Higher input costs, falling demand may impact profitability of Apollo Tyres

Higher input costs, falling demand from auto makers and competitive pressures are expected to impact profitability of Apollo Tyres. The market leader in the truck and bus replacement segment in the country with a share of 30 per cent share is facing demand pressures, which will reflect both on orders from auto makers 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 continues to be muted with most companies are pinning the hopes on pre-buying ahead of the implementation of the BSVI emission norms from April 1, 2020. 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 would weigh on the company’s margins. Natural rubber prices which are up by a third since the start of the year accounts 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 the company’s European operations were under pressure due to start-up costs at the new Hungary plant. In fact, overall margins for the company fell by 120 basis points on a sequential basis to 9.9 per cent due to profitability pressure in the European operations. Besides this, competitive pressures have increased driven by low-priced brands of larger tyre makers and Chinese brands. The geography accounts for 30 per cent of consolidated sales for the company.

The stock which is down 17 per cent since the start of April could see further downsides given multiple headwinds both in India and Europe. At the 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.