Apollo Tyres

After a dismal 2008-09, the auto sector has taken off in the last four months recording higher sales in key auto categories of cars and commercial vehicles (CV). Commercial vehicle sales, for example, have doubled in the month of January visa-vis the year ago period. This is likely to help Apollo Tyres, the country’s largest CV tyre maker.

The company reported a 12.2 per cent sequential growth in consolidated revenues for the December 2009 quarter to Rs 2,296 crore. At the standalone level, higher raw material (natural rubber) costs meant that OPMs fell 90 basis points to 15.4 per cent despite Apollo increasing prices by 5-10 per cent. With natural rubber prices at historical highs, expect margins to be under pressure in the fourth quarter unless the company hikes its tyre prices further. With the commissioning of its Chennai plant in the first quarter of 2010-11, and completion of a brownfield expansion by March 2010 should help Apollo meet the increased demand for radial tyres.

The company which has subsidiaries in South Africa (Dunlop) and Netherlands (Vredestein) is planning to improve the utilisation levels and operating profit margins of the former. If it manages to do that then overall margins could improve going ahead. At Rs 55, the stock is trading at 7.3 times its 2010-11 estimated earnings, which is not demanding and investors can consider taking an exposure to the stock.