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Apollo Tyres: Firm grip and steady growth

Recommendation: Hold

B. Krishnakumar

BL Research Bureau

THE sustained uptrend in automobile output since January 1999 has had a positive impact on stocks from the automobile tyre segment. With its aggressive foray into the radial tyre market, and the possibility of Continental picking up a stake, investors c an take another look at Apollo Tyres.

The company has a significant presence in the replacement market for the truck and bus industry, enjoying a near 20 per cent share in this segment. Apollo Tyres is strong in the tractor tyre segment as well. The negligible presence in the original equipm ent segment and the fast-growing passenger radial tyre market have been unsettling factors from a long-term perspective.

To address this issue, the company took aggressive measures recently. It set up exclusive facilities at Baroda for the manufacture of passenger car radials in technical collaboration with Continental AG, of Germany. Apollo Tyres also offered Continental a 15 per cent stake, but it remains to be seen if the latter is keen to pick up the stake or not. A decision may be known by March 2000.

Meanwhile, the company also actively targeted the original equipment (OE) market, where it was hitherto an insignificant player. As a result of the efforts, Apollo is an original equipment supplier to truck major Ashok Leyland. Given the strong brand ima ge and the technical backing, it may gain market share in this segment.

Apart from the minuscule role in the radial tyre and OE segment, chronic labour-related problems have plagued Apollo Tyres, acting as a drag on the performance in recent years. To resolve this issue, the company signed a long-term agreement with the labo ur unions.

On the financial performance front, Apollo posted sharp growth in earnings for the first half of this year. Apart from the steady inflow of demand, the flat trend in the price of key inputs, coupled with the price hike effected by the company, appears to have bolstered the company's bottomline in the first half of 1999-2000.

For the six-month period ended September 1999, the company's turnover improved about 25 per cent, to Rs. 672 crores, while the net profit shot up 92 per cent, to Rs. 28.64 crores. But the performance in the first half of 1998-99 was affected by labour un rest at the company's plant at Perambra; thus, the growth rates may have to be tempered while taking an investment view.

On the flip side, the recent strengthening of the prices of petro-based inputs, including carbon black, is a little worrisome. However, the company has already effected price hikes, and has the option of effecting a further revision if the situation warr ants.

With the labour-related problems taken care of and the radial tyre plant taking shape, Apollo Tyres appears well set to post a steady growth in performance. The company's recent decision to slash the radial tyre price by about 25 per cent may help it gai n a foothold in the radial market.

Though the strategy may hamper profitability growth in the near term, it may be necessary to make inroads into the highly competitive radial market, which is dominated by the likes of MRF, J. K. Industries, Goodyear and Ceat.

Meanwhile, the company is also making efforts to gain a stronger presence in the two-wheeler segment. Towards this end, Apollo is reviving its Black Cat brand of two-wheeler tyres. It trying to garner a market share of at least 20 per cent in all major s egments of the tyre industry. Given this backdrop, shareholders may stay invested. Fresh exposures may be contemplated on price declines.