Apollo Tyres encounters challenges of rising costs and weak demand

Apollo Tyres encounters challenges of rising costs and weak demand/Reuters

VoM News Desk | April 22, 2024 | 06:58 PM IST | Breaking News | Follow on Google News

Apollo Tyres encounters challenges of rising costs and weak demand

Apollo Tyres encounters challenges of rising costs and weak demand.

The company does have a cushion, though, with high-margin segments growing their share and debt falling.

Apollo Tyres Ltd stock has underperformed the market over the past month. Investors have understandably turned cautious amid the recent spike in prices of rubber, and demand is expected to be weak in the near term. But the company does have a cushion, with high-margin segments growing their share and debt falling.

The company’s financials have been highly erratic over the past five years owing to the pandemic and commodity-price fluctuations, which have a strong influence on profitability.

For instance, over FY19-21, revenue declined by 5% while net profit was up 22%. However, in FY22, a steep rise in raw-material costs caused profits to plunge as much as 64% year-on-year even as revenue grew at almost 25%. In FY22, raw-material costs as a percent of total expenditure rose by almost 11 percentage points year-on-year, severely denting the margin.

With the softening of raw-material prices, Apollo’s performance improved in FY23 and continued to do so in 9MFY24, with net profit jumping 122% and 111% and revenue growing 18% and 4%, respectively. Apollo’s revenue in 9MFY24 was ₹19,119 crore and its Ebitda margin was almost 18%. Note that the margin expansion was due not just to softening raw-material prices but the changing customer mix as well.

More importantly, the Indian market is also moving towards ‘premiumisation’, with increasing sales of SUVs and higher radialisation in truck and bus tyres. Radialisation refers to shifting from traditional tyres that use nylon threads to ones that use steel wires.

According to an Emkay Global Financial Services report, the four-year moving average of the share of SUVs in passenger-vehicle sales has increased from 22% in FY20 to an estimated 43% in FY24, and is projected to touch 53% by FY26. Similarly, the level of radialisation is estimated to have risen from 49% in FY20 to 63% in FY24.

It also helps that Apollo’s debt is falling. As of the end of December, consolidated net debt dropped to ₹3,000 crore from ₹3,830 crore at the end of September. The net-debt-to-Ebitda ratio fell to 0.7 times by the end of December from 1.4 at the end of FY23.

Apollo’s shares trade at 14.3 times its estimated FY25 earnings, according to Bloomberg data. Sure, valuations appear undemanding, but near-term triggers seem limited amid anticipated margin pressure. Against this backdrop, investors will watch the company’s pricing actions closely.

The company’s capital expenditure (capex) guidance for FY24 is around ₹1,100 crore and is expected to be used for de-bottlenecking, digitisation and maintenance activities. Latest management commentary suggests that capex intensity is likely to remain low in the medium term, which bodes well for return ratios and the health of the balance sheet.

(Except for the headline, this story has not been edited by VoM News staff and is published from Mint website)

VoM News Desk

VoM News is an online web portal in jammu Kashmir offers regional, National & global news.