Stock Review: APOLLO TYRES

Apollo Tyres, the second-largest player in the tyre segment and leader in the commercial vehicle tyres, reported double-digit revenue growth in the March quarter. This was on account of a recovery in the European tyre demand and sustainable growth in the domestic replacement market. However, a faster jump in raw material costs, mainly rubber prices, restricted the net profit growth.

Apollo Tyres is the only company among the country's top tyre makers to gain on bourses in the past six months. Its stock increased by 11% compared with the decline in stocks of peers, including MRF and JK Tyre and Industries.

Apollo's sales grew by 27% in the March quarter, with the increase in consolidated tyre volume by 14% on year-on-year basis helped by robust demand across the markets. During the March 2011 quarter, a revision of 3-5% in tyre prices did help Apollo to retain its operating profitability on a sequential basis. But on year-on-year comparison, margin fell sharply by 550 basis points to over 12%. Further, higher non-operating expenses nearly halved net profit to . 192 crore.

Prices of rubber, which is the main raw material for tyre makers, soared at a faster clip last fiscal. Average rubber price rose by 70% in FY11 to . 242 per kg. Due to such a steep rise in raw material costs, most tyre companies were unable to reap the benefit of growing demand in the automobile sector last year.

Rubber Board of India has estimated natural rubber production for 2011 at nine lakh tonnes compared to the expected consumption of 9.7 lakh tonnes. This may keep rubber prices firm in the coming quarters in contrast to the expectation of benign price scenario by some of the tyre makers. It may put more pressure on the operating margin of the tyre companies. Apollo is likely to report a robust topline growth with better demand from Europe and Africa. However, slower demand in automobile in the domestic market besides high raw material costs may play spoilsport.