No respite for Apollo Tyres’ investors from cost inflation in Q3

Reacting to the numbers, shares of Apollo Tyres ended in red on the NSE on Friday. It should be noted that the shares of the company have also been under pressure in the last two trading session after the Competition Commission of India penalised the company.

In a post-earnings conference call, the management told analysts that till Q3FY22, the company has taken price increases in the range of 10-12%, adding that price increases and cost savings remain the company’s focus areas to tackle commodity inflation.

Although the company has been taking gradual price hikes, analysts say, it is not sufficient to offset the cost pressures. So, for margins to meaningfully recover, more price increases need to follow.

“Apollo Tyres absorbed part of the commodity cost inflation (up 4% sequentially) with a small price hike in 3QFY22 in the domestic market and plans further price hike of 2-3% in 4QFY22. We expect the RM cost pressure to persist in the next couple of quarters and Apollo Tyres will need to take more price increases (raw material under-recovery of around 6-7%) to get back to its normalized margins,” analysts at Nirmal Bang Institutional Equities Ltd said in a report.

Sharing a similar concern, analysts at Kotak Institutional Equities said, “We expect gross margins to remain under pressure over the near term as the RM basket continues to inch up. We expect the company to tide through led by improvement in European Union operations profitability, cost-cutting initiatives and calibrated price hikes.”

Meanwhile, volumes growth for the company was robust at around 3% year-on-year, largely aided by exports. As far as the replacement segment is concerned, while the demand there remained muted in Q3FY22, the management said that it is witnessing signs recovery. The management added that outlook for its European business remains positive and that the European tyre market is showing a strong growth momentum.