Margins will rise if raw material costs fall: Apollo Tyres

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Apollo Tyres has reported its earnings results for the quarter ended December 31, 2011. The company's consolidated net profit fell 18% to Rs 98 crore versus Rs 120 crore year-on-year. The consolidated revenue grew 36% to Rs 3228 crore versus Rs 2368 crore, for the same period last year.

Apollo Tyres reported a Rs 29 crore exceptional loss in the third quarter due to a penalty levied on its South African subsidiary. The company's South African business, however, grew 27% while their India business rose 47% for the quarter.

Neeraj Kanwar, the managing director of Apollo Tyres told CNBC-TV18 that their margins were impacted due to high raw material and interest costs. He said margins could improve provided the cost of raw materials fell substantially.

Rubber prices have eased but are still much higher than the rates two years ago. He said that even though rubber prices were still on the higher scale at Rs 210 per kg, results could improve if prices remained stable.

Below is an edited transcript of his interview. Watch the accompanying video for more.

Q: The numbers are better than what the consensus was expecting you to deliver. What's gone right this time around? What are the concerns that are still there? By when do you see them getting resolved?

A: We have grown by 36% on a total consolidated basis. All three of our zones - India, South Africa and Europe have done extremely well. India has grown by nearly 47% in Q3, South Africa has grown by 27% and Europe has grown by nearly 26%.

India has done well on the back of truck/bus radials and passenger car radials that have been launched. Our Chennai plant has come online and that is really giving growth, obviously to do with our products that are coming out in the market. Today we are by far the leaders in the truck/bus radial segment, thanks to the technology people in the company that have come out with great products for our customers and for our fleet operators.

Europe has also done extremely well on a 26% growth. We can see this because the winter season has been good in Europe and both the Apollo brand and the Vredestein branded are selling very well in Europe.

Q: How do you expect margins to pan out hereon? We did see some relief on rubber prices. Will you get into double-digit margins at all?

A: Rubber has eased but it is still at Rs 200-210 kg. It's much higher than what it used to be two years ago which was nearly at Rs 80-90. The margins had eased up as you have seen in our results, we have come to a 10.15% operating profit margin (OPM). From here we believe that if all stays well and the raw material prices remain stabilised, I believe that our results will be far better from what they are in Q3 going forward.

Q: You spoke about significant performance improvement both in Europe and India. Anecdotal evidence one hears is a lot of gloom doom and recession in Europe and slowdown in India. What's the sense you are getting in Q4 itself? Will you be able to maintain this run-rate? I am asking about Q4 because you have seen half of it?

A: My target for Q4 is much more bullish and much more optimistic. With the launches of new products that are happening in India and in Europe, they are happening in various product categories in various different cars, different trucks, therefore I am pretty bullish that we will have much better results in Q4 on the topline and on the bottomline.

As far as Europe is concerned, there is a lot of negativism about the eurozone, but as far as tyres and especially where our products are concerned we were able to launch the Apollo Tyres brand two years ago and our team in Europe is doing a wonderful job of selling the Apollo brands into the market. So, those numbers are giving me confidence that there is a likely growth of much better results in Q4 than Q3.

Q: You alluded to the mix improvement, the bus and truck radials doing better and that's a better margin business for you. How much do you see that driving your margins going forward?

A: The Chennai plant is now up and running and today we are by far the leaders in the truck and bus radial segment. This is a very high segment. The demand for technology is very superior. Our products are doing very well and this is where the major growth of Apollo is going to come in India.

Today, we are producing 4,000 tyres per day from the Chennai plant in this category and we hope to achieve our terminal capacity within the next quarters of nearly 5,000-6,000 tyres per day. This is all going to come into the market and we are going to see a very hefty growth as far as truck/bus radials are concerned.

Q: The South African penalty you spoke about is just a one timer, no carry forwards?

A: No it's a one timer. We have provided for it. It is around Rs 29 crore, but from a cash flow perspective we will be paying it over the next three-four years.

Q: Are there further expansions lined up after your successful breakthrough in Europe and even in South Africa for that matter?

A: We are looking at various markets. We have started selling into the Brazilian market very aggressively. We are selling tyres from India and from South Africa into the LatAm (Latin America) region and into Brazil. We are also looking at Europe. We are still at a very nascent drawing board stage. We are looking at various markets such as Asia, the European continent itself, but as a first priority we are looking at Brazil and we are looking at entering into Africa from the South African market. This is nearly in the horizon.

Q: Your interest costs have actually dented the bottomline a bit. They are up almost 40%. Any plans to deleverage or bring down debt so that the interest costs can be managed?

A: Not as of now as far as markets are concerned, but internally we will be looking at better current asset management, looking at inventories and looking to try and bring these interest costs down further to below 2% as a percentage to sales.

Q: There is obviously tell-tale evidence of a passenger cars slowdown. How are you looking at that market? What kind of demand are you expecting?

A: In Q3, passenger OEs had come down, but if you see the January results 7-8% has been the increase, as far as OE car sales are concerned. I am seeing a back upswing in the passenger car market as far as India is concerned. With new products coming out from our passenger car basket, we are looking at export markets.

Today, Apollo would be the number one exporter of passenger cars to the world from India. We are opening up new markets for our brands like we have opened up in Europe. We are looking at Middle East and parts of Asia. That's where the new opportunities lie for Apollo branded products.

Q: So, the weakness you feel is behind in the passenger vehicles market and the trend that you saw in January could be carried forward to the rest of the quarter in the year?

A: Yes, surely. I am pretty optimistic on both passenger cars and on the commercial segment going forward.