Apollo Tyres: A turn for the better

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.

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