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Apollo Tyres: Deflated by rubber prices - Views on News from Equitymaster

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Apollo Tyres: Deflated by rubber prices
Jul 30, 2010

Apollo Tyres has reported an 11% YoY growth in consolidated topline for the quarter ended June 2010. Its bottomline however has remained virtually flat. Here is our analysis of the results.

Performance summary
  • Consolidated topline grows by 11% YoY during the quarter
  • Operating profits decline by 4% as costs rise faster than topline
  • Bottomline remains virtually flat on account of decent growth in topline and a significant fall in tax outgo
  • Standalone net profits fall 57% YoY on the back of a mere 5% fall in topline as natural rubber prices take toll


Financial performance snapshot
  Standalone Consolidated
(Rs m) 1QFY10 1QFY11 Change 1QFY10 1QFY11 Change
Sales 11,803 11,213 -5.0% 16,351 18,207 11.3%
Expenditure 9,860 10,044 1.9% 14,293 16,222 13.5%
Operating profit (EBDITA) 1,943 1,169 -39.8% 2,058 1,985 -3.6%
Operating profit margin (%) 16.5% 10.4%   12.6% 10.9%  
Other income 6 7 10.4% 15 35 134.8%
Interest 203 259 27.8% 307 338 10.3%
Depreciation 312 341 9.6% 544 638 17.3%
Profit before tax 1,434 575 -59.9% 1,223 1,043 -14.7%
Tax 488 169 -65.3% 485 301 -37.8%
Share of profit in associates NA NA   - -  
Minority interest NA NA   - -  
Extraordinary income/(expense) - -   - -  
Profit after tax/(loss) 947 406 -57.1% 738 742 0.5%
Net profit margin (%) 8.0% 3.6%   4.5% 4.1%  
No. of shares (m) 504.1 504.1   504.1 504.1  
Diluted earnings per share (Rs)   7.2     13.0  
P/E ratio (x)   9.0     4.9  

What has driven performance in 1QFY11?
  • It is a known fact that the growth in the company's topline should follow the growth in the automobile industry. Hence, from this perspective, the 5% decline in standalone topline is indeed surprising. Blame it on the shutdown of one of company's plant in Kerala. As a result of this, around Rs 3 bn worth of business was lost by the company and this perhaps explains the fall in topline. Besides, capacity constraints in its radial tyres manufacturing capacity also hurt its topline growth. Consolidated topline was however up by 11% as its European facility was under its wings for full 90 days as opposed to 45 days in the previous quarter as it was acquired only during the latter half of that particular quarter. On a like to like basis, growth in both its European as well as South African businesses remained flat.
    Cost break-up...
      Standalone Consolidated
    (Rs m) FY09 FY10 Change FY09 FY10 Change
    Raw materials 6,635 7,375 11.2% 8,673 9,396 8.3%
    % sales 56.2% 65.8%   53.0% 51.6%  
    Staff cost 626 774 23.5% 1,929 2,911 50.9%
    % sales 5.3% 6.9%   11.8% 16.0%  
    Other expenditure 2,599 1,895 -27.1% 3,691 3,914 6.0%
    % sales 22.0% 16.9%   22.6% 21.5%  

  • If the standalone topline performance was disappointing, its operating performance was even worse. The company experienced severe margin pressure as the same fell by around 6%. This was mainly due to the huge rise in raw material expenses as a percentage of sales. Almost all of the major raw materials prices witnessed a huge jump, especially natural rubber which more than doubled on a YoY basis. While the company did manage to pass through some of the rise, it simply was not sufficient enough to maintain margins. Besides, staff expense also shot up as the company undertook wage hikes. While margins for the consolidated entity also fell, the drop was not as huge as in the case of the standalone entity.

  • At 57% YoY, the standalone net profits fell even more than operating profits, mainly on account of adverse depreciation and interest charges. Consolidated profits however, came in flat due to a fall in effective tax rates. From a geographical perspective, growth in profits from Europe helped compensate the steep fall in Indian operations.

What to expect?
At the current price of Rs 64, the stock is trading at 13 times our estimated standalone FY12 earnings per share. The company's performance has indeed come below our expectations. However, we believe that the worst is behind the company now and going forward margins should stabilise or even improve a bit from the current levels. Furthermore, the quick resolution of problems at its Kerala plant should also help matters. Having said that, our projections for the company are indeed on the conservative side and we remain confident that the company should be able to meet our target price.

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