Apollo Tyres Ltd was evidently riding on a rough patch in the March quarter. Its operating profit margin fell below the 10% mark, from 12.8% in the year-ago March quarter.
Like MRF Ltd and Ceat Ltd that announced results a few days ago, an increase in raw material prices was responsible for the drop in margins. Rubber prices were about 12% higher year-on-year (yoy). Volatile prices of crude derivatives such as synthetic rubber and carbon black also weighed on margins.
But Apollo’s biggest setback was the ₹46.5 crore Ebit loss (earnings before interest and tax) posted by its European subsidiaries last year. This compares with a ₹25 crore profit in the year-ago period and ₹69.5 crore profit in the December quarter. The management clarified that the March quarter is normally a weak one compared to December, which is far better for the company given that Apollo sells a large number of winter tyres in Europe. But even on a y-o-y comparison, which negates seasonality factors, Ebit margin shrank to -3.8% from 2.1% in the year before period. With European business comprising about 30% of the total revenue, weakness in this region dragged consolidated profitability.
Meanwhile, it was not an easy ride on home turf too. Ebit margin of the Asia Pacific, Middle East and Africa business fell from 11.9% to 8.6% yoy. So even though revenues in these regions rose 8% y-o-y, earnings before interest and tax fell about 22%.
Coupled with the loss in the European business, consolidated Ebitda was 20% lower y-o-y and way below the Street’s forecast. On top of it, the tyre maker wrote off another ₹100 crore worth investments (total of ₹200 crore in FY2019) in the beleaguered IL&FS in the March quarter. Even after adjusting for this, Apollo’s net profit was a drop of 26.4% from the year-ago period. It’s little wonder the stock fell 3.6% to ₹184.9 a piece on Thursday.
The management is still optimistic about recovery in the economy and the auto sector after elections. But as things stand, the outlook seems bleak. Apart from the auto slowdown in domestic markets, overseas markets are faced with challenges on emission norm changes and political risks that could weigh on sales.
Apollo shares have underperformed the benchmark Nifty 500 by a wide margin over the last year. The current stock price of ₹185 discounts the FY21 estimated earnings by around 9 times, which reflects the pain the sector and the falling profitability.
