Apollo: On a roll

Fall in prices of rubber and other inputs should help Apollo improve margins.

Tyre companies faced a tough environment in the September quarter. Natural rubber prices reached a high of Rs 106-107 a kg, twice the levels seen in the previous year.

Even crude oil-based raw materials such as nylon cord tyre and synthetic rubber typically follow oil prices, which had peaked in the last quarter.

Thus, it is not surprising to see Apollo's adjusted raw material costs as a percentage of sales going up by 120 basis points to 68.2 per cent in the September 2006 quarter.

The positive is that the automobile industry did well, having grown by 22.84 per cent in the first half of FY06, coupled with a strong replacement demand.

So, sales went up 21.3 per cent in Q2 FY07 on the back of higher numbers and price hikes. Apollo's market share has gone up by 200 basis points y-o-y in the truck and bus segment and 100 basis points in car tyres.

Apollo was not able to pass on higher costs entirely to its customers and its operating profit went up only 0.6 per cent with operating profit margins declining 160 basis points to 7.8 per cent.

Rubber prices are down to Rs 84 a kg, and even other raw materials are cheaper. The fall in price should help Apollo improve margins this quarter even after its price cut of 3.5-4 per cent last month.

Apollo had acquired Dunlop, South Africa, in January this year, for Rs 290 crore, and to finance this buy, it will raise Rs 250 crore through a placement and issue warrants to promoters.

The Apollo Tyres had nearly doubled from its June low. The results do not seem to have inspired markets as the stock fell 5 per cent on Thursday, and now trades at about 15 times estimated FY07 earnings.

Mastek: Lagging peers

Mastek's revenue growth in the September 2006 quarter does not match up to the numbers declared by Infosys and iGate. This is because revenues declined in markets other than North America and Europe.

Mastek saw its revenues increase by 3.7 per cent q-o-q in the September quarter, while its operating profit improved by 1.7 per cent, after a 2.9 per cent decline in the previous quarter. In September 2006, its operating profit margin stayed above 16 per cent, and net profit grew 2.9 per cent.

Mastek's North America and Europe businesses, which account for around 85 per cent of revenues, grew 9.4 per cent and 6.7 per cent over the June quarter.

During the quarter, it won a multi-year order from a financial services company in the UK and a large project from a US insurance company.

The JV with Deloitte continued to see a drop in revenues and margins as some projects have been cut in size. Mastek expects its insurance industry solution Elixir to do better going forward.

Also, its alliance with Euriware, France, would also start yielding results over the next few quarters. The stock trades at about 11-12 times estimated FY07 earnings and appears reasonable.

BASF: Input woes

The key takeaway from BASF India's September 2006 quarter result is that despite strong demand conditions in its different product segments, rising input costs have dented margins.

The company has seen its operating profit grow by 7 per cent y-o-y to Rs 33.83 crore in Q2 FY07 compared with 14.2 per cent growth in net sales to Rs 218.47 crore. As a result, the company has seen its operating profit margin dip 100 basis points y-o-y to 15.5 per cent in the last quarter.

Analysts highlight that as the company uses inputs derived from petroleum products, higher raw material prices led to adjusted raw material costs, as a percentage of net sales, rising 870 basis points y-o-y to 56.2 per cent in the September quarter.

Investors appear to have factored rising costs for the company, as the stock has lagged the market over the past three months. The stock has gained 10 per cent over the past three months compared with 17.5 per cent gains in the Sensex.

Meanwhile, in its key performance products division, which includes tanning agents and textile chemicals, the company has benefited owing to strong demand from user industries in the leather and textile sector respectively.

Segment profit of this division grew 46.4 per cent y-o-y in the last quarter. However, in its plastics division, segment profit declined 40.9 per cent y-o-y in the September 2006 quarter. The stock gets a discounting of nine times estimated FY07 earnings, given the cost pressures faced by the company.