How MRF and Apollo managed to beat the street in Q4FY23

Something very interesting has been happening in the tyre stocks. In the last two quarters, the tyre companies have reported stellar results and that has shown in the stock price performance also. For instance, Apollo Tyres has more than doubled from the lows of last year and the rally shows no signs of relenting. Similarly, MRF Ltd has also rallied over 50% from the lows of last year. What has triggered this rally?

There have been 3 factors at play. Firstly, the demand for tyres, especially from the OEM (original equipment manufacturers) has been rising in line with auto demand. Most of the auto companies are having overflowing order book positions and that has led to a surge in the demand for tyres. Secondly, the price of rubber, a key input for tyre has gone down sharply in the recent past .This has boosted margins for tyre companies. The last point dates back to 2020 when the government banned cheap Chinese dumping, which had helped China to capture a substantial part of the local tyre market. The ban on these imports made a big difference to the cost pressures on local tyre manufacturers. Let us now look at the specific stories of MRF Ltd and Apollo Tyres.

MRF Q4FY23 PAT jumps 162% on OPM boost

For the Q4FY23 quarter, MRF reported 10.10% higher sales revenues on standalone basis at Rs5,725cr. Revenues were also sequentially up by 3.44%. MRF is India’s largest tyre company by a margin with annual sales exceeding Rs22,000 crore. The 162% profit surge came from efficient operations, better efficiency gains and an exceptional gain of Rs80 crore in the quarter. For MRF, the benefits came from lower rubber prices and also from a growth in replacement demand and also OEM demand.

Let us understand this logic of the exceptional gain in the current quarter first. The exceptional gain has arisen due to the requirement of arms-length pricing between its Singapore subsidiary and the parent. Due to the shift to arms-length pricing, the outcome was an be exceptional one-time gains of Rs80 crore. This has boosted the profits for the quarter, although being an exceptional item, it is not a sustainable flow. However, improved operational metrics led to OMPs or operational margins more than doubling yoy from 4.18% to 8.99% in Q4FY23. Given below is the gist of the quarterly Performance

Consolidated Profit after tax (PAT) for March 2023 quarter was up 162% at Rs411cr on the back of improved operating performance and exceptional gains. Both the net margins and operating margins have improved sharply on a yoy basis and on a sequential basis.

Apollo Tyres Q4FY23 PAT grows 4-fold to Rs427 crore

Like MRF, even Apollo Tyres benefited from improved sales of auto companies as well as lower cost of rubber. This gave a substantial boost to the profits of the company. Let us look at the top line first. Apollo Tyres Ltd reported 12% growth in total sales for the March 2023 quarter on consolidated basis at Rs6,247cr. However, on a sequential basis, revenues were down -2.73% as compared to the December 2022 quarter. In terms of regional performance, Apollo Tyres saw sales sharply higher in the APMEA (Asia Pacific, Middle East, Africa) region and the Europe region while the rest of the world market saw contraction in exports due to demand constraints amid rising macroeconomic uncertainty over the hawkishness of the Fed and the evolving banking crisis in the US.

Where did Apollo get the boost to its operating profits from? The big boost came from operating profits of the APMEA region, which grew nearly 3-fold. Not to be left too far behind, the operating profits from the Europe region more than doubled on yoy basis. This boost to the operating profits came from higher revenues from auto sales and from lower prices of rubber, a key component in the manufacture of tyres. Even the prices of carbon black, another key ingredient for tyres, is down on a yoy basis.

This was reflected in the net margins and the operating margins of Apollo Tyres. For Q4FY22, Apollo Tyres saw operating margins doubling and net margins more than 3 fold on a yoy basis. However, the net cash generated from operations remained stable in Fy23 as compared to FY22, which can be attributed to the working capital pressures through major part of the year. On a yoy basis, the company has seen a sharp improvement in the interest coverage ratios and the debt service coverage ratios; which is a good solvency signal and this is true of both the tyre companies.

To sum it up, there is clear traction in the tyre business on the top line and on the bottom line.