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Apollo Tyres: Rubber prices mar performance
May 13, 2011

Apollo Tyres has announced its financial year ending 2010-2011 (FY11) results. The company has reported a 9% YoY growth in topline and 33% YoY fall in net profits for the year ended March 2011 on a consolidated basis. Here is our analysis of the results.

Performance summary
  • Consolidated topline registers a 9% YoY growth during the year.
  • Contraction in operating margins leads to a 17% YoY fall in operating profits.
  • Bottomline declines at an even greater rate of 33% YoY on account of adverse interest and depreciation charges
  • Standalone bottomline falls 52% YoY despite the 9% YoY growth in topline

  Standalone Consolidated
(Rs m) FY10 FY11 Change FY10 FY11 Change
Sales 50,368 54,907 9.0% 81,210 88,680 9.2%
Expenditure 42,528 49,570 16.6% 69,459 78,897 13.6%
Operating profit (EBDITA) 7,840 5,338 -31.9% 11,751 9,783 -16.8%
Operating profit margin (%) 15.6% 9.7%   14.5% 11.0%  
Other income 109 264 141.6% 211 260 23.2%
Interest 739 1,493 101.9% 1,154 1,852 60.5%
Depreciation 1,228 1,474 20.0% 2,542 2,719 7.0%
Profit before tax 5,982 2,635 -55.9% 8,266 5,471 -33.8%
Tax 1,832 653 -64.4% 2,607 1,063 -59.2%
Share of profit in associates NA NA   (0) (6)  
Minority interest NA NA     (0)  
Extraordinary income/(expense) - -   874 -  
Profit after tax/(loss) 4,150 1,983 -52.2% 6,534 4,402 -32.6%
Net profit margin (%) 8.2% 3.6%   8.0% 5.0%  
No. of shares (m) 504.1 504.1   504.1 504.1  
Diluted earnings per share (Rs)   3.9     8.7  
P/E ratio (x)   17.8     8.0  

What has driven performance in FY11?
  • Standalone net sales for the full year grew by 9% YoY. This was driven mainly by higher realisations, which the company had to undertake to pass on the tremendous hike in raw material prices. On account of production constraints, volumes growth remained subdued for most part of the year. However, the same picked up during the fourth quarter, surging 14% YoY on the back of demand from the replacement market. As for the consolidated topline growth, while South Africa registered an 8% YoY growth, Europe managed to grow its revenues by 12% YoY during the fiscal.

    Cost break-up
      Standalone Consolidated
    (Rs m) FY10 FY11 Change FY10 FY11 Change
    Raw materials 30,223 36,950 22.3% 41,520 48,211 16.1%
    % sales 60.0% 67.3%   51.1% 54.4%  
    Staff cost 2,895 3,068 6.0% 10,885 11,553 6.1%
    % sales 5.7% 5.6%   13.4% 13.0%  
    Other expenditure 9,411 9,552 1.5% 17,053 19,133 12.2%
    % sales 18.7% 17.4%   21.0% 21.6%  

  • As far as operating margins are concerned, they have a taken a hit to the tune of 3.4% YoY on a consolidated basis and consequently, operating profits have fallen 17% 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 fiscal. Inability to fully pass on the same is reflected in the company’s poor operating performance.

  • At 33%, the fall in net profits has come in worse than the 17% fall in operating profits. This is mainly on account of jump of 61% YoY in interest expenses and also adverse depreciation charges.

What to expect?
At the current price of Rs 70, the stock trades at around 13 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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