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Home » Articles » Apollo Tyres To Keep Trucking Amid Numerous Pitfalls

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  • Apollo Tyres to keep trucking amid numerous pitfalls

    Publish Date: October 03, 2018

    Apollo Tyres, like its peers, has come unstuck in the last couple of years.

    To make matters worse, the tyre manufacturer faces a welter of controversies and pain points. From rising input costs to protests against the high wages of the top brass, the company is in the midst of a bruising battle.

    So, let’s run the rule over the looming problems and gauge whether the company can ride the storm and emerge unscathed.

    1) Row over remuneration

    The top management’s high wages have irked shareholders. The company founder, Onkar S. Kanwar, and the managing director, Neeraj Kanwar, together pocketed Rs 87.74 crore as annual salary this year. That’s more than a tenth of the entire company’s consolidate net profit for the year.

    The protest against the company comes on the back of news that Neeraj Kanwar’s annual compensation rose 38% this year, though the company’s earnings per share plummeted by 26% in the last three years.

    Against the backdrop of dwindling profits in the last two years, the shareholders feel the high salaries are hurting the company, according to a Mint report.

    2) Rising cost pressures

    High input costs have been a bugbear for the entire tyre industry. Apollo is no different. Fortunately, strong demand has meant tyre-makers have passed the rising prices on to the customer.

    But soaring crude prices in recent weeks have lead to a further uptick in raw material costs. Crude prices have risen by 18% in rupee terms in the last two months, sparking synthetic rubber, carbon black and chemical costs to vault 55%.

    Cost of carbon black, an important material for tyre-manufacturing, has spiraled due to scarcity in the Indian market. Forced to import, tyre companies like Apollo are paying a higher import duty.

    Related read - Is hiking import duty the best way to save a falling rupee

    Therefore, the high cost input, coupled by rising crude prices, has squeezed the company’s operating margin.

    3) Higher capex plans

    Apollo, the country’s largest commercial vehicle tyre maker, is planning to incur a capital expenditure of Rs 6,300 crore. Part of its grand plan to dislodge MRF Tyres from its number one slot, the tyre maker is looking to undertake new projects and investments in the next three financial years.

    The downside is that the company’s free cash flow will be negative at Rs 600 crore, meaning its debt levels are expected to pile up too.

    4) IL&FS after-effect

    The IL&FS fiasco has hurt Apollo too. The tyre maker invested Rs 275 crore in inter-corporate deposits of the beleaguered company last year. As per Apollo, it is scheduled to receive an outstanding amount of Rs 200 crore in the next one month. However, IL&FS’ liquidity crisis suggests that next month’s repayment remains up in the air.

    All these factors have reflected in the company’s stock performance in recent weeks. The company’s stocks have tumbled by more than 25% in the last two months.

    But is it all doom and gloom for Apollo Tyres? We think not.

    Apollo, unlike its peers, has held fort in recent quarters. It reported a three-fold surge in consolidated net profits last quarter and a 10% net profit increase in the quarter before that.

    If you look at the management uncertainty, we feel that Neerak Kanwar will remain as the managing director beyond May 2019 — that’s when his MD tenure ends. We also believe the company will come up with a revised compensation package to satisfy shareholders.

    As far as the rising cost pressures are concerned, we believe the 2%-6% decline in natural rubber prices will offset the high carbon black prices. Also, the company has increased the cost of by 2%-4% in the last three months, suggesting the high cost pressures have been transferred to the customer.

    The company’s strong volumes growth indicates that the high cost of tyre has not deterred the company’s standing in the market.

    And lastly, we expect the company’s Europe business to do better once the Hungary plant ramps up going forward.

    In short, Apollo faces a stiff test ahead but it has the tools to weather it.

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