Apollo Tyres: On a roll, still

Ramping up of production and favourable input prices work in favour of the company

As new vehicle sales have slowed in the last few months, component makers who derive a sizeable portion of their revenue from after-market sales are better placed than suppliers who serve only auto manufacturers. Apollo Tyres is one such company. The firm is ramping radial tyres production for commercial vehicles (CVs) at its Chennai facility. This move is welcome at a time when radialisation levels are fast increasing in this segment. Benign raw material prices are a positive too.

The across-the-board correction in mid- and small-cap stocks in the last one year has not spared Apollo Tyres. From the earlier ‘buy’ recommendation in May 2018, the stock has lost 22 per cent till date.

Negative sentiments such as the ₹200 crore exposure in unsecured inter corporate deposits with the beleaguered IL&FS Financial Services did not do it any good either.

However, the company has written off half the investment already. It may mark down the entire amount over the next one to two quarters, thus lowering concerns for investors with a long-term perspective.

The stock now trades at 15 times its trailing 12- month consolidated earnings. This is cheaper than other peers such as Balkrishna Industries (24 times) and MRF (22 times). These factors make Apollo Tyres a good buy at this juncture.

 

 

After-market strength

Apollo Tyres derives 60 per cent of its consolidated revenue from the India business.

The company has about 25 per cent market share in tyres for trucks and buses and 15 per cent market share in passenger car tyres in the country.

Following the challenges due to the BS IV and GST transition until July 2017, the sales of new trucks and buses improved subsequently.

For 2017-18, both light and heavy vehicles recorded double digit volume growth.

Into 2018-19, slowing economic activity, a liquidity crunch among finance companies and the implementation of higher axle load norms for existing trucks have taken the sheen off CV sales in the last few months.

Deriving 60 per cent of its standalone revenue from the replacement demand for tyres in the secondary market, Apollo Tyres is well-placed to ride this slowdown.

Besides, with radialisation levels in truck and bus tyres moving up to 55-60 per cent, the company is on a strong wicket. It counts leading commercial makers such as Tata Motors, Ashok Leyland and Volvo-Eicher, among its clients, and has over 20 per cent market share in truck-bus radials (TBRs) alone.

This factor will play out in its favour when new vehicle sales pick up. It has ramped up production of TBRs in its Chennai facility, with capacity utilisation moving up to 85 per cent at the end of the December 2018 quarter.

On the passenger vehicles side, the company is expanding its capacity for car radials, for which there have been capacity constraints.

A greenfield plant is being set up for car radials in Andhra Pradesh and is expected to be operational in the fourth quarter of this fiscal. Given the high demand for TBRs, this facility will also produce TBRs on a smaller scale.

Ramp-up in Europe

The company supplies Apollo and Vredestein brand tyres to the passenger car replacement market in Europe. A slowdown in demand in the continent as well as the start-up costs for the Hungary plant, inaugurated in April 2017, have been the Achilles heel for the company in the last few quarters.

But things are taking a turn for the better, with the steady ramping up of production at Hungary and sales volumes improving.

In the nine months ended December 2018, the company’s volumes were up 8 per cent compared to the market growth of 0.5 per cent.

Apollo has gained market share across summer, winter and all-season tyres in this period.

Besides, to increase its presence, the company is beginning to cater to auto-makers directly in Europe.

Towards this, it has already roped in Ford and Volkswagen.

Good financials

For the nine months ended December 2018, the company’s consolidated sales moved up by 22.5 per cent over the same period in 2017 to ₹13,097 crore, while consolidated profits grew by 25.8 per cent at ₹595.84 crore.

Operating margins came in at 10.8 per cent, marginally higher than 10.6 per cent a year ago. Given the capex for the radial tyre plant at Andhra, the debt-to-equity ratio is expected to peak at 0.7 per cent in 2019-20.

However, while interest costs may shoot up, profitability may be supported by good performance at the operating level.

Natural rubber prices have been range-bound for the last one year and are not expected to move up sharply.

Crude oil prices too have come off their October 2018 highs. Thus, the company is reasonably comfortable on this front.

Higher replacement demand will aid margins as tyre-makers usually have higher pricing power in the replacement market.

As commercial vehicles rapidly adopt radial tyres, bettering product mix from higher share of radial tyres will also improve profitability.

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