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B. Krishnakumar

The Acelere range of tubeless passenger car radials — Kamal Narang.

LONG-TERM investors can consider equity exposure in Apollo Tyres at the prevailing market price of Rs 293. Though the performance of the tyre companies have not been quite impressive in recent quarters, the situation is likely to improve. The Budget proposals along with the price hikes effected in the past would have a positive impact on tyre companies' earnings.

Apollo Tyres is a major player in the domestic tyre market. The company has a major presence in the truck and bus tyre market and derives over 70 per cent of the revenues from the replacement market. Apart from the truck and bus tyres, the company has presence in the tractor and passenger car radial segment as well.

The company's performance in the recent quarters has not been quite encouraging. For the year-ended March 2004, the turnover rose 19 per cent to Rs 1910.8 crore while post-tax earnings dropped 41 per cent to Rs 70.4 crore. The sharp increase in price of key raw materials including natural rubber and carbon black was the primary reason behind the drop in profitability.

The situation has, however, improved in recent months. The price of natural rubber has eased from the high recorded a few months ago. Apollo and other tyre producers have also increased tyre price to offset the impact of raw material price rise.

The impact of these measures and signs of improved business scenario are evident in the performance for the quarter ended December 2004. Turnover for this period increased 19 per cent to Rs 682 crore, while post-tax earnings recorded 8 per cent growth to 16.9 crore.

The reduction in excise duty on tyres sold in the replacement market (effected in the latest Budget) from 24 per cent to 16 per cent is a major positive factor for the tyre industry. Considering that Apollo has a major presence in the replacement market, it would stand to benefit to the extent the excise duty cut is not passed on to the consumer.

On the negative side, the firm trend in the price of crude oil is a cause of concern. Considering that quite a few inputs for the tyre industry are petro-based, the profitability would be strained if crude price remains at the present high levels. The reduction in peak import duty and appreciation of the rupee would, however, offer some relief in this context.

Though profitability may be under pressure if input cost rule firm, the sales volume could pick-up in the future. The steady increase in commercial vehicle production over the last couple of years and the buoyant trend in economic and industrial activity would spur demand for tyres from the replacement market.

The recovery in the tractor industry would also have a positive impact on the company's performance.

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 the price of these products would affect profitability of Apollo and other tyre producers. Signs of either a slowdown in economic activity or rise in the price of raw materials would warrant reduction of holdings.

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