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Institutional Equities

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Reuters: APLO.BO; Bloomberg: APTY IN

Apollo Tyres

The Radial! Apollo Tyres, the leading player in the truck and bus radial (TBR) tyre segment, is expected to be a key beneficiary of the likely shift towards radialisation in the TBR segment. We have a positive view on the stock in the wake of: 1) Likely improvement in profitability over FY13E-FY14E due to lower rubber prices, 2) Improvement in cash flows with the capex cycle coming to an end in FY12, and 3) Strong EBITDA margin of European operations. We assign a Buy rating to the stock with a 12-month target price of Rs118, implying an upside of 19% from the current market price (8x FY14E EPS).

Earnings to show a CAGR of 30% over FY12-FY14E: We expect the profitability of the company to improve in FY13E/FY14E on the back of: 1) Soft raw material prices, 2) Strong performance of the company’s subsidiaries, and 3) Richer product mix comprising higher replacement market sales. Due to these factors, we expect consolidated EBITDA margin to expand by 164 bps in FY14E over FY12. Following higher EBITDA and lower interest outgo due to likely reduction in debt, we expect the earnings to show a CAGR of ~ 30% over FY12-FY14E.

Replacement demand to offset current OEM segment sales slowdown: We believe the current slowdown in the OEM (original equipment manufacturer) segment will be offset by strong recurring demand from the replacement segment as automobile sales over the past three years have been robust. Also, automobile sales during FY09-FY12 showed a strong CAGR of 21% which will ensure the growth remains stable in the replacement segment in the coming years, as the need to replace tyres in vehicles arises every two-three years.

EBITDA margin to expand on multiple levers: We expect EBITDA margin at the standalone level to be in double-digits in FY13 on the back of multiple levers i.e. raw material costs easing (natural rubber prices) and richer product mix. In FY10-FY12, domestic rubber prices grew by a CAGR of 35%, leading to huge pressure on margins of companies in the tyre space but have corrected 10% from the average of FY12. We expect the company’s consolidated EBITDA margins at 11.3% and 11.2% for FY13E/FY14E, respectively.

European operations continue to shine: The company’s European unit Vredstein remains a key subsidiary, contributing ~31% to consolidated EBIT and 23% to consolidated sales. We expect the European operations of the company to continue the strong show and expect it to report double digit EBIT margins of 14.5% and 14.2% for FY13E/FY14E, respectively, up from 13.6% in FY12.

Valuation: At the current market price, the stock trades at 7.9x and 6.7x FY13E/14E EPS of Rs12.5 and Rs14.8, respectively. We have valued the stock on P/E methodology and arrived at a target price Rs118, implying an upside of 19% from the CMP (8x FY14E EPS).

BUY

Sector: Automobile Ancillary

CMP: Rs99

Target Price: Rs118

Upside: 19%

Gaurant Dadwal [email protected] +91-22-3926 8145

Key Data

Current Shares O/S (mn) 504.0

Mkt Cap (Rsbn/US$mn) 50.1./925.7

52 Wk H / L (Rs) 102/52

Daily Vol. (3M NSE Avg.) 3,325,470

Share holding (%) 3QFY12 4QFY12 1QFY13

Promoter 46.4 46.9 46.9

FII 23.3 23.3 23.1

DII 10.3 11.1 11.4

Corporate 2.0 2.0 2.0

General Public 7.4 6.9 7.5

One Year Indexed Stock Performance

80

90

100

110

120

130

140

150

160

170

180

Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12

APOLLO TYRES LTD NSE S&P CNX NIFTY INDEX

Price Performance (%)

