bottomline falls 47% YoY on the back of a 8% growth in topline

Financial performance snapshot
  Standalone Consolidated
(Rs m) 3QFY10 3QFY11 Change 3QFY10 3QFY11 Change
Sales 13,234 14,321 8.2% 22,963 23,687 3.2%
Expenditure 11,183 12,830 14.7% 19,126 20,955 9.6%
Operating profit (EBDITA) 2,051 1,491 -27.3% 3,837 2,732 -28.8%
Operating profit margin (%) 15.5% 10.4%   16.7% 11.5%  
Other income 3 31 974.0% 30 50 66.8%
Interest 211 434 105.9% 438 529 20.7%
Depreciation 293 367 25.4% 674 673 0.0%
Profit before tax 1,550 720 -53.5% 2,756 1,580 -42.7%
Tax 520 179 -65.6% 882 372 -57.8%
Extraordinary income/(expense) - -   - -  
Profit after tax/(loss) 1,029 541 -47.4% 1,874 1,208 -35.5%
Net profit margin (%) 7.8% 3.8%   8.2% 5.1%  
No. of shares (m) 504.1 504.1   504.1 504.1  
Diluted earnings per share (Rs)   7.3     11.6  
P/E ratio (x)   7.0     4.4  

What has driven performance in 3QFY11?
  • On a consolidated basis, volumes were down 12% YoY for the company during the quarter. Thus, the 3% growth in topline was driven entirely by increase in realisations, which the company took to offset higher raw material costs. Coming to Indian operations, here volumes fared even badly and were seen declining 20% YoY. Even here, it was the robust growth in realisations that saved the day for the company. As per the company, volumes in the replacement market fell 20% YoY in the domestic market on the back of lower demand by the end consumer. Bettering the current level of topline growth in the coming quarters looks difficult as apart from realisations, even volumes might be expected to come under pressure.

      Standalone Consolidated
    (Rs m) 3QFY10 3QFY11 Change 3QFY10 3QFY11 Change
    Raw materials 8,133 9,400 15.6% 11,356 12,546 10.5%
    % sales 61.5% 65.6%   49.5% 53.0%  
    Staff cost 800 779 -2.6% 2,965 3,126 5.4%
    % sales 6.0% 5.4%   12.9% 13.2%  
    Other expenditure 2,251 2,651 17.8% 4,805 5,283 9.9%
    % sales 17.0% 18.5%   20.9% 22.3%  

  • As far as operating margins are concerned, they have a taken a hit to the tune of 5.2% on a consolidated basis and consequently, operating profits have fallen 29% YoY. The decline has been attributed mainly to rise in raw material expenses. As per the company, natural rubber, which is a key raw material for the company has seen its prices going up by 70% YoY during the quarter. Inability to fully pass on the same is reflected in the company's poor operating performance.

  • At 36% YoY, the fall in net profits has come in worse than the 29% YoY fall in operating profits. This is mainly on account of jump of 21% in interest expenses and also adverse depreciation charges.

What to expect?
At the current price of Rs 50, the stock trades at around 9 times its expected FY12 standalone earnings per share. We believe that on account of capacity constraints and raw material price pressures, the company is operating below its sustainable earning power and hence, there exists some upside to its earnings growth in the medium term. The growth will also get a boost on account of the ramp up of its new capacity. In view of this, we stick with our target price of Rs 90 on the stock.

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