The Indian tyre industry has been clamouring for a ban on the low cost Chinese tyre imports for a very long time. Fortunately for local tyre manufacturers, the government has recently imposed a five-year anti dumping duty on the import of radial tyres from China. The Indian tyre industry’s performance has been mixed during the last two years. First, the demonetisation initiative had sucked out the excessive cash from the system, making the industry witness a sharp volume drop. Second, the implementation of GST created a rough patch for the domestic tyre manufacturers. Third, the tyre industry had to face the burden of increase in commodity prices. Raw materials like carbon black, nylon fabric, synthetic rubber, chemicals and natural rubber have seen their costs increase by at least 10% in the last two years. On top of that, crude oil, which is a major raw material contributor for the production of tyres, has seen prices going up in the recent past. But now with remonetisation and formalisation of the economy, the Indian tyre industry is stabilising and starting to move forward.
Apollo Tyres Ltd is an Indian multinational with two prominent global brands, Apollo and Vredestein. The company has multiple manufacturing facilities in India, Hungary and the Netherlands, with a vast manufacturing and sales network around the globe. Apollo Tyres reported a decent increase in consolidated net profit at Rs 146 crore for the second quarter of the current financial year, as against Rs 140 crore in the same quarter of last fiscal. The total income during Q2FY19 stood at Rs 4,269 crore as against Rs 3,496 crore in the year ago period. This was in spite of many challenges like the havoc created by floods at two of its manufacturing plants in South India, a transport strike and volatile raw material prices. The future outlook for the tyre industry seems quite bright and robust as India’s progress on structural reforms should raise productivity and incentivise private investment. GST implementation should also help reduce internal barriers to trade, increase efficiency and improve tax compliance. Normal monsoon expectation, rural spend on upcoming elections and a strong domestic economy should be good for the Indian tyre industry. The government’s thrust on infrastructure development and increased farm credit are expected to spur demand in the domestic economy over the next one year, coinciding with the elections. Analysts and fund managers expect positive financial results from Apollo Tyres in the next one year on the back of doubling of production at the Chennai facility. The greenfield plant at AP should also continue to maintain leadership position and market growth across all product categories. The Apollo Tyres stock is a good portfolio buy at the current market price of Rs 236 for an appreciation target of Rs 290 in the next one year.
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.