1 M 6 M 1 Yr

Apollo Tyres 8.9 22.3 69.0

Nifty Index 4.4 5.3 10.1

Source: Bloomberg

Y/E Mar (Rsmn) FY10 FY11 FY12 FY13E FY14E

Net sales 81,207 88,677 121,533 133,161 145,407

EBITDA 11,749 9,651 11,661 15,081 16,332

Net profit 5,660 4,408 4,415 6,308 7,449

EPS (Rs) 11.2 8.7 8.8 12.5 14.8

EPS growth (%) 306.6 (22.1) 0.2 42.9 18.1

EBITDA margin (%) 14.5 10.9 9.6 11.3 11.2

PER (x) 8.9 8.1 11.3 7.9 6.7

P/BV (x) 2.6 2.0 1.7 1.4 1.2

EV/EBITDA (x) 6.3 7.6 6.3 4.9 4.5

RoCE (%) 22.0 14.5 13.1 14.1 14.6

RoE (%) 35.0 20.1 16.6 20.1 19.6

Source: Company, Nirmal Bang Institutional Equities Research

20 September 2012


Apollo Tyres 2

Investment Arguments

Playing the replacement market theme

In an uncertain economic environment where the macro-economy is under pressure, OEM sales also feel the pressure due to high interest rates and high inflation. In such an environment, we prefer to play the replacement market theme, where growth will be primarily driven by replacement demand and not by demand from OEMs. We like Apollo Tyres as its replacement demand is expected to remain relatively stable over the next two years on the back of the boom in automobile sales witnessed during FY09 and FY12. The company derives 63% of its consolidated revenue from the replacement market and hence we expect it to reap the benefits of robust automobile sales growth. Other factors such as soft raw material prices etc will continue to drive earnings growth of the company in the next two years.

Exhibit 1: Segment wise revenue break-up

India business Europe business

56%34%

10%

Replacement OEM Exports

78%

19%

3%


South Africa business Consolidated

67%

31%

2%


63%

27%

10%




Apollo Tyres 3

Replacement demand to offset current slowdown in OEM segment sales

We believe the current slowdown in demand for tyres from the OEM segment will be offset by strong recurring demand from the replacement segment. Automobile sales during the period FY09-FY12 showed a strong CAGR of 21%, which will ensure that the growth will remain stable in the replacement segment in the coming years, as replacement demand comes in with a lag. The slowdown in demand from the OEM segment will be partially offset by growth in replacement segment demand, as higher automobile sales over the past three years will result in higher replacement demand in the coming years.In India, Apollo Tyres derives close to 56% of its revenue from the replacement market and 10% from exports. Given the slowdown in OEM segment, we forecast a 7% YoY growth in tonnage in FY13E backed by growth in replacement segment. As the margins in the replacement segment are higher when compared to the OEM segment’s margins, it augurs well for the profitability of the company in the near term. Also, the recent fall in rubber prices will have a positive impact on the margins in the coming months.

Exhibit 2: Robust growth in local passenger car sales in FY09-FY12

0

50,000

100,000

150,000

200,000

250,000

Ap

r-0

7

Au

g-0

7

De

c-0

7

Ap

r-0

8

Au

g-0

8

De

c-0

8

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Ap

r-1

2

Au

g-1

2

(Nos)

Source: Society of Indian Automobile Manufacturers

Exhibit 3: Commercial vehicle sales also grew robustly during FY09- FY12

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Ap

r-0

7

Au

g-0

7

De

c-0

7

Ap

r-0

8

Au

g-0

8

De

c-0

8

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Ap

r-1

2

Au

g-1

2

(Nos)

Source: Society of Indian Automobile Manufacturers


Apollo Tyres 4

Lower raw material costs of tyres to offset slowdown in demand from OEMs

Automobile sales have been under pressure since the past six months because of higher interest rates and a weak macro-economic environment. YTDFY13 Passenger car sales have witnessed a growth of 7% YoY, while commercial vehicle sales posted a drop of 12% YoY during the same period. In the wake of ongoing slowdown in OEM sales. However, the slowdown is likely to have a marginal impact on the bottom line as the fall in rubber prices (down 10% from the FY12 average) is likely to result in strong earnings growth over FY13E/FY14E. We expect raw material prices (i.e. natural rubber) for FY13 to remain stable for FY13/FY14 and hence expect EBITDA margin to expand by 173bps YoY to 11.3% in FY13E. In 1QFY13, standalone net sales of the company grew by just 9.8% YoY, but the bottom-line expanded 69.4% YoY, driven by a 270bps YoY improvement in EBITDA margin. Despite a single-digit top-line growth assumption, our PAT growth assumption for FY13 stands at 43% YoY, driven by improvement in profitability due to lower raw material costs.

