Material costs, muted growth a bottom line dampener for Apollo
Reporting its performance during the first quarter of India’s financial year, Apollo Tyres says net sales during the period were “robust”, increasing 55 per cent year-on-year to Rs 28.22 billion (£382.60 million). Despite this, factors such as all-time high natural rubber prices and “sluggish” growth in some markets dampened the company’s profitability in the three months between April 1 and June 30, 2011. Operating profit rose 20 per cent to Rs 2.42 billion (£32.81 million) while net profit was up 3.9 per cent in the quarter to Rs 771.28 million (£10.46 million).
Addressing this abovementioned lackluster growth, Apollo shares that while growth continued as anticipated in India and Europe, the South African economy has been of “particular concern” to Apollo Tyres. It notes demand there is “failing to pick up adequately” and the high cost of manufacturing in South Africa – Apollo Tyres SA operates plants in Ladysmith and Durban – together with the growing number of tyres imported from China poses an “enormous challenge” to the domestic industry. Perhaps in response to this challenge, Apollo intends to invest US$30 million in its South African subsidiary during the current financial year.
“This will be yet another difficult year for us,” reflected company chairman and managing director Onkar S Kanwar. “In our largest market in India, inability to raise prices in time is having an adverse impact on all Indian tyre manufacturers. Some of the players have already posted negative results and this will influence overall investments in the sector. Europe continues to do well, despite high raw material prices. However, government inaction on large scale import of tyres into South Africa is taking a toll on the tyre manufacturing industry. What has further contributed to the situation is the high cost of manufacturing and recurring wage negotiations in South Africa. However, I continue to remain optimistic about the company’s ability to negotiate these challenges, especially given the multiple actions we have already deployed across geographies, to increase internal efficiencies.”
Africa is not the only region experiencing economic difficulties. “In some senses we are currently facing the lag effect of the earlier crisis,” Kanwar observed. “Global recovery seemed to have hit a snag, where nearly every country is trying to cope with a general manufacturing slowdown, high input costs, a higher cost of borrowing and spiraling inflation. The European Union is struggling with a potential debt crisis and fiscal austerity. The United States with debt and unemployment. Japan has been hit hard by a natural calamity and faces the daunting task of rebuilding a disrupted supply chain. While India and China continue to project growth, the numbers have all been revised downwards, to more moderate levels.”