Apollo Tyres: Investors should consider stock if volume growth sustains

Profitability hit a four year high figure for Apollo Tyres in the quarter
Apollo Tyres posted a better-than-expected performance in the September quarter (Q2) led by strong volume growth across segments and margin gains. In addition to double-digit growth in the replacement market, recovery in demand from auto makers (OEMs) and market share gains helped the company post an eight per cent year-on-year (YoY) growth in revenues. Revenue growth in Q1 was down 34 per cent YoY. 

In the India market (68 per cent of consolidated revenues), its replacement volumes in truck, bus and passenger vehicles were its highest ever for September. Tyre volumes for heavy vehicles were subdued earlier due to the change in axle load regulations, transition to Bharat Stage-VI emission norms, and Covid-19 pandemic, but have picked up given the increase in movement of goods, mining activity and rising freight rates. Truck and bus tyres account for 60 per cent of India revenues. 

In the passenger vehicle segment, the company has said it gained 500 basis points market share in the first five months of the financial year given import restrictions, demand improvement as consumers have shifted to personal mode of transport (instead of public transport) and network expansion, especially rural touch points. The company expects to sustain volume growth in December and March quarters. 

In addition to demand recovery, what stood out were margin gains. Profitability hit a four-year high of 16.2 per cent and was up 540 bps over the year-ago quarter. In addition to top line growth, margin gains were led by lower raw material costs, better product mix and cost containment measures. On the cost reduction front, the company was able to reduce fixed costs by 15 per cent in the first half of FY21 with gains from rentals, revision in supplier contracts, travel costs and digital launches. However, its ability to maintain margins will depend on its ability to pass on higher costs due to raw material inflation and rise in other costs post unlock. 

While the company indicated that return ratios should move up on the back of lower capex intensity, lower debt, volume and market share gains across segments and markets, a second wave of Covid-19 infections could derail recovery. Investors could look at an investment if the volume growth trend sustains.

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