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B. Krishnakumar

THE performance of automotive tyre companies has not been quite impressive in the recent quarters. The rise in raw material price played a major role in affecting their profitability. With tyre price revision in place and crude oil price seeming to stabilise around the $50 mark, the recent pressure on profitability is likely to ease.

Long-term investors may take exposures at the prevailing price level of Rs 240.

Apollo Tyres derives over 70 per cent of the revenues from the replacement market. The company has also initiated efforts to gain a better presence in the original equipment market as well. In the replacement market, Apollo derives a bulk of the earnings from the lucrative truck and bus segment. The company also has presence in the farm tyre and passenger car radial segment.

Owing to a strong presence in the replacement market, the company's performance depends on the growth in economic and industrial activity. Over the recent quarters, the performance of Apollo and other tyre companies have been affected owing to the sharp spurt in input cost. The price of almost all key inputs such as natural rubber, carbon black and tyre chord have moved up sharply in the last couple of years.

For the quarter ended September 2004, the turnover rose 5 per cent to Rs 502.5 crore while post-tax earnings dropped 14 per cent to Rs 14.9 crore. The performance would have been worse but for the price revision effected by the company.

The company's performance is likely to improve. The recent buoyancy in the commercial vehicle production would translate into growing demand for tyres from the replacement market. The recovery in the tractor industry would also have a positive impact on the company's performance.

The company also has a presence in the rapidly growing radial tyre segment. The recent alliance with the French tyre major, Michelin, for the manufacture of radial tyres for commercial vehicles is a positive development from a long-term perspective. The joint venture entity is likely to be commissioned in 2005.

The implementation of the "golden quadrilateral" programme and the increase flow of freight traffic through roads is likely to drive demand for commercial vehicles. Having a strong presence in the truck and bus segment, Apollo Tyres is likely to benefit from the expected growth in replacement market demand.

From an investment perspective, the price trend in crude oil and natural rubber would be the critical factors to keep a tab on. Further increase in price of these products would affect the profitability of Apollo and other tyre producers. The signs of either a slowdown in economic activity or rise in price of raw materials would warrant reduction of holdings.

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