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Apollo Tyres: Wrong side!

Nov 3, 2004

Introduction to results
Apollo Tyres, India’s leading tyre manufacturer announced its 2QFY05 results last week. The company has continued to witness pressure at the operating level. As a consequence, despite a 5% YoY growth in topline, bottomline has fallen by around 14%. For the half yearly period, the corresponding figures stood at 9% and a negative 15% respectively, on a YoY basis. If it were not for the other income the bottomline performance would have been even worse.

Apollo Tyres is one of India’s leading manufacturers of tyres with presence in the commercial vehicle OEM segment (as a supplier to Telco and the like). It has market leadership in the truck tyre replacement segment. The company also supplies to car and tractor OEM majors (original equipment manufacturers). It has entered into a JV with Michelin, the world’s largest tyre maker for manufacturing of truck and bus radial tyres.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 4,799 5,025 4.7% 9,289 10,095 8.7%
Expenditure 4,404 4,689 6.5% 8,494 9,279 9.2%
Operating profit (EBDITA) 395 336 -15.1% 795 816 2.6%
Operating profit margin (%) 8.2% 6.7%   8.6% 8.1%  
Other income 12 130 954.5% 18 130 636.2%
Interest 48 119 146.4% 84 236 181.4%
Depreciation 103 146 42.0% 203 276 36.0%
Profit before tax 257 201 -21.8% 526 435 -17.4%
Extraordinary items - - - - -  
Tax 84 52 -37.9% 166 130 -22.0%
Profit after tax/(loss) 173 149 -13.9% 360 305 -15.3%
Net profit margin (%) 3.6% 3.0%   3.9% 3.0%  
No. of shares (m) 32.6 38.3   32.6 38.3  
Diluted earnings per share (Rs)* 18.0 15.5   22.1 15.9  
P/E (x)   13.5     13.1  
(* annualised)            

Key performance indicators
Net sales:  Since the company derives a majority of its revenues from the replacement market, it has not been able to take much advantage of the strong growth in demand in the CV industry by way of supplies to OEMs. According to estimates, after growing in the region of 30% in the last two years, the growth in industry volumes has remained strong this year also as there has been a near 30% surge in 1HFY05. As a consequence of its dependence on replacement market rather than OEM supplies, the growth in topline has been rather moderate at 5% YoY. However, since replacement demand usually comes with a lag of 2-3 years, we expect volumes to pick up in the near future.

Operating profits:  Operating margins have fallen by a significant 150 basis points during the quarter. High rubber prices have been affecting company’s profitability for quite some time now and the trend has continued during the quarter under consideration. Although the company has resorted to nearly 5-6 rounds of price hikes in the replacement market in the last couple of years, presence of competition has not given much latitude in terms of price hikes. However, rubber prices (RSS 4 and RSS 5) have fallen by nearly 18%-20% in the past few months and this is likely to give the much-needed fillip to operating margins.

Cost break-up...
(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Raw materials 2,987 3,176 6.3% 5,663 6,288 11.0%
% sales 62.2% 63.2%   61.0% 62.3%  
Staff cost 350 358 2.3% 670 722 7.8%
% sales 7.3% 7.1%   7.2% 7.2%  
Other expenses 1,067 1,155 8.3% 2,161 2,269 5.0%
% sales 22.2% 23.0%   23.3% 22.5%  

Net profits:  Although interest expenses are much higher as compared to same quarter last year, a more than ten fold jump in other income has been able to offset the effect of the same and hence the fall in bottomline has been restricted to 14%.

What to expect?
At Rs 209, the stock is trading at a P/E multiple of 13 times its annualised 1HFY05 earnings. Given the company’s strong presence in the replacement market and its new joint venture with Michelin, the world’s largest tyre manufacturer, it may not have problems on the volumes front. However, the prospects are strongly linked to rubber prices and if they continue to rule at high levels then the growth story might be disrupted.

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