EBITDA margin to expand on multiple levers

We expect Apollo Tyres’ standalone EBITDA margin to remain double-digits in FY13 on the back of multiple levers i.e. cooling off of raw material costs (natural rubber prices) and full effect of the price hikes coming into play. In FY10-12, rubber prices grew by a CAGR of 35% resulting in huge pressure on margins of companies in the tyre space. In order to pass on rising raw material costs, the company had to resort to frequent price hikes in the replacement market. Price hikes taken during FY10-12 will turn out to be good in FY13 as domestic rubber prices have softened and are down 10% from the average price in FY12. Due to lower raw material costs in 1QFY13, the company reported improvement of 270/480/300bps YoY in EBITDA margins of its Indian/European/South African operations at 10.3%/18.3%/4.8%, respectively. We expect consolidated EBITDA margins at 11.3% and 11.2% for FY13E/FY14E, respectively.

Exhibit 4: Consolidated EBITDA margin to improve

7

8

9

10

11

12

13

14

15

FY09 FY10 FY11 FY12 FY13E FY14E

(%)


Raw material costs to decline in FY13

Natural rubber prices in India have come down by 7% since April 2012. We expect this to be a positive for tyre companies as natural rubber accounts for ~65% of raw material costs. Following the fall in raw material prices, we expect Apollo Tyres to report a 173bps improvement in EBITDA margin in FY13E, at 11.3% from 9.6% in FY12. In 1QFY13, the company had reported an improvement of 270bps YoY largely due to the drop in raw material costs.


Apollo Tyres 5

Exhibit 5: Raw material costs/ tn

80

90

100

110

120

130

140

150

160

FY10 FY11 FY12 FY13E FY14E

(Rs/tn)

Source: Nirmal Bang Institutional Equities Research

Exhibit 6: FY12 raw material costs break-up

65%

12%

11%

7%

6%

Rubber Fabric Carbon black Others Chemicals

Source: Company

Exhibit 7: Raw material costs as a percentage of sales

55

57

59

61

63

65

67

69


(%)



Apollo Tyres 6

Exhibit 8: Gross margin

15

20

25

30

35

40

45

50


(%)


Exhibit 9: Sharp correction in domestic rubber prices from a peak of Rs243/kg to Rs169/kg

0

5,000

10,000

15,000

20,000

25,000

Ma

y-0

4

Ma

r-0

5

Jan

-06

No

v-0

6

Se

p-0

7

Jul-0

8

Ma

y-0

9

Ma

r-1

0

Jan

-11

No

v-1

1

Se

p-1

2

(Rs/100kg)

Source: Capitaline

Natural rubber prices unlikely to rise in the near term

Rubber has been one of the worst performing commodities in the past one year as global growth concerns coupled with lower automobile sales across the world led to a sharp correction in rubber prices. International rubber prices have declined 31% Since April 2012 and are down 56% from their peak in February 2011 following slowing Chinese and US automobile sales. As the US and China are the biggest automobile markets in the world, most of the demand for natural rubber comes from these countries and hence there is a strong co-relation between rubber prices and automobile sales. Given the weak global scenario, rubber prices are unlikely to gain momentum and hence we expect rubber prices to remain stable in the near term.


Apollo Tyres 7

Automobile sales in US and China in a decelerating mode since 4QFY12

Exhibit 10: Automobile sales in US and China

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

Jan

-05

Jun

-05

No

v-0

5

Ap

r-0

6

Se

p-0

6

Fe

b-0

7

Jul-0

7

De

c-0

7

Ma

y-0

8

Oct

-08

Ma

r-0

9

Au

g-0

9

Jan

-10

Jun

-10

No

v-1

0

Ap

r-1

1

Se

p-1

1

Fe

b-1

2

Jul-1

2

China USA

(Nos)

Source: Bloomberg

Exhibit 11: International rubber prices falling in line with slack vehicle demand – Down 56% from February 2011

0

100

200

300

400

500

600

Jan

-09

Ma

y-0

9

Se

p-0

9

Jan

-10

Ma

y-1

0

Se

p-1

0

Jan

-11

Ma

y-1

1

Se

p-1

1

Jan

-12

Ma

y-1

2

Se

p-1

2

(Yen/kg)

