Keep Your Profits On A Roll With Apollo Tyres

Apollo Tyres Ltd (ATL) is one of the outperforming stocks from the tyre industry. The share price of the company soared from Rs182 on February 7, 2017, to Rs285 on August 7, 2017, showcasing an increase of 57 per cent and generating amazing returns for its shareholders. 

We, at DSIJ, present an exclusive analysis of Apollo Tyres Ltd (ATL) which has been increasing wealth of its investors in the last six months. 

COMPANY OVERVIEW 

ATL, founded in 1972, is world’s 17th biggest tyre manufacturer. The company is in the business of manufacture and sale of tyres, catering to over 100 countries across the globe. They manufacture tyres for commercial vehicles, passenger vehicles, industrial and farm vehicles and two-wheelers. ATL markets its products under two global brands- Apollo and Vredestein and two region specific brands – Kaizen and Regal. While Apollo and Vredestein comprise of tyres for passenger, commercial and off-highway vehicles, the Regal and Kaizen brands focus on the truck-bus tyre segment. 

ATL has four manufacturing units in India and one each in Hungary and the Netherlands. Its largest plant is near Chennai. Two other plants are located in Kerala, and the fourth is in Limda, Gujarat. These four have a combined production capacity of 1,450 tonnes a day. ATL also has a network of nearly 5,000 dealers in India. At the end of the financial year 2017, the company clocked a turnover of US$ 1.94 billion. 

A GLOBAL PLAYER 

ATL is working on products for American and other global markets, including ASEAN and the Middle East. It has already introduced specific products for markets in Europe, Malaysia and Thailand in the last fiscal. 

There has been a constant improvement in contribution of ATL’s European subsidiary from FY10 onwards. Revenue and profit contribution from Europe have increased from 24 per cent in FY10 to 30 per cent in FY15. On account of unfavourable winter season and currency movement, the share had dropped to 27 per cent in FY16. 

Earlier this year, ATL set up a new $500 million consumer and commercial tyre plant outside of Budapest, Hungary. The facility is the company’s second plant in Europe. It is in addition to Apollo’s existing plant in the Netherlands and will produce both Apollo and Vredestein tyres. The final capacity of the plant at the end of Phase I will be 5.5 million passenger and light truck tyres and 675,000 truck tyres. This is Apollo’s first greenfield plant outside of India, and a further indication of ATL’s growing presence in Europe. Going forward, this would help the company to serve the increasing demand in Europe. 

INDUSTRY OVERVIEW 

The tyre industry is ancillary to the automobile industry. Therefore, the demand swings in the automobiles have an impact on the demand for tyres. 

The Director General of Automotive Tyre Manufacturers Association (ATMA) believes that the Indian tyre Industry is on the cusp of formidable growth. With an investment of Rs400,000 million in the last few years, it is on the threshold of a major leap forward. The domestic tyre industry essentially caters to two segments –

(1) Original Equipment manufacturers (OEM);
(2) Replacement market (Aftermarket). 

The replacement demand dominates the tyre market, contributing 56% of total size, while the OEM market share is 44%. 

Indian tyre market is driven largely by two & three-wheeler tyres (53 per cent), followed by passenger cars (28 per cent) and commercial vehicle segments (16%). The tractor segment accounted for only 3% of the tyre sales in 2015-16. 

The top 10 players account for about 80% market share in the domestic tyre industry. 

HEAVY RAW MATERIAL DEPENDENT SECTOR 

Raw material prices impact the margin as the raw material cost accounts for about 65-70 per cent of total cost of production. In 2016-17, with surge in rubber costs, overall raw material costs soared. During April 2016 to Feb 2017 period, domestic natural rubber prices have increased by a sharp 19 per cent Y-o-Y after declining for two consecutive years. However, despite this increase in prices of raw materials and marginal decline in operating profits, the tyre industry’s operating profitability remained range bound during the Apr-Dec 2016-17 on account of about 1.6 per cent increase in sales during the period. 

