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Apollo Tyres
Performance highlights
Y/E March (consolidated ` cr) 1QFY14 1QFY13 Net sales 3,190 3,165 EBITDA 393 352 EBITDA Margin (%) 12.3 11.1 Adjusted PAT 165 139
Source: Company, Angel Research
NEUTRAL
CMP Target Price
% chg (yoy) 4QFY13 0.8 3,038 11.9 356 123bp 11.7 19.0 123 % chg (qoq) 5.0 10.6 62bp 33.7
`62 -
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code
Tyre 3,107 1,947 1.0 102/55 619,972 1 18,789 5,566 APLO.BO APTY@IN
Better-than-expected 1QFY2014 performance: Apollo Tyres (APTY) reported strong results for 1QFY2014, beating our estimates, driven by better-thanexpected operating performance led by softening of natural rubber prices. The consolidated top-line grew 0.8% yoy (5% qoq) to `3,190cr, slightly ahead of our estimate of `3,091cr. A strong revenue growth of 11% yoy in the European operations, aided primarily by volumes, contributed to the overall growth in the companys top-line even though the company faced pricing pressures. The standalone operations too reported a better-than-expected revenue growth of 0.7% yoy, as against our expectations of a decline of ~2%, led by volume growth of 3% yoy. On the operating front, EBITDA margins expanded 62bp sequentially (123bp yoy) to 12.3%, beating our estimates of 11.5%, and were driven primarily on account of softening of raw-material prices. The expansion of margins on a sequential basis surprised given that the company had reduced tyre prices in the domestic markets by 1-2% in 4QFY2013. Led by a strong operating performance, the net profit grew 19% yoy to `165cr, beating our expectations of `123cr. Standalone performance too beats estimates: The standalone top-line posted a better-than-expected growth of 0.6% yoy (6.3% qoq) to `2,165cr driven by ~3% growth in volumes despite a challenging environment. The Net average realization however, registered a decline of 2.4% yoy due to adverse product and price mix. While the EBITDA margin improved 144bp yoy on account of softening of natural rubber prices, it declined 35bp sequentially due to price cuts implemented in 4QFY2013. The Net profit stood at `94cr aided partially by a high other income. Outlook and valuation: We have tweaked our revenue and earnings estimates marginally to account for the demand pressures as guided by the Management and better-than-expected EBITDA margin performance during the quarter. Our revised EPS estimates for FY2014/15 stand at `13.1/ `15.4 respectively. We believe that the stock price movement of the company in the near term would be determined by the combined performance (post-acquisition) of APTY and Copper Tire and Rubber Company (CTB). According to the Management, the acquisition is set to close by October 2013. The proposed acquisition of US based CTB is expected to increase the companys leverage significantly and leaves limited room for error in execution in our view. We maintain our Neutral rating on the stock.
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 43.4 14.9 26.7 15.0
3m (6.0)
1yr 6.8
(37.1) (22.4)
FY2012 12,153 37.1 411 (4.3) 9.4 8.1 7.5 1.1 15.7 14.9 0.4 4.8
FY2013E 12,795 5.3 596 45.1 11.4 11.8 5.2 0.9 19.1 17.3 0.4 3.4
FY2014E 13,409 4.8 662 11.2 11.8 13.1 4.7 0.8 17.9 17.8 0.3 2.9
FY2015E 15,106 12.7 775 17.0 11.6 15.4 4.0 0.7 17.8 18.3 0.3 2.5
Yaresh Kothari
022-3935 7800 Ext: 6844 yareshb.kothari@angelbroking.com
