Apollo Tyres Ltd has been the worst performer among tyre stocks, sliding 26% since April. It has also underperformed the Nifty Auto and the Nifty 200 indices in the same period. This is due to waning optimism about a turnaround in its European operations.
Apollo’s European business, comprising tyre plants in Hungary and the Netherlands, make up 30-35% of consolidated revenue. Analysts recently reported that Apollo’s Vredestein brand (Europe) will supply to global original equipment manufacturers (OEMs) such as BMW, Mercedes and Audi. While this is good news, profit margins, which are normally lower in OEM supplies, may not immediately improve.
“In the long-term, the management has guided to a 12-14% margin on 5-7% revenue growth from the European operations,” said a report from Elara Securities (India) Pvt. Ltd.
However, for now, as per initial indications from the market, the winter-tyre season in Europe began in low gear. This dampened investor sentiment, given overseas operations were wobbly in first half FY20.
Besides, prolonged domestic auto-sales slowdown has been an overhang on the stock.
Higher realisations and profit margins in replacement sales helped Apollo and other tyre firms stay afloat during the slowdown. Even so, September quarter Ebit margins of Apollo’s India operations fell by 250 bps to 6.5%. Ebit is earnings before interest and taxes. In the long run, the company plans to raise utilisation at its low-cost Hungary plant. This, along with a greater share of ultra-high performance tyres, will lift margins over the long run. Unfortunately, soon after the Hungary acquisition and domestic capacity expansion, the auto industry slump crimped tyre sales. Besides, due to weak sales and poor operating leverage, the rise in costs has punctured profits.
Little wonder then Apollo is going slow on its capital-expenditure plans. Mitul Shah, vice-president, research, Reliance Securities Ltd, said: “Apollo has shaved off its overall capex plans over the next two years by ₹600-700 crore. It plans to spend for its India operations ₹2,300 crore and ₹1,400 crore in FY20 and FY21 respectively against its earlier guidance of ₹2,700 crore and ₹1,700 crore.”
Investors are perhaps watching from the sidelines to gauge the impact of BS-VI emission norms starting 1 April on auto sales. A smooth transition and rising auto sales will be cues to the stock’s uptick, assuming raw material costs stay stable.
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