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Apollo Tyres: Applying brakes on costs

May 28, 2010

Apollo Tyres has announced its full year FY10 results. The company has reported a 63% growth in consolidated topline and the bottomline is up nearly fivefold. Here is our analysis of the results.

Performance summary
  • Standalone topline grows an impressive 24% on a YoY basis during the fiscal
  • Huge reduction in raw material costs leads to a 141% surge in operating profits as margins nearly double
  • Bottomline up nearly fourfold as benign depreciation and interest charges add further to the buoyancy
  • Consolidated bottomline surges more than fourfold on the back of an impressive 63% growth in topline
  • Recommends a dividend of Rs 0.75 per share subject to approval. This would translate into a yield of 1.1% at current prices

Financial performance snapshot
  Standalone Consolidated
(Rs m) FY09 FY10 Change FY09 FY10 Change
Sales         40,716         50,368 23.7% 49,852          81,210 62.9%
Expenditure         37,457         42,528 13.5% 45,679         69,459 52.1%
Operating profit (EBDITA) 3,259 7,840 140.6%    4,173          11,751 181.6%
Operating profit margin (%) 8.0% 15.6%   8.4% 14.5%  
Other income      101      109 7.9%   219      211 -3.5%
Interest      668      739 10.6%   973   1,154 18.6%
Depreciation      980 1,228 25.3%     1,285 2,542 97.8%
Profit before tax 1,712 5,982 249.5%    2,134 8,266 287.4%
Tax      630 1,832 190.6%   742 2,607 251.1%
Share of profit in associates  NA    NA            0    (0)  
Minority interest  NA    NA            -       
Extraordinary income/(expense)     -        -             -         874  
Profit after tax/(loss) 1,081 4,150 283.9%    1,392 6,534 369.5%
Net profit margin (%) 2.7% 8.2%   2.8% 8.0%  
No. of shares (m) 504.1 504.1       504.1 504.1  
Diluted earnings per share (Rs)   8.2         13.0  
P/E ratio (x)   8.5     5.4  

What has driven performance in FY10?
  • Standalone topline was up nearly 24% on a YoY basis. Followers of the Indian auto industry wouldn’t have been too surprised with such a growth. It should be noted that FY10 was one of the best years in recent times for the auto industry with robust volume growth across almost all segments. Apollo Tyres is a leading player in CV and passenger car tyres and hence, benefited from such a trend. Also, in view of tight demand supply situation and pressure on raw material prices towards the latter half of the year, part of the topline growth was also driven by increase in realisations for the company. Going forward, the company feels reasonably confident of achieving a similar topline growth in the current fiscal as well.

  • As far as the consolidated topline is concerned, it has logged in an even better growth of 63% YoY for the fiscal. This was made possible on account of the inclusion of the European business that the company acquired last year. The South African business on the other hand logged in a growth in the region of 20%. Going forward, while the company expects European business to remain more or less flattish, South Africa should chip in with some sort of growth.

    Cost break-up...
      Standalone Consolidated
    (Rs m) FY09 FY10 Change FY09 FY10 Change
    Raw materials 28,213 30,223 7.1% 32,172 41,520 29.1%
    % sales 69.3% 60.0%   64.5% 51.1%  
    Staff cost 2,075 2,895 39.5%                4,150 10,885 162.3%
    % sales 5.1% 5.7%   8.3% 13.4%  
    Other expenditure 7,169 9,411 31.3% 9,357 17,053 82.2%
    % sales 17.6% 18.7%   18.8% 21.0%  

  • Standalone operating margins have nearly doubled for the fiscal. This has been made possible due to a significant reduction in raw materials cost as a percentage of sales. However, with most raw material prices now inching upwards, sustaining margins at current levels looks like a difficult proposition for the company, especially given its limited ability to pass on the same to end customers. We expect a small decline to the tune of 2% to 3% in margins going forward. To that extent, the consolidated operating margins are also likely to get affected.

  • Economies of scale and a greater financial leverage has helped the company post an even better bottomline performance as the net profits have come in higher by a huge 284% YoY. Similar factors have also helped the consolidated performance as the net profits here have gone up by 370% on a YoY basis.

What to expect?
At the current price of Rs 70, the stock trades at a multiple of 8.5x its standalone FY10 earnings per share. The company has performed much better than our expectations. Having said that, growth of a similar magnitude, especially on the bottomline front is not possible year after year as there is a limit to which operating margins can expand. Hence, going forward, growth should revert to the long term average. However, thanks to the not so expensive valuations and the long term fundamentals of the stock, we remain positive from a 2-3 year perspective.

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