Source: Bloomberg

Exhibit 12: Apollo Tyres’ share price has inverse co-relation with rubber prices

Indexed to a base of 100

50

60

70

80

90

100

110

120

130

140

Jan

-00

Au

g-1

1

Au

g-1

1

Se

p-1

1

Se

p-1

1

Oct

-11

Oct

-11

No

v-1

1

No

v-1

1

De

c-1

1

De

c-1

1

Jan

-12

Jan

-12

Fe

b-1

2

Fe

b-1

2

Ma

r-1

2

Ma

r-1

2

Ap

r-1

2

Ap

r-1

2

Ma

y-1

2

Ma

y-1

2

Jun

-12

Jun

-12

Jul-1

2

Jul-1

2

Jul-1

2

Au

g-1

2

Au

g-1

2

Se

p-1

2

Apollo - share price Rubber - price

(%)

Source: Bloomberg, Nirmal Bang Institutional Equities Research


Apollo Tyres 8

De-risking domestic business

Apollo Tyres has a de-risked business model, as its domestic business accounts for only 66% of overall consolidated net sales. The company has subsidiaries in Europe and South Africa, which contribute 23% and 11%, respectively, to consolidated revenue. Apollo Tyres in India is further de- risking its business model by increasing its focus towards exports. Exports account for 10% of its overall domestic revenue, with the company exporting its products to 118 countries across the globe, which includes sales of European subsidiary. Given the higher profitability in Europe, the contribution of European subsidiaries towards EBIT is to the extent of 31% (EBITDA margin of 18.3% in Europe in 1QFY13 versus 10.3% in India in the same quarter).

Exhibit 13: Sales contribution – Region-wise Exhibit 14: EBIT contribution – Region-wise

India, 66%

Europe, 23%

SFA, 11%

India, 69%

Europe, 31%

Source: Company Source: Company

European operations continue to shine

Apollo Tyres’ European unit Vredstein remains a key subsidiary as it contributes ~31% to consolidated EBIT. As European markets are more mature than the markets in India and other developing countries, passing on the price hikes is relatively easier and hence the European subsidiary has generally reported double-digit EBITDA margins even during the tough times of FY11/FY12, when rubber prices were at their peak. In Europe, the Vredstein brand is well accepted for winter tyres and sells at a premium compared to its summer tyres. Vredstein’s winter tyres are sold almost at par with other majors like Michelin, Bridgestone etc, while summer tyres of Vredstein sell at a discount when compared to these players. Apart from Vredstein’s products, Apollo Tyres has also started selling tyres under its own brand by using the network of Vredstein.

The impact of the fall in rubber prices was also highly visible in 1QFY13 in the case of Vredstein as the company reported its best-ever EBITDA margin of 18.3% for 1QFY13 (up 470bps YoY), at a time when the eurozone is hit by economic crisis. The improvement in EBITDA margin in 1QFY13 was largely driven by a richer product mix, as dealers have started piling up inventory ahead of the winter season in Europe. Generally, 3Q and 4Q are the best quarters for European operations due to the winter season and hence we expect further improvement in profitability for the next two quarters. We expect the European operations to report EBIT margin of 14.5% and 14.2% for FY13E/FY14E, respectively, up from 13.6% in FY12.

EBITDA margin of European operations to improve further in 2HFY13

In 1QFY13, European operations of the company reported best-ever EBITDA margin of 18.3% at a time when demand for tyres was weak in the European region. Historically, the first quarter of any financial year is the worst quarter for European operations, as during the quarter only sales of summer tyres take place which enjoy lesser realisation when compared to winter tyres. 2HFY13 is expected to be strong for the company as sales of winter tyres take place. With the sales of winter tyres expected to gather momentum in the next two quarters and the full impact of the sharp fall in natural rubber prices coming into play, which comes with a one-quarter lag, strong EBITDA margin expansion is likely over the next six months. We expect European operations to report EBIT margins of 14.5% for FY13E and 14.2% for FY14E.


