The Hindu Business Line : Apollo Tyres: Hold/Buy on declines

AIDED by the recovery in automobile industry, the increased activity in the housing sector and recovery in industrial production, tyre companies reported improved performance over the last few quarters. Apollo Tyres too recorded a sharp growth in performance for the quarter ended September 2002.

The company's share price has already risen sharply over the recent months. However, the Apollo Tyres scrip has eased off since the announcement of the second quarter performance last week. Taking into account the recent trend in earnings and the strong position of the company in the industry, shareholders can remain invested while price declines could be used to pick up equity exposures in the company. Apollo Tyres has a strong presence in the replacement market of the lucrative truck and bus tyre segment. Over the years, the company has taken efforts to gain a presence in other market segments as well. In particular, Apollo has actively tapped the original equipment segment. It has also launched the fast-growing radial tyres for passenger cars.

The company now derives close to 79 per cent of the revenues from the replacement market while the original equipment segment chips in with a 13 per cent share. Exports account for about 8 per cent of the turnover. Segment-wise, truck and bus tyres still account for about 74 per cent of the company's turnover.

Given that the truck and bus segment accounts for bulk of the revenues, the company's performance has tended to move in sync with the economic and industrial production. After passing through a rough patch in 1999-2000 and 2000-01, the company's performance has improved in the last few quarters.

The closure of Modi Rubber's production facility since late-2001, coupled with the pick-up in industrial production and increased activity in the construction segment, has helped the company post an improved performance. For the year ended March 2002, the company reported a 17.55 per cent growth in turnover and a 44.8 per cent rise in post-tax earnings.

The trend of growth in earnings has continued this fiscal with the company recording a 14.39 per cent rise in turnover and a 297 per cent jump in post-tax earnings for the six month period ended September 2002.

However, it remains to be seen if the company manages to sustain these growth rates in the future. The scepticism stems from the recent increase in the price of key raw materials, natural rubber, in particular. Moreover, the sub-normal monsoon would also have an impact on agricultural and industrial demand which, in turn, could affect the offtake of truck tyres.

On the positive side, the company has decided to acquire the production facilities of Modi Rubber. Considering that Modi Rubber has a strong presence in the truck and bus tyre segment, acquisition of its production facility would lead to operational synergy for Apollo. Besides, the company has also planned other acquisitions, which would have positive impact from a long-term perspective.

In the meantime, the company is also actively tapping the original equipment market and has managed to make inroads into this segment. Besides, the company also has a reasonably prominent presence in exports. Considering these factors, the company appears well-positioned to capitalise on any improvement in business environment. Long-term investors could use price dips to include Apollo Tyres in their portfolio.

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