Though the quarterly numbers for the first quarter of 2017-18 were weak, analysts are hopeful that conditions will improve significantly for Apollo Tyres in the coming quarters. This is because tyre dealers have already started restocking after the first quarter of destocking triggered by the implementation of GST from July 1.
Similar restocking pick-up in auto sales should help them in the Original Equipment Manufacturer (OEM) sales as well. Replacement demand (69% of industry’s domestic demand) is also expected to get a boost from the good monsoon this year. Moderation in cost, triggered by the fall in natural rubber prices, whichcontributes around 60% of input cost, is another positive factor for the tyre industry. The natural rubber prices fell 45% in the international market (from the February peak of Rs 194 to Rs 107 now).
Since tyre manufacturers are allowed to import natural rubber without paying import duty (only for equal quantity of exports), this will also put pressure on domestic natural rubber prices. The Indian tyre industry is slowly going the radial way and Apollo will be a big beneficiary of this. The company is taking measures to increase its radial capacity, starting with a plan to increase its Chennai radial plant capacity by 50%. After a gap of two years, the government has imposed anti-dumping duty on radial truck and bus tyres from China, which will help domestic tyre companies to recoup their lost market share in this segment.
Although the start-up cost of its plant in Hungary will put some pressure on margins, it will also give a good boost to the company’s European operations. Apollo Tyres has taken steps to improve its brand presence with the help of English Premiere League sponsorships. Fair valuation is another factor that is attracting analysts to this counter. The tyre industry is now trading at a reasonable valuation and Apollo is the cheapest among the big tyre manufacturers. Despite being in a capital intensive industry, Apollo was able to maintain its debt-equity ratio at 0.4 times.
Apollo Tyres also raised Rs 1500 crore of equity money through Qualified Institutional Placements. The funds will be used to accomplish future growth plans of the company, as well as to augment the its capital base and financial position. The Chennai and Hungary plants will be the growth drivers.
Source – News wire.