Apollo Tyres 9

Exhibit 15: Europe EBIT margin in double-digits

6

8

10

12

14

16

18

20

1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13

(%)


South African subsidiary to break even

Apollo Tyres’ South African subsidiary was under pressure in FY11 and FY12 due to lock-out at its plant in FY11 and also due to higher rubber prices and rising tyre imports from China. The South African subsidiary reported EBIT-level loss of Rs433mn in FY12 as against EBIT-level profit of Rs324mn in FY11. We expect the company to break-even at the EBIT level in FY13 and the same has been witnessed in 1QFY13, reporting positive EBIT margin of 1.4% driven by lower raw material prices and improvement in volume growth in South Africa. As rubber prices have eased, players like Apollo Tyres are now in a much better position to compete with low-cost Chinese players as against FY11-FY12 when demand for low-priced Chinese tyres went up in the wake of higher rubber prices. The company also went for a 3% price hike in South Africa in 1QFY13 and the full effect of the same will be visible in the coming quarters.

We believe the numbers from South Africa will look much better going forward as the price hikes taken by the company and volume growth will result in a positive operating leverage. We expect the South African operations to trim losses in FY13 and achieve break-even in FY14, with the company witnessing strong growth in top-line due to price hikes and improvement in demand. For 1QFY13, the company reported a 40% growth in top-line of its South African operations, which was due to low base, higher exports and a richer product mix. Also, in 1QFY13, its EBIT margin turned positive. We expect EBIT margins of 2.4% for FY14E on likely improvement in demand and profitability.

Exhibit 16: EBIT margin of South African arm turns positive in 1QFY13

(10)

(8)

(6)

(4)

(2)

0

2

4

6

8


(%)



Apollo Tyres 10

Capex cycle over

Over the past three years, Apollo Tyres has invested heavily in expanding its capacity to meet strong demand. The company has invested Rs23 bn in a Greenfield project in Chennai for adding capacity of 500tpd in the TBR (truck and bus radial) segment. The company’s plant is currently running at 75% of its capacity and the existing capacity, in our view, should be good enough until FY14/15 aided by some de-bottlenecking. Given the excess capacity, we are not factoring in any major capacity expansion over the next two years and therefore expect free cash flows to improve

Exhibit 17: Industry capacity utilisation

FY08 FY09 FY10 FY11 FY12P FY13P

Production (000' tn) 917 911 1,062 1,157 1,228 1,348

Capacity (000' tn) 969 971 1,133 1,295 1,426 1,502

Capacity utilisation 94.6 93.8 93.7 89.3 86.1 89.7

Source: Crisil

Exhibit 18: Sharp increase in capacity

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

FY08 FY09 FY10 FY11 FY12

(mt/day)

Source: Company

Debt burden likely to reduce

Given the adequate capacity, we don’t expect any significant capex in FY13/FY14. Consequently, we expect the debt level to come down to Rs23.7bn in FY14E, implying a D/E ratio of 0.6 for FY14E.. The company is unlikely to go for any major capex in Europe in FY13 in the wake of the ongoing eurozone crisis. As there is no major capex planned for FY13/FY14, we expect the company to use its free cash flow to reduce the debt over in FY13/FY14.The company currently has debt burden of Rs28.7bn, which is currently higher due to commissioning of Chennai plant. As the plant is expected to be fully operational by the end of 3QFY13, we don’t expect any major additional capex on Indian operations in FY14. We expect the debt burden to reduce to Rs23.7bn In FY14E from Rs28.7bn in FY12. With the likely reduction in debt, we expect the interest outgo to decline to Rs2.5bn in FY14E from Rs2.9bn in FY12 which was on account of higher debt on the company’s books. Due to reduction in debt we expect the debt/equity ratio to come down to 0.6% in FY14 from 1.0% in FY12.


Apollo Tyres 11

Exhibit 19: Debt burden to reduce in FY14 as most capex incurred in FY12/1HFY13

10

12

14

16

18

20

22

24

26

28

30


(Rsbn)


Return ratios likely to improve

Return ratios of Apollo Tyres have come under pressure in the past two years on account of a sharp rise in raw material prices, higher capex and lower profitability. With rubber prices currently at 10% below their FY12 average price and the capex cycle over, we expect improvement in profitability of the company in FY13/FY14. We expect RoE and RoCE of the company to rise to 20.1% and 14.1% in FY13E from 16.6% and 13.3%, respectively.