1QFY14 3,190 1,708 53.5 393 12.3 170 5.3 525 16.5 2,796 393 12.3 72 99 11 234 234 7.3 68 29.0 (1) 0 165 165 5.2 50.4 3.3 3.3
1QFY13 3,165 1,777 56.2 388 12.3 179 5.7 468 14.8 2,813 352 11.1 75 94 10 193 193 6.1 54 28.0 (0) 0 139 139 4.4 50.4 2.7 2.7
% chg (yoy) 0.8 (3.9) 1.3 (5.1) 12.1 (0.6) 11.9 (3.6) 5.4 11.9 21.1 21.1 25.4
4QFY13 3,038 1,675 55.1 375 12.3 121 4.0 511 16.8 2,682 356 11.7 74 120 44 206 (17) 223 7.3 82 36.7 (1) 0
% chg (qoq) 5.0 2.0 4.9 40.3 2.8 4.3 10.6 (2.4) (17.7) (74.9) 13.5 4.9 (17.2)
FY2013 12,795 7,343 57.4 1,471 11.5 654 5.1 1,870 14.6 11,338 1,457 11.4 313 397 94 842 (17) 859 6.7 245 28.5 (0) 0
FY2012 12,153 7,379 60.7 1,335 11.0 658 5.4 1,615 13.3 10,987 1,166 9.6 287 326 33 586 29 556 4.6 144 25.9 (0) 0 412 441 3.6 50.4 8.2 8.8
% chg (yoy) 5.3 (0.5) 10.2 (0.6) 15.8 3.2 24.9 8.9 21.8 189.4 43.7 54.3 69.6
19.0 19.0
17.6 33.7
49.0 35.2
19.0 19.0
2.8 2.4
17.6 33.7
12.2 11.8
49.0 35.2
Top-line growth beats estimates: The consolidated top-line grew 0.8% yoy (5% qoq) to `3,190cr, slightly ahead of our estimate of `3,091cr. The growth was driven by a strong revenue growth of 11% yoy in the European operations aided primarily by volume growth of 6% yoy, even though the company faced pricing pressures. The standalone operations too reported a better-than-expected revenue growth of 0.7% yoy, as against our expectation of a decline of ~2%, led by volume growth of 3% yoy. South Africa operations reported a flattish performance in INR terms; however, revenue grew strongly by 13% yoy in local currency. The capacity utilization levels for the Indian operations remained stable on a yoy basis at ~75%. The Europe and South Africa operations operated at utilization levels of ~90% and ~80% respectively.
2,822
2,871
3,228
3,231
3,165
3,375
3,217
3,038
3,190
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
% chg (yoy) 0.7 (0.8) 11.0 (63.6) 18.0 247.2 (4.5) (333.8)
4QFY13 2,061 305 736 35 215 (7) 86 (20) 10.4 (2.4) 11.6
% chg (qoq) 5.4 28.2 (1.4) (47.6) (5.8) (352.8) 3.9 (90.9)
FY2013 8,507 1,497 2,990 184 735 (1) 432 (8) 8.6 (0.1) 14.5
FY2012 8,158 1,305 2,850 105 499 (43) 386 1 6.1 (3.3) 13.6
% chg (yoy) 4.3 14.8 4.9 75.1 47.4 (96.8) 11.9 (690.1)
EBITDA margin expands on softening of commodity prices: On the operating front, the EBITDA margin expanded 62bp sequentially (123bp yoy) to 12.3%, beating our estimates of 11.5%, driven primarily by softening of raw-material prices. The expansion of margins on a sequential basis surprised positively given that the company had reduced tyre prices by 1-2% in 4QFY2013. At the standalone level, while the EBITDA margin improved 144bp yoy on account of softening of natural rubber prices, it declined 35bp sequentially due to price cuts implemented in 4QFY2013. In Europe, EBIT margins declined 200bp yoy to 12.2% largely on account of pricing pressures. South Africa operations on the other hand, staged a smart recovery posting EBIT margins of 4.7% (up 330bp yoy) led by volume growth and lower raw-material prices.
1QFY14
181 174
55.0 45.0 35.0 25.0 8.2 8.3 10.3 11.2 11.1 10.9 11.9 11.7 12.3
100 50 0
15.0 5.0
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY10
3QFY10
1QFY11
3QFY11
1QFY12
3QFY12
1QFY13
3QFY13
1QFY14
Adjusted net profit ahead of estimates at `165cr: Led by a strong operating performance, the consolidated net profit grew robustly by 19% yoy (33.7% qoq) to `165cr, beating our expectations of `123cr.
