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Apollo Tyres: Bottomline woes continue

Aug 4, 2004

Introduction to results
Apollo Tyres, India’s leading manufacturer of tyres, recently announced its 1QFY05 results. While the topline growth of the company has been robust and operating margins have also improved, a more than three fold jump in interest outgo has resulted in net profit decline of nearly 17% on a YoY basis.

What is the company’s business?
Apollo Tyres is one of India’s leading tyre brands and has a leadership in the truck tyre replacement market. Besides having a strong presence in the commercial vehicle OEM segment, the company also supplies to car and tractor OEM majors. Last year, it entered into a joint venture with Michelin to manufacture, market and sell truck and bus radial tyres.

(Rs m) 1QFY04 1QFY05 Change
Net sales 4,490 5,070 12.9%
Other income 5 1 -88.9%
Expenditure 4,091 4,590 12.2%
Operating profit (EBDITA) 400 480 20.1%
Operating profit margin (%) 8.9% 9.5%  
Interest 36 117 229.0%
Depreciation 100 130 30.0%
Profit before tax 269 234 -13.2%
Extraordinary items - - -
Tax 82 78 -5.8%
Profit after tax/(loss) 187 156 -16.5%
Net profit margin (%) 4.2% 3.1%  
No. of shares (m) 32.6 38.3  
Diluted earnings per share (Rs)* 19.5 16.3  
P/E (x)   11.3  
(* annualised)      

What has driven performance in 1QFY05?
Sales: Volume sales of CVs and passenger vehicles have improved by 25% and 18% respectively during 1QFY05 on a YoY basis. The growth in the company’s topline is therefore a consequence of buoyancy in auto sales, as it has a significant presence in the OEM segment. Besides, the company had also hiked product prices across categories and this seems to have further aided the growth in topline.

Operating margin: Despite pressure on the raw material expenses front (61.4% of sales in 1QFY05 as compared to 59.6% of sales in 1QFY04), operating margins have improved by 60 basis points. The improvement is a result of savings on other expenses front, down 240 basis points in terms of percentage of sales.

Net profits: Owing to more than three-fold jump in interest expenses and significant 30% rise in depreciation outgo, the company’s bottomline has witnessed a decline of nearly 17% on a YoY basis. While the exact reasons behind the rise in interest expenses are not known, it could be due to investments that the company has undertaken in recent times, one of which is its JV with Michelin.

Over the last few quarters: Despite buoyancy in CV sales, the sales growth of the company has not been consistent and has displayed mixed trends. However, we would be comfortable with the 8%-10% growth range in the medium to long term. As far as operating margins are concerned, they are likely to improve from the current levels as rubber prices, which are a key input constituent, are ruling at their three-year highs and any further appreciation seems unlikely.

What to expect?
The stock is currently trading at Rs 185, implying a P/E of 11x its annualised 1QFY05 earnings. Unlike last year, we expect the growth in topline to be slower in FY05 on account of slowdown in CV demand. Softening of rubber prices however, will have a positive impact on the operating margins. Unless there is a significant improvement in the same, the risk reward ratio seems skewed towards risks.

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