Higher input costs, falling demand from automakers, and competitive pressures are expected to impact the profitability of Apollo Tyres.
The market leader in the truck and bus replacement segment, with a share of 30 per cent, is facing demand pressure that will reflect both on orders from automakers as well as the replacement market.
The slowdown has impacted commercial vehicles, led by slowing rural consumption, depressed freight rates, and under-utilisation of trucks.
The near-term outlook remains muted, with most firms pinning their hopes on pre-buying ahead of the implementation of the BS-VI emission norms from April.
Over 60 per cent of Apollo Tyres’ revenues comes from the trucks segment, with a larger chunk of the sales from the replacement market.
In addition to demand worries, rising natural rubber prices, too, will weigh on the company’s margins.
Natural rubber prices, which are up by a third since the start of the year, account for 35-40 per cent of raw material costs for a tyre company. Given the competitive pressures and poor demand environment, it will be difficult for the company to pass on the costs.
Margins for its European operations were under pressure due to start-up costs at the new Hungary plant.
In fact, overall margins fell 120 basis points on a sequential basis to 9.9 per cent, due to profitability pressure in Europe.
Besides this, competitive pressure has increased, driven by low-priced brands of larger tyre makers and Chinese brands. The region accounts for 30 per cent of consolidated sales.
The stock, which is down 17 per cent since the start of April, could see further downsides, given multiple challenges both in India and Europe. At its current price, the stock is trading at 11 times its FY20 earnings estimates.
Investors are better off awaiting a recovery in auto demand as well as margin improvement before taking an exposure to the stock.