Apollo Tyres Ltd stock has tanked 26% in just two trading sessions, hitting a 52-week low of Rs96.7 on Thursday. This may be in line with the fall in the broader market where the BSE Sensex has shed nearly one-fifth of its value in seven trading sessions in March so far but there are specifics in Apollo’s case that need deeper study.
Indeed, news of a larger-than-expected economic impact of the coronavirus (COVID-19) on European nations, which account for about 33% of the tyre maker’s consolidated revenue, have made investors jittery.
Wednesday’s statement by the Hungarian Prime Minister Viktor Orban that the country's economy would be hit hard by the coronavirus pandemic punctured the stock. Note that Apollo’s Hungarian plant that makes passenger car (PC) and truck and bus radial (TBR) tyres was beginning to stabilize after commercial operations began in 2018.
The Q3FY20 analysts’ call highlighted the management's confidence of revenue traction and profitability from its European operations. Hungary plant utilization was at 70% even as sales outperformed industry growth rates in both PC and TBR segments in Europe.
The story board has changed overnight. To begin with, the firm’s arduous efforts to improve the mix of ultra-high performance tyres in European operations to 35% from 20% over the next couple of years, may face hiccups. Analysts' forecast of a 5%-6% growth rate between FY20 and FY22 from European operations could go haywire if demand hits the skids due to the pandemic. Expectations that the virus outbreak in China may thwart Chinese tyre imports to European nations and therefore boost Apollo’s sales have waned too.
That’s not all. Q3FY20’s drop in India’s sales volumes was sharper than expected given the weak offtake from original equipment manufacturers. In the coming quarters, one is unsure how the domestic demand would pan out following uncertainties on account of coronavirus and BS-VI transition.
The only silver lining is that Apollo’s recent infusion of about Rs1,000 crore through compulsory convertible preference shares issued to Warburg Pincus, will reduce its high leverage. “The fund infusion eases concerns on the company’s balance sheet in an uncertain environment, and is a key positive,“ said a report by Elara Securities (India) Pvt. Ltd. Net debt:equity for FY20 will drop to 2.5 times from the earlier estimate of about 3.1 times.
Luckily, funds were tapped at an opportune moment when the tyre maker is set to incur a capital expenditure of Rs2,400 crore in FY20 and an additional Rs1,400-1,500 crore in FY21.
Analysts are hopeful that the greenfield facility, which is slated to go onstream in the current quarter, is on course. Any adversities could weigh on the stock further.
That said, the coronavirus-led hit and supply shock is quite pronounced in the auto and components sectors. This is bound to pull down Apollo’s revenue growth across markets at least in the near term. Perhaps, benign raw material costs on the back of soft rubber prices and tumbling crude oil price would shore up profit margins.
Further, given the company’s exposure to several international markets, currency volatility may also impact earnings in the coming two to three quarters. Undoubtedly, the stock may face downward pressure until clarity emerges on the impact of and recovery from the coronavirus pandemic.