Apollo Tyres: Profit margins may remain benign

Apollo Tyres: Profit margins may remain benign

Despite a lacklustre March'16 quarter (Q4'FY16) results announced post market hours on Wednesday, the stock of Apollo Tyres managed to gain 3.6% on Thursday's trading.

The run-up in its stock price came mainly due to positive management commentary. Otherwise, its net revenues for Q4'FY16 at Rs 2,966 crore declined by 5% year-on-year, while net profit at Rs 245 crore plunged over 20%, and came significantly lower than Bloomberg estimates of Rs 3,058 crore and Rs 284 crore, respectively.

The bigger blip was the 36 basis points year-on-year decline in operating margins at 16% (versus Bloomberg estimates of 16.81%). UBS which has a 'neutral' recommendation on Apollo Tyres commented that the March quarter results were a miss on all fronts despite commodity tailwinds.

The quarter also saw revenues of Indian operations decline by five% and European operations (27% of consolidated revenues) by about three% year-on-year. Change in internal accounting systems in the European business also had an impact on profits. Earnings before interest and taxes (EBIT) was down 57% at Rs 41 crore. However, this is a one-time hit, the company said.

Indian operations, which is the most margin accretive, saw EBIT margin rise from 13.4% in Q4'FY15 to 15.1% in Q4'FY16. But the Street is wary of whether these margins are sustainable as supply constraints on rubber persists 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 1-2 months; Apollo is down about 20%.

Going ahead, even as the management is confident of a brisk growth in volumes, competitive pressures and price cuts taken by tyre makers will keep demand buoyant and may 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 pas," he adds.