Exhibit 20: RoCE to improve over FY13E/FY14E

12.0

12.5

13.0

13.5

14.0

14.5

15.0

FY11 FY12 FY13E FY14E

(%)


Exhibit 21: RoE to improve over FY13E/FY14E

10

12

14

16

18

20

22


(%)



Apollo Tyres 12

Free cash flows likely to improve

We expect improved profitability in FY13/FY14 on the back of lower raw material costs and improved margins at the consolidated level. Due to improved profitability and lower capex outgo likely over the next two years, we expect free cash flow of the company to improve significantly over FY13/FY14.We expect cash flows to improve from Rs3.5bn to Rs4.5bn in FY13E/FY14E.

Exhibit 22: Free cash flow

(12,000)

(10,000)

(8,000)

(6,000)

(4,000)

(2,000)

0

2,000

4,000

6,000


(Rsmn)


Shift towards radial tyres

Over the past few years, there is a strong shift towards radial tyres in the case of OEMs, with the end-consumers also preferring radial tyres. Currently, 98% of the cars plying in India have radial tyres, while the commercial vehicle segment has still a long way to go in this respect. The usage of radial tyres in truck and bus category currently stands at 23% and is expected to increase to 40% by FY16. Radial tyres offer better fuel efficiency and hence, with the fuel prices rising we believe vehicle owners will also start shifting to radial tyres in the coming years, thereby boosting growth in the overall tyre space in India. Apollo Tyres, which has the largest radial tyre capacity in India, is adding additional capacity by December 2012, which will make it the company having the highest capacity (32% of the industry’s TBR capacity). We believe Apollo Tyres will be key beneficiary of the shift towards radial tyres in India.

Key beneficiary of increased radialisation of tyres

Over the past few years, there was a strong trend towards radialisation of tyres with the end-consumers also moving to radialised tyres. Currently, over 98% of the cars plying in India have raidial tyres while the commercial vehicle segment has still a long way to go. The truck and bus vehicle segment is estimated to be radialised only by ~ 23%, up from 16% in FY11. India remains highly under-penetrated compared to global peers who have a penetration level of over 70%, with developed nations’ penetration level at over 95%. Lower penetration levels in radial tyres gives much needed comfort that demand will keep coming in. Apollo Tyres currently has the largest capacity for making radial tyres and will remain key beneficiary of the shift towards radial tyres. While its peers are also ramping up capacity, they still lag behind by a wide margin. With the fuel prices rising, we believe the end-consumers will also start moving to radial tyres in the coming years as they offer much better fuel efficiency when compared to normal cross-ply tyres.


Apollo Tyres 13

Exhibit 23: Apollo leads market share in truck and light truck segment

Apollo’s market share- Truck Apollo’s market share- Light truck Apollo’s market share -Passenger cars

Apollo, 27%

MRF, 21%JK, 19%

CEAT, 11%

Birla, 14%

Others, 8%

Apollo, 27%

MRF, 26%JK, 19%

CEAT, 7%

Birla, 6%

Others, 15%

Apollo, 17%

MRF, 21%

JK, 9%Bridgestone, 18%

Goodyear, 13%

Others, 22%


Exhibit 24: Lower penetration level in radial tyres – (truck and bus tyres)

Estimated radialised level (%)

Passenger cars Light commercial vehicles Truck and bus

FY06 90 11 4

FY07 95 12 4

FY08 97 15 5

FY09 98 18 8

FY10 98 20 10

FY11 98 22 16

FY12 98 25 23

Source: Crisil

Exhibit 25: Radial tyre capacity addition –Apollo Tyres to lead the market until FY16 easily

