Gains of nearly 3% intra-day got evaporated and Apollo Tyres’ stock closed down marginally by 0.4% on Wednesday. Though analysts were expecting pressure on sales due to weak demand in India and Europe, sales in December 2012 quarter was significantly lower than estimates (8-9% growth). The company benefitted from lower raw material costs, which was expected, and hence margins improved. The trend is likely to continue as March 2013 quarter will reflect full benefits of lower rubber prices.
Going ahead, though demand side pressures remain, with reasonable valuation of 5.5 times FY14 estimated earnings, analysts believe downside risk is limited for the stock (at Rs 85). However, the upside is also likely to remain capped until the business environment improves visibly and clarity emerges on the company’s equity dilution plans.
India biz disappoints on topline, but leads profit growth
However, decline in raw material prices (natural rubber) came as rescue to margins, which saw significant improvement and were better than analysts’ estimates. Consolidated operating profit margin improved 183 basis points to 11.9% thanks to 381 basis points drop in raw material costs as percentage to sales. Natural rubber prices (average) were down around 15% year-on-year in December quarter and 30% from the peak level of Rs 242 seen in April 2011. Reported net profit margin also jumped 168 basis points to 5.6%. But, the quarter saw a huge surge in other income to Rs 27 crore compared to Rs 2.4 crore (possibly due to a forex loss) in same quarter last year. The higher growth in other income further boosted net profit.
While India business has disappointed heavily on topline growth despite ramp-up of newly commissioned Chennai plant, it has been the driver for improvement in profitability as standalone operating profit and net profit jumped 21% and 73% year-on-year, respectively. Further gains came from overseas operations which also witnessed better margins with South Africa reporting profit (against loss in the year ago period) and Europe reporting better profitability.
Outlook remains subdued
Natural rubber prices touched a two-year low level of Rs 161 in early December. Hence, the current quarter will see full benefit of this and margins are expected to improve further despite the rupee depreciation, feel analysts. Production is generally higher in the second half of fiscal and hence rubber prices could soften further. Even low demand globally will affect rubber prices. While continued improvement in profitability is a positive, this is unlikely to trickle down to upside in stock, which has underperformed Sensex in last three months, as worries of topline growth and possible equity dilution exist.
Replacement demand is not very impressive in domestic market and will take time to pick up. Europe continues to face macro-economic challenges and South Africa revenue faces risk of Chinese imports, competition and slowdown in growth. The company had announced capital raising plans in September 2012 quarter through a $150 million QIP and $27.5 million of convertible warrants to promoters for lowering debt, setting up capacities and inorganic growth opportunities. Although the equity dilution plan has been postponed the timing has not been decided.
Positively, analysts find stock valuation cheap and see limited downside from current levels. Ashwin Patil, analyst, LKP Securities, sees positives going ahead for the stock as he sees pick up in replacement demand, margins improving, slowing capex outlay and delayed or no capital raising leading to improvement in net debt to equity ratio and reduction in interest costs.
Going ahead, though demand side pressures remain, with reasonable valuation of 5.5 times FY14 estimated earnings, analysts believe downside risk is limited for the stock (at Rs 85). However, the upside is also likely to remain capped until the business environment improves visibly and clarity emerges on the company’s equity dilution plans.
India biz disappoints on topline, but leads profit growth
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Consolidated sales growth slipped by 0.33% as India business reported a decline of 2.7% in revenues due to 3% year-on-year fall in overall volumes thanks to weakness witnessed by the truck OEM segment. European operations disappointed with marginal decline of 0.5% unlike modest growth expected as winter was delayed. Even South African operations disappointed with a sales growing 5.9% against a jump a 35% year-on-year in first half of the fiscal. Though analysts had expected pressure on the topline growth, the quantum has come as a negative surprise. Says Yaresh Kothari, analyst at Angel Broking, “Topline is below estimates across all geographies due to low demand.”
However, decline in raw material prices (natural rubber) came as rescue to margins, which saw significant improvement and were better than analysts’ estimates. Consolidated operating profit margin improved 183 basis points to 11.9% thanks to 381 basis points drop in raw material costs as percentage to sales. Natural rubber prices (average) were down around 15% year-on-year in December quarter and 30% from the peak level of Rs 242 seen in April 2011. Reported net profit margin also jumped 168 basis points to 5.6%. But, the quarter saw a huge surge in other income to Rs 27 crore compared to Rs 2.4 crore (possibly due to a forex loss) in same quarter last year. The higher growth in other income further boosted net profit.
While India business has disappointed heavily on topline growth despite ramp-up of newly commissioned Chennai plant, it has been the driver for improvement in profitability as standalone operating profit and net profit jumped 21% and 73% year-on-year, respectively. Further gains came from overseas operations which also witnessed better margins with South Africa reporting profit (against loss in the year ago period) and Europe reporting better profitability.
Outlook remains subdued
Natural rubber prices touched a two-year low level of Rs 161 in early December. Hence, the current quarter will see full benefit of this and margins are expected to improve further despite the rupee depreciation, feel analysts. Production is generally higher in the second half of fiscal and hence rubber prices could soften further. Even low demand globally will affect rubber prices. While continued improvement in profitability is a positive, this is unlikely to trickle down to upside in stock, which has underperformed Sensex in last three months, as worries of topline growth and possible equity dilution exist.
Replacement demand is not very impressive in domestic market and will take time to pick up. Europe continues to face macro-economic challenges and South Africa revenue faces risk of Chinese imports, competition and slowdown in growth. The company had announced capital raising plans in September 2012 quarter through a $150 million QIP and $27.5 million of convertible warrants to promoters for lowering debt, setting up capacities and inorganic growth opportunities. Although the equity dilution plan has been postponed the timing has not been decided.
Positively, analysts find stock valuation cheap and see limited downside from current levels. Ashwin Patil, analyst, LKP Securities, sees positives going ahead for the stock as he sees pick up in replacement demand, margins improving, slowing capex outlay and delayed or no capital raising leading to improvement in net debt to equity ratio and reduction in interest costs.