Stock Fundamentals

Apollo Tyres: A turn for the better

Parvatha Vardhini C | Updated on January 15, 2018 Published on March 26, 2017

PO27_Tyre

2503ApolloTyres_c_col

Improving prospects in the domestic market and expansion in Europe are positives

Tailwinds for the domestic auto segment and improved outlook for the European business make the stock of Apollo Tyres a good bet for investors with a two to three year perspective. Although the jump in rubber prices may hurt in the near term, improving demand should help the company pass on some of the cost pressures through price increases. The stock now trades at around 9.5 times its trailing 12-month consolidated earnings. This is at a discount to peers such as MRF, Ceat and Balkrishna Industries which trade at 14-18 times.

Demand boost

Apollo Tyres has about 25 per cent market share in tyres for trucks and buses (commercial vehicles). This segment brings about 60 per cent of the domestic revenues for the company. Tyres for cars, SUVs, off-highway vehicles, and more recently, two-wheelers, contribute to the rest of the revenues. Like other tyre manufacturers, the company was impacted by a combination of a slowdown in new truck and bus sales, followed by cheaper Chinese tyre imports in 2016.

But things have taken a turn for the better in the last three-four months. Prevalence of cash dealings in the sale of Chinese tyres meant that sales took a beating with the note ban coming into effect in early November. The rise in rubber prices has also left Chinese manufacturers with less room when marking down their tyre prices. Thirdly, as per reports available in the public domain, with the US deciding not to charge anti-dumping duty on tyres recently, some of the Chinese supplies have been redirected there, thus reducing the quantities coming into India.

At the same time, new truck sales have begun improving in some pockets such as mining trucks, thanks to the government’s thrust on infrastructure growth. Pre-buying ahead of the implementation of BS-IV emission norms next month has kept the volumes ticking too. New car and SUV sales are looking up as well, thanks to improving urban consumption and rural incomes. Besides, the double-digit volume growth seen in commercial vehicle sales in fiscals 2015 and 2016 imply that replacement demand for tyres in these vehicles will come up soon. This will help at a time when rubber prices have firmed up, as manufacturers have greater pricing power in this segment and can pass on the cost increases.

The outlook for the European operations also appears bright, with overall growth prospects looking up in important markets such as Germany. In Europe, the company predominantly provides winter tyres for the replacement markets under the Vredestein brand. It has ramped up its sales network with the acquisition of Reifencom, a tyre retailer, about a year ago.

Apollo’s plant in Hungary will become operational shortly; the plant will manufacture passenger vehicle and truck tyres. While the focus is currently on the replacement market, the company has also begun signing up with auto manufacturers there for providing tyres to new vehicles. Considering that vehicle owners tend to choose the same brand when replacing old tyres, supplies to auto manufacturers will help strengthen its position in the replacement market.

For the nine months ended December 2016, the company’s consolidated sales grew by 11.6 per cent y-o-y to ₹9,794 crore , while consolidated profits (adjusted) moved up by 8.4 per cent to ₹871 crore. Operating margin was around 16 per cent, about two percentage points lower than that reported in the nine months ending December 2015.

Margins to look up

The India business contributes 60-65 per cent to the consolidated revenues. Rubber prices (RSS 4 variety) moved up from a multi-year low of around ₹94 a kg in February 2016 to around ₹134 a kg by December 2016. International prices have also followed suit. But lower demand in the Indian operations and threat from Chinese imports prevented the company from passing the increase to customers.

In fact, price cuts were undertaken to boost demand even until October. Rubber prices have continued to increase in 2017 too. The company has just taken a price hike of 1-1.5 per cent in January 2017 in the farm tyres category and as demand improves, may pass on the cost increases further. Higher presence of radial tyres (truck bus radials) in the sales mix will help margins further as these are more profitable than bias tyres. Thanks to improving radialisation levels in commercial vehicle tyres, the company has expanded its Chennai capacity for truck bus radials recently.

Published on March 26, 2017

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Sincerely,

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.