The Hindu Business Line : Apollo Tyres: Buy

TAKING into account the strong fundamentals, the prominent presence in the truck and bus segment, and the recent efforts to gain a foothold in the original equipment market, long-term investors could contemplate equity exposure in Apollo Tyres at the current market price of Rs 174.

The automotive tyre producer, Apollo Tyres, came up with a relatively lacklustre financial performance for the quarter ended June 2003.

After recording a 146 per cent rise in post-tax earnings for the quarter ended March 2003, Apollo Tyres faced a 13.4 per cent drop in the first quarter of this fiscal.

The economic recovery and increase in automobile production has spurred the demand for tyres.

This helped Apollo Tyres post a 12 per cent rise in turnover for the quarter ended June 2003.

With a major presence in the truck and bus tyre segment, the company appears to have benefited from the sustained increase in commercial vehicle production and the recovery in economic fundamentals in the recent months.

The operating profit margin has, however, been under pressure during the quarter ended June 2003.

From about 10.2 per cent in the first quarter of 2002-03, the OPM dropped to 7.4 per cent for the same period in the current fiscal.

Much of the erosion in profitability is explained by the sharp rise in price of key raw materials such as natural rubber, carbon black and nylon tyre cord.

The price of natural rubber rose by about 30 per cent in the first quarter of this fiscal. The rise in the price of crude oil had an inflationary impact on price of petro-based inputs such as carbon black and nylon tyre cord.

As a result, the raw material cost rose 37 per cent to Rs 285 crore while the turnover recorded a relatively modest growth of 12 per cent.

Interest cost fell to Rs 3.55 crore from Rs 8.95 crore primarily due to the dropping rates.

With taxation provision almost unchanged, the drop in profitability played a key role in pulling down the post-tax earnings by 13.4 per cent to Rs 18.72 crore.

However, the company's performance could improve in the near term because of sustained increase in demand and improvement in profitability stemming from the recent soft trend in price of key inputs.

The recent decline in the prices of natural rubber and crude oil is likely to lower the total raw material cost. This, in turn, would have a beneficial impact on profit margin.

Normal monsoons this year have had a beneficial impact on the economic growth and, by extension, tyre demand. Automobile production continues to remain robust, which again would help Apollo record improved performance.

Along with these factors, the excise duty on tyres sold in the replacement market has been reduced in the latest Budget.

This would also have a positive impact on the company's earnings to the extent it is not passed on to the consumers.