Shares of Apollo Tyres Ltd hit the skids after a disappointing September quarter (Q2FY20) performance. The stock was down about 5.3% on the National Stock Exchange in early deals on Wednesday.

The poor performance can be largely attributed to poor demand from original equipment manufacturers (OEMs) coupled with a slowdown in the replacement market. The management, in an analysts’ call, indicated a 12.5% year-on-year drop in sales volumes. This dragged consolidated revenue down by 6.4% to ₹3,986 crore, which was below Bloomberg’s 12-brokers’ average estimate of ₹4,207 crore.

Not surprisingly, Indian operations that account for about 70% of the company’s business led the decline, given the sharp slowdown in domestic auto sales. Revenue from domestic operations fell 10.3% even as European operations held out better with a 3.4% growth in sales.

Fortunately, rubber prices have been benign and protected profitability in spite of poor operating leverage. Hence, it clocked a consolidated 10.8% Ebitda (earnings before interest, tax, depreciation and amortisation) that was a tad lower than the year-ago period, but better than the Street’s forecast.

“Ebitda margin gained from better product mix and replacement market sales,“ said Mitul Shah, vice-president research at Reliance Securities Ltd.

That said, plummeting auto sales on home turf, with most OEMs working at below optimum capacity utilisation, has dampened sentiment. The management said it would slow the pace of capital expenditure planned over the next two years at its greenfield facility in Andhra Pradesh.

Weak sales volumes in the domestic market hit profitability as seen in the 250 basis points (bps) yoy drop in Ebit (earnings before interest and tax) margin to 6.3%. European operations did not fare well too as losses widened amid hope of a recovery on the back of better sales in the region.

Adding to the woes was the 40% yoy jump in depreciation costs on commissioning of its new plant and an equivalent jump in interest costs as debt levels increased. As a result, the net profit of ₹83 crore was about 55% lower than the year-ago period, after adjusting for an exceptional item. This was way below Bloomberg’s consensus of ₹110 crore.

That’s not all. With Apollo Tyres’ significant exposure to commercial vehicles, both Europe and the Indian operations battling slowdown in the auto sector, and depreciation and interest costs being high, “it would take several quarters before profits ramp up. In the view of near-term OEM slowdown and sluggish economic condition, we lower our revenue estimates by 6% and 4% for FY20 and FY21 respectively," said Shah.

Therefore, the stock, which has been underperforming benchmark indices, is likely to remain under pressure going ahead.