2.7
2.7
3.0
157
138
152
181
142
77
78
98
166 1QFY14
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
1.0 0.0
1QFY14 2,165 1,428 66.0 115 5.3 64 3.0 304 14.0 1,911 254 11.7 63 59 8 139 139 6.4 46 32.8 94 94 4.3 50.4 1.9 1.9
1QFY13 2,152 1,505 69.9 109 5.1 64 3.0 252 11.7 1,931 222 10.3 62 55 5 110 110 5.1 35 31.5 75 75 3.5 50.4 1.5 1.5
% chg (yoy) 0.6 (5.1) 4.8 0.1 20.4 (1.0) 14.7 2.4 8.4 60.6 26.8 26.8 32.2 24.3 24.3
4QFY13 2,036 1,346 66.1 100 4.9 52 2.6 292 14.4 1,790 246 12.1 63 56 25 152 152 7.5 64 42.0 88 88 4.3 50.4
% chg (qoq) 6.3 6.1 14.7 23.3 3.8 6.7 3.3 0.7 6.7 (67.7) (8.5) (8.5) (28.5) 6.0 6.0
FY2013 8,507 5,860 68.9 427 5.0 254 3.0 1,069 12.6 7,609 898 10.6 261 220 57 475 475 5.6 162 34.1 313 313 3.7 50.4
FY2012 8,158 5,997 73.5 369 4.5 238 2.9 888 10.9 7,492 666 8.2 241 186 18 258 258 3.2 76 29.6 181 181 2.2 50.4 3.6 3.6
% chg (yoy) 4.3 (2.3) 15.8 6.5 20.4 1.6 34.8 8.2 18.5 215.4 84.3 84.3 112.6 72.4 72.4
24.3 24.3
1.8 1.8
6.0 6.0
6.2 6.2
72.4 72.4
Net sales down on 10% yoy decline in volumes: On a standalone basis, the topline posted a better-than-expected growth of 0.6% yoy (6.3% qoq) to `2,165cr led by ~3% growth in volumes despite a challenging environment. The Net average realization however registered a decline of 2.4% yoy due to adverse product and price mix. Effective March 15, 2013, APTY undertook an average price cut of 1-2% which weighed on the companys realization. During the quarter, the replacement market accounted for 65% of standalone revenues and the balance was contributed by the OEMs (27%) and exports (8%). In terms of product-mix, truck tyres accounted for 63% of revenues and passenger car tyres accounted for 16% of the revenues. According to the Management, the radialization levels in the truck tyre segment continue to gain traction and have reached ~25%. The companys market share in the TBR space stands at 27.5% as of FY2013. Further, the Management expects the raw-material prices to remain stable going forward; however, the INR depreciation is likely to keep EBITDA margin under pressure.
1,961
1,845
2,093
2,259
2,152
2,283
2,036
2,036
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
EBITDA margin at 11.7%: On the operating front, while the EBITDA margin improved 144bp yoy largely on account of softening of natural rubber prices, it declined 35bp sequentially due to price cuts implemented in 4QFY2013. The Net profit for the quarter stood at `94cr (up 24.3% yoy and 6% qoq), slightly ahead of our estimate of `91cr and was partially aided by higher other income (up 60.6% yoy).
1QFY14
2,165
500
44
22
43
72
75
75
74
88 4QFY13
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
1QFY14
94
Investment arguments
Tyre industry set for a structural shift: Currently, manufacturing radial tyres is far more capital intensive than manufacturing cross-ply tyres. The investment required for radial tyres per tpd is 3.2x that of cross-ply tyres, at `6.1cr/tpd. On the other hand, the selling price of radial tyres is ~20% higher than that of cross-ply tyres. Thus, to generate a similar RoCE and RoE, tyre companies would need to earn EBITDA margin of ~21% compared to ~9% earned on cross-ply tyres, considering the difference in capital requirements and the consequent impact on asset turnover, interest cost and depreciation. Therefore, higher capital requirements will help protect margins from upward-bound input costs, as the business model evolves, bearing in mind final RoEs rather than margins. With the sector set for a structural shift and the apparent pricing flexibility, RoCE and RoE of tyre manufacturers are expected to improve going forward. Riding on high domestic demand: The Indian tyre industry is currently witnessing a slowdown in demand from the replacement as well as OEM markets, primarily due to macro-economic concerns. However the demand scenario in the long term remains encouraging which will aid APTY to operate at optimal capacities. CTB acquisition to remain an overhang in the near term: APTY and CTB have announced a definitive merger agreement, under which APTY will acquire CTB in an all cash transaction valuing the firm at US$2.5bn (including minority interest). The acquisition would be funded entirely through debt. While the acquisition appears to be a good strategic fit for APTY in the long run, concerns regarding the large size of acquisition, substantial increase in leverage and the Managements ability to successfully integrate the operations has led to an ~40% correction in APTYs stock price since the deal has been announced. According to the Management, post the consolidation, the consolidated net Debt: Equity is expected to jump sharply to ~2x from 0.6x currently. We believe that the execution would be the key thing going ahead, as successful execution will lend stability to the operations and lead to lower leverage over time. Additionally, sustainability of margins of CTB (EBITDA margins have been in the range of 7.5%-12.5% over the last three years) would be very important given the obligation of servicing the huge debt that the company would be undertaking.
