Apollo Tyres: Profit margins face challenge
Despite poor performance in the March quarter (Q4) results, announced after market hours on Wednesday, the stock of Apollo Tyres managed to gain 3.6 per cent in Thursday’s trading. The run-up came mainly because of positive management commentary.
At ₹2,966 crore, net revenue declined by five per cent yearon-year, while net profit, at ₹245 crore, plunged 20 per cent. Both were significantly lower than Bloomberg estimates of ~3,058 crore and ~284 crore, respectively. The bigger blip was the 36 basis points year-onyear decline in operating margins at 16 per cent, compared with Bloomberg estimates of 16.81 per cent. UBS, which has a ‘neutral’ recommendation on Apollo Tyres, commented that Q4 results were a miss on all fronts despite commodity tailwinds.
The quarter also saw revenues of the company’s Indian operations decline by five per cent and European operations (27 per cent of consolidated revenues) by about three per cent year-on-year. Change in internal accounting systems in the European business also had an impact on profits. Earnings before interest and taxes (Ebit) were down 57 per cent at ~41 crore. However, this is a one-time hit, the company said.
Indian operations, which are the most margin-accretive, saw EBIT margin rise from 13.4 per cent in Q4 FY15 to 15.1 per cent in Q4 FY16. But the Street is wary of whether these margins are sustainable as supply constraints on rubber persist and input prices are also up. The supply issues and input price increase, coupled with the pricing pressure in domestic market, are also among reasons why stocks of rubber companies have fallen in the last two months — Apollo is down about 20 per cent.
Going ahead, even as the management is confident of a brisk growth in volumes, competitive pressure and price cuts by tyre makers will keep demand buoyant and could hurt the operating margins of Apollo Tyres. Added to this is the problem of China dumping its tyres, particularly for commercial vehicles (where realisation are the highest) in the replacement market where Apollo leads the pack. Prayesh Jain, AVP Research at IIFL points out that as the threat from Chinese imports continues to persist, pricing will be under pressure even as volumes may stay strong. “Therefore, going ahead, profitability will not be as strong as seen in the recent past,” he added.