Replacement segment gives smooth ride to Apollo Tyres amid auto slowdown

Slowing auto sales, higher commodity costs remain major areas of concern

The stock of Apollo Tyres gained over 5 per cent after its June quarter results, which came marginally ahead of analysts’ estimates. Revenues, on the back of robust growth in both Indian and European operations, stood at Rs 4,272 crore, slightly more than the Rs 4,249 crore last year.

Indian operations, which account for over 70 per cent of revenues, were up 1 per cent; the European business saw 5 per cent growth.

Growth in India was led by the replacement segment, both in the commercial and passenger vehicles segments. This is the largest segment and accounts for over two-thirds of the company’s sales.

Higher sales in the replacement market have helped offset the weakness in supplies to auto makers and original equipment manufacturers (OEM).

The company indicated that it was able to buck the trend — on the back of growth in replacement demand — despite headwinds in the Indian market. It has been focussing on the truck replacement segment and had launched fuel-efficient tyres. In addition, the firm had increased its volumes in the truck and bus radial segments, and gained market share.

Chairman Onkar S Kanwar is hopeful that the markets will recover and sales will bounce back close to the festive season in India. In Europe, the company is outperforming the market and this trend is expected to continue for now.

While consolidated earnings before taxes, depreciation, interest and amortisation (Ebitda) fell 10 per cent to Rs 475 crore, it was still above analysts’ estimates.

Margins, however, came in at 11 per cent — up 103 basis points on a sequential basis — which was higher than estimates that had pegged the same at the 10 per cent-mark. Though product mix has improved, flat volumes and higher costs (employee, other expenses) as a percentage of revenues restricted the improvement in margins.

While Apollo Tyres is expanding its presence across product categories and segments, the Street will watch out for the impact of slowdown in the auto segment on volumes.

Further, raw material costs, which continue to remain elevated, could also be an overhang on margins.