(Million units) FY11E FY12P FY13P FY14P FY15P FY16P

Apollo Tyres 0.6 1.1 1.8 2.4 2.4 2.4

JK Tyres 0.7 0.9 1.1 1.4 1.7 2.0

MRF 0.6 0.6 1.2 1.2 1.3 1.4

CEAT - 0.4 0.5 0.5 0.5 0.5

Birla Tyres 0.8 0.8 0.8 1.0 1.2 1.2

Bridgestone - 0.1 0.1 0.2 0.3 0.3

Michelin - - - - 0.9 0.9

Others - - 0.1 0.3 0.3 0.3

Total 2.7 3.9 5.6 7.0 8.6 9.0

Source: Crisil

Exhibit 26: Tyre radialisation level in India lowest compared to other countries

0 20 40 60 80 100

World

Africa/ Middle East

India

Asia

South America

North America

Eastern Europe

Central Europe

Western Europe

Source: Company


Apollo Tyres 14

Radial tyres are more cost-effective, run ~1.3x more than normal cross-ply tyres

Radial tyres offer two benefits to customers, firstly, they are more cost-effective as the normal wear and tear of a radial tyre is less and runs ~1.3x times more than a cross-ply tyre. However, radial tyres are expensive when compared to a normal cross-ply tyre and hence the shift towards truck and bus radial tyres is happening at a slow pace. OEMs have started accepting radial tyres on a big scale and most of them offer radial tyres with their high end products. As radial tyres are more cost-effective, we expect the replacement demand to also gradually shift towards radial tyres. According to Crisil estimates, radial tyre usage in truck and bus category is likely to increase from 23% in FY12 to 40% by FY16E.

Exhibit 27: Estimated share of radial tyre usage in T&B category (%)

FY07E 4

FY08E 5

FY09E 8

FY10E 10

FY11E 16

FY12E 23

FY16P 40

Source: Crisil

Exhibit 28: Estimated share of radial tyre usage in replacement market (%)

FY07E 2

FY08E 3

FY09E 5

FY10E 6

FY11E 10

FY12E 17

FY16P 32

Source: Crisil

Reduction in tyre prices unlikely

With passenger car sales remaining subdued over the past two months, the production level of tyre companies has been muted for the said period, leading to excess supply. Apollo Tyres reported a 4% YoY growth in volume in 1QFY13 due to subdued OEM sales. In the case of Apollo Tyres, the company has not cut its prices despite rubber prices easing in 1QFY13, but has gone for a price hike in May 2012 in the cross-ply tyre segment. We believe that higher contribution to revenue from replacement segment and export segment will drive profitability of the company in FY13/FY14. According to the management, the company is witnessing much better growth in 2QFY13 compared to 1QFY13 on account of revival in replacement demand. It is also expected to do better in 3QFY13 due to pick-up in demand from OEM as vehicle sales pick up in the festive season.

Exhibit 29: Domestic volume (mt) - continues to rise YoY, but at a slower pace

60,000

65,000

70,000

75,000

80,000

85,000

90,000

95,000

100,000

105,000

110,000


(mt)



Apollo Tyres 15

Financials

Consolidated net sales expected to grow 9% in FY12-FY14E

We expect consolidated net sales of Apollo Tyres to show a CAGR of 9% on the back of improved growth of its subsidiaries in Europe and South Africa. In respect of the standalone business, we expect sales to show a 9% CAGR over FY13E-FY14E as we expect the growth in domestic passenger car and commercial vehicle sales to remain at a lower level i.e. in single-digits in FY13/FY14 versus strong growth witnessed in FY12.

Exhibit 30: Net sales

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000


(Rsmn)


Exhibit 31: EBITDA

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000


(Rsmn)



Apollo Tyres 16

Exhibit 32: EBITDA margin

0

2

4

6

8

10

12

14

16


(%)


Earnings to show a CAGR of 30% over FY12-FY14E

We expect the profitability of the company to improve in FY13/FY14 backed by: 1) Softer raw material prices, 2) Strong performance of subsidiaries, 3) Richer product mix comprising higher replacement market sales, and 4) Full effect of price hikes coming into play in FY13. Due to these factors we expect consolidated EBITDA margins to expand by 164bps in FY14E over FY12. Following higher EBITDA and lower interest outgo due to likely reduction in debt, we expect the earnings to show a CAGR of 30% over FY12-FY14E.

Exhibit 33: PAT

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


(Rsmn)



Apollo Tyres 17

Valuation

At the current market price, the stock trades at 7.9x and 6.7x FY13E/14E EPS of Rs12.5 and Rs14.8, respectively. We have valued the stock on P/E methodology and arrived at a target price Rs118, implying an upside of 19% from the CMP (8x FY14E EPS).

