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Apollo Tyres: Pressure quarter - Views on News from Equitymaster

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Apollo Tyres: Pressure quarter

Nov 11, 2010

Apollo Tyres has announced its September quarter results. The company has reported a 5% YoY drop in topline and 59% YoY fall in net profits for the quarter ended September 2010 on a consolidated basis. Here is our analysis of the results.

Performance summary
  • Consolidated topline registers a 5% YoY decline during the quarter.
  • Contraction in operating margins leads to a 36% YoY fall in operating profits.
  • Bottomline declines at an even greater rate of 59% YoY on account of adverse interest and depreciation charges
  • Standalone bottomline falls 63% YoY on the back of a 4% fall in topline


  Standalone Consolidated
(Rs m)  2QFY10   2QFY11  Change 2QFY10  2QFY11  Change
Sales         12,203          11,756 -3.7%           20,462         19,489 -4.8%
Expenditure         10,203          10,541 3.3%            17,589         17,636 0.3%
Operating profit (EBDITA)            2,001             1,215 -39.3%              2,873            1,853 -35.5%
Operating profit margin (%) 16.4% 10.3%   14.0% 9.5%  
Other income                   13                   58 358.3%                     32                     4 -87.4%
Interest                126                362 188.3%                  284                442 56.0%
Depreciation                329                377 14.6%                  684                669 -2.1%
Profit before tax             1,559                534 -65.8%              1,938                745 -61.6%
Tax                538                160 -70.2%                  646                213 -67.1%
Share of profit in associates  NA   NA                          -                      -    
Minority interest  NA   NA                      -                      -    
Extraordinary income/(expense)                    -                      -                           -                      -    
Profit after tax/(loss)            1,021                374 -63.4%              1,292                533 -58.8%
Net profit margin (%) 8.4% 3.2%   6.3% 2.7%  
No. of shares (m)            504.1            504.1                 504.1            504.1  
Diluted earnings per share (Rs)                   5.9                   11.5  
P/E ratio (x)                 11.9                     6.1  

What has driven performance in 2QFY11?
  • At a time when auto companies in the country are coming out all guns blazing, it is indeed disappointing to see Apollo Tyres suffer a fall in revenues. Capacity constraints and inability to fully pass on the tremendous rise in raw material prices, mostly natural rubber, seem to be the key reasons behind the same. Furthermore, the fact that one of its international facilities in South Africa had to undergo a lockout for some days of the quarter also made matters worse for the company. However, there is some good news on this front. Operations have resumed at both its Indian as well as South African facilities and this should help its revenues in the forthcoming quarters. Price pressures though would continue to persist. As per reports, the company will have to raise prices by some 15%-20% in order to sustain margins. This looks difficult given the bargaining power of its customers.

    Cost break-up...
      Standalone Consolidated
    (Rs m)  2QFY10   2QFY11  Change 2QFY10  2QFY11  Change
    Raw materials             7,335             7,886 7.5%             11,246           11,476 2.0%
    % sales 60.1% 67.1%   55.0% 58.9%  
    Staff cost                 753                 769 2.0%                3,017             3,013 -0.1%
    % sales 6.2% 6.5%   14.7% 15.5%  
    Other expenditure             2,114             1,887 -10.8% 3,325             3,147 -5.4%
    % sales 17.3% 16.0%   16.3% 16.1%  

  • As far as operating margins are concerned, they have a taken a hit to the tune of 4.5% and consequently, operating profits have fallen 36% YoY. The decline has been attributed mainly to rise in raw material expenses, which the company was not able to fully pass on to end users and also staff costs.

  • At 59%, the fall in net profits has come in worse than the 36% YoY fall in operating profits. This is mainly on account of huge jump of 57% 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 the 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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