Apollo Tyres faces twin speedbumps of rising costs, weak demand
Apollo Tyres Ltd stock has underperformed the market over the past month. Investors have understandably turned cautious amid the recent spike in prices of rubber, and demand is expected to be weak in the near term. But the company does have a cushion, with high-margin segments growing their share and debt falling.
The company’s financials have been highly erratic over the past five years owing to the pandemic and commodity-price fluctuations, which have a strong influence on profitability. For instance, over FY19-21, revenue declined by 5% while net profit was up 22%. However, in FY22, a steep rise in raw-material costs caused profits to plunge as much as 64% year-on-year even as revenue grew at almost 25%.
In FY22, raw-material costs as a percent of total expenditure rose by almost 11 percentage points year-on-year, severely denting the margin. With the softening of raw-material prices, Apollo’s performance improved in FY23 and continued to do so in 9MFY24, with net profit jumping 122% and 111% and revenue growing 18% and 4%, respectively. Apollo’s revenue in 9MFY24 was ₹19,119 crore and its Ebitda margin was almost 18%.
Note that the margin expansion was due not just to softening raw-material prices but the changing customer mix as well. More importantly, the Indian market is also moving towards ‘premiumisation’, with increasing sales of SUVs and higher radialisation in truck and bus tyres. Radialisation refers to shifting from traditional tyres that use nylon threads to ones that use steel wires.
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