RUBBER PRICES TO STABILIZE            
                                                                   Industry Cost                                                                                                     Structure

The natural rubber prices rose by 12 per cent in July 2017. The rubber price touched Rs140 per kg in July, around Rs27 per kg higher than international markets. In Kerala, the rubber capital of the country, the state government recently gave the approval for the implementation of price incentive scheme in the current year, which ensures Rs150 per kg for small growers having up to two hectares. The difference between Rs150 and Rubber Board published figures will be credited directly to the account of the growers. The state government of Kerala has earmarked Rs500 crore for the scheme in the budget. The scheme has been popular with around 4 lakh growers registering under the scheme. With this scheme in place, we can expect the rubber output to improve and its price to stabilize. 

OUTLOOK: STABLE                                                                                                   

Supported by favourable tyre demand in the domestic and international markets and likely improvement in realisation, the outlook for the domestic tyre industry over the near to medium term looks stable. During FY2014-17, the industry commissioned Rs11,500 crore worth of projects. The next four years FY2017-20 is expected to witness commissioning of another Rs21,000 crore worth of projects. 

Over the next two years, the industry wide operating and net profit margins are expected to stand at 14-16 per cent and 7-9 per cent, respectively, provided there is absence of any unnatural price disruptions for crude and natural rubber. 

Over the next three years, exports are projected to grow at 6-8 per cent, led by stable demand and increased acceptance of Indian tyres in the overseas markets. 

IMPACT OF GST AND RISING EXPENSES 

With the spike in raw material prices and falling realisations, industry margins contracted sharply during Q3 FY2017. The operating and net margins stood at 16.5 per cent and 9.0 per cent, respectively. 

ATL too suffered significant loses on account of higher expenses and pre-GST destocking by its trade partners. For the Apollo quarter ended June 30, the company reported its consolidated net profit at Rs88.3 crore, a 72 per cent decline from a net profit of Rs315.54 crore reported in the same duration of the previous fiscal. 

The expenses during the last quarter stood at Rs3423.9 crore, as against Rs3158.6 crore during the year ago period, moving up by 8.39 per cent. 

Chinese Competition and Anti dumping Duty News 

China's share of imported tyres reached 91 per cent in FY17 compared with 40 per cent three years ago. The demonetisation drive greatly affected the import of Chinese tyres which were largely cash based in nature. The prices of Chinese TBR tyres are 20-25 per cent lower than domestic tyre prices. This helped the Chinese TBR tyres to capture a sizeable share in the domestic replacement market. But with the news that anti-dumping duties are likely to be imposed on truck and bus radials (TBR) from China, Apollo Tyres is likely to benefit the most. At present, the company enjoys a market share of more than 25 per cent in TBR. Also, Apollo Tyres recently doubled its Chennai TBR capacity to 12,000 tyres per day. 

FINANCIALS 

On the financial front, Apollo Tyre Limited posted a minor 0.91 per cent fall in its revenue from Rs3512.98 crore in Q1FY17 to Rs3525.13 crore in Q1FY18. The company’s profit before interest, depreciation and tax (PBIDT) stood at Rs273.25 crore in Q1FY18, crashing by 49.29 per cent on a year-on-year basis. The profit after tax of the company stood at Rs88.3 crore, a decrease of about 72.02 per cent in the first quarter of FY18 on a yearly basis. 

On an annual basis, the company’s revenue increased by 10.28 per cent to Rs14,052 crore in FY17 from Rs12742.89 crore in FY16. The company’s PBIDT stood at Rs1846.42 crore in FY17, declining by 7.56 per cent from Rs1997.46 crore in the FY16. The company’s profit after tax stood at Rs1099.30 crore, decreasing by 2.38 per cent in FY17 from Rs1126 crore in FY16. 

Despite challenges in the last fiscal, all the key operations of the company have done well. The company is looking forward to a good volume growth in the current fiscal on the back of tyres rolling out of the new Hungarian plant and also from the expanded truck-bus radial facility in Chennai. 

VALUATIONS 

On the valuation front, ATL is trading at PE ratio of 15.78x as compared to industry PE of 18.63x. The company’s ROE and ROCE stood at 15.04 per cent and 11.5 per cent, respectively, in FY17. ATL has given 1.11 per cent dividend yield to its shareholders in FY17. 

The anti-dumping duty benefits, stabilising rubber prices and upcoming festive season will likely revive the tyre company’s financial performance. We recommend BUY on the stock for our reader-investors.