We believe that the stock price movement of the company in the near term would be determined by the combined performance (post-acquisition) of APTY and Copper Tire and Rubber Company (CTB). According to the Management, the acquisition is set to close by October 2013. The proposed acquisition of US based CTB is expected to increase the companys leverage significantly and leaves limited room for error in execution in our view. We have not yet incorporated the financials of CTB into our assumptions. We maintain our Neutral rating on the stock. Key downside risks to our call: A sharp rise in input costs from current levels, slower growth in international business and lower-than-anticipated domestic replacement demand pose downside risks to our estimates.
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Company background
Apollo Tyres (APTY) is India's second largest tyre manufacturer with an overall tyre market share of ~18%. The company has a leadership position in the heavy and light commercial vehicle tyre segments, with a 23% and 26% market share respectively. APTY acquired Dunlop's South African operations in 2006 and Vredestein Branden BV (Netherlands) in May 2009. These acquisitions now account for ~35% of APTY's consolidated revenue. The company has eight manufacturing plants located across India (1,400TPD), South Africa (175TPD) and Europe (170TPD), with a total installed capacity of 1,750TPD. APTY's main brands include Apollo (India); Dunlop (South Africa); and Maloya, Regal and Vredestein (Europe). The company has recently entered into an agreement to acquire US based tyre manufacturer, CTB in an all cash transaction valuing the firm at US$2.5bn (including minority interest). Post the acquisition; the combined entity will be the 7th largest tyre company in the world with combined revenues of US$6.6bn.
Oct-12
Jul-13
10
11
12
Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV /Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 0.7 1.1 6.9 0.8 2.1 3.4 0.8 2.1 2.8 0.6 1.3 3.4 0.4 1.0 4.0 0.3 0.8 4.7 2.1 36 23 41 19 1.4 57 36 65 25 1.6 56 31 59 26 1.5 57 30 49 30 1.5 57 32 48 34 1.7 61 33 46 39 29.3 26.0 35.8 15.6 14.3 19.6 14.9 14.3 15.7 17.3 17.7 19.1 17.8 18.7 17.9 18.3 19.4 17.8 11.5 0.7 2.9 23.6 7.4 0.6 32.7 7.9 0.8 2.1 13.3 8.4 0.8 17.1 6.8 0.7 2.3 11.4 9.2 0.8 13.3 8.3 0.7 2.2 12.9 9.3 0.7 15.4 8.7 0.7 2.2 13.6 9.2 0.5 15.6 8.7 0.7 2.3 14.3 9.2 0.3 16.0 13.0 11.8 16.8 0.7 39.0 8.7 8.5 13.9 0.5 47.9 8.1 8.1 14.6 0.5 56.2 12.2 11.8 20.0 0.5 67.5 13.1 13.1 21.3 0.5 79.4 15.4 15.4 23.9 0.5 93.6 4.8 3.7 1.6 1.2 0.5 3.8 1.1 7.1 4.4 1.3 0.8 0.6 5.3 1.0 7.5 4.2 1.1 0.8 0.4 4.8 0.9 5.2 3.1 0.9 0.8 0.4 3.4 0.8 4.7 2.9 0.8 0.8 0.3 2.9 0.7 4.0 2.6 0.7 0.8 0.3 2.5 0.6 FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E
13
E-mail: research@angelbroking.com
Website: www.angelbroking.com
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
Apollo Tyres No No No No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
14