Exhibit 34: 1 year forward PE

0

20

40

60

80

100

120

140

Se

p-0

7

De

c-0

7

Ma

r-0

8

Jun

-08

Se

p-0

8

De

c-0

8

Ma

r-0

9

Jun

-09

Se

p-0

9

De

c-0

9

Ma

r-1

0

Jun

-10

Se

p-1

0

De

c-1

0

Ma

r-1

1

Jun

-11

Se

p-1

1

De

c-1

1

Ma

r-1

2

Jun

-12

Se

p-1

2

Price 3X 5X 7X 9X

(Rs)


Our earnings estimates versus Bloomberg consensus projections

We expect Apollo Tyres’ earnings to show a CAGR of 30% over FY12-14E backed by a 9% CAGR in net sales and a 164bps improvement in EBITDA margin. We have factored in relatively stable raw material costs over the next two years and hence we expect an improvement in profitability. Our earnings estimates for FY13E and FY14E are higher than consensus projections, respectively, as we believe consensus estimates are not fully capturing the impact of a drop in raw material prices over the next two years.

Exhibit 35: Our estimates versus Bloomberg consensus projections

(Rsmn) NBIE Bloomberg Variation (%)

FY13E FY14E FY13E FY14E FY13E FY14E

Net sales 133,161 145,407 135,939 150,636 (2.0) (3.5)

EBITDA 15,081 16,332 13,712 16,170 10.0 1.0

PAT 6,308 7,449 5,370 7,235 17.5 3.0


Risks

Natural rubber prices

We have estimated fairly stable natural rubber prices for the next two years and hence expect an improvement in profitability. Domestic rubber prices are down 10% from FY12 average. As rubber accounts for close to 65% of the company’s costs, any rise in rubber prices is likely to have a negative impact on our earnings estimates for FY13E/FY14E.

CCI inquiry

As per media reports, Competition Commission of India (CCI) is making an inquiry against tyre manufacturers for cartelisation. Apollo Tyres is one of the companies which is being investigated by the regulator. If found guilty, it could hurt profitability of the company.


Apollo Tyres 18

Financials

Exhibit 1: Exhibit 36: Income statement

Y/E March (Rsmn) FY10 FY11 FY12 FY13E FY14E

Net sales 81,207 88,677 121,533 133,161 145,407

% growth 62.9 9.2 37.1 9.6 9.2

Raw material costs 45,808 53,221 80,370 83,021 91,429

Staff costs 10,885 11,341 13,350 17,172 18,850

Other expenditure 12,766 14,463 16,152 17,888 18,795

Total expenditure 69,459 79,026 109,872 118,080 129,075

EBITDA 11,749 9,651 11,661 15,081 16,332

% growth 182.3 (17.9) 20.8 29.3 8.3

EBITDA margin (%) 14.5 10.9 9.6 11.3 11.2

Other income 214 509 327 192 211

Interest 1,153.8 1,969.6 2,872.9 2,778.9 2,466.9

Gross profit 35,400 35,456 41,163 50,140 53,978

% growth 123.5 0.2 16.1 21.8 7.7

Depreciation 2,542 2,719 3,256 3,738 3,823

Profit before tax 8,267 5,472 5,565 8,755 10,254

% growth 287.3 (33.8) 1.7 57.3 17.1

Tax 2,607 1,063 1,444 2,447 2,805

Effective tax rate (%) 31.5 19.4 25.9 27.9 27.4

Net profit 5,660 4,402 4,099 6,308 7,449

% growth 306.6 (22.2) (6.9) 53.9 18.1

Extraordinary items - (6) (316) - -

Adj.net profit 5,660 4,408 4,415 6,308 7,449

% growth 306.6 (22.1) 0.2 42.9 18.1

EPS (Rs) 11.2 8.7 8.8 12.5 14.8

% growth 306.6 (22.1) 0.2 42.9 18.1

DPS (Rs) 0 1 1 1 1

Payout (%) 4.0 4.1 5.7 4.0 3.4


Exhibit 2: Exhibit 38: Balance Sheet


Equity 504 504 504 504 504

Reserves 19,174 23,621 27,824 33,839 40,995

Net worth 19,678 24,125 28,328 34,343 41,499

Net deferred tax liabilities 2,514 3,162 4,025 4,025 4,025

Short-term loans 2,607 9,938 9,339 9,339 9,339

Long-term loans 14,465 14,865 19,381 17,381 14,381

Total loans 17,072 24,802 28,720 26,720 23,720

Minority Interests - 8 8 8 8

Liabilities 39,264 52,098 61,081 65,097 69,252

Gross block 55,628 68,950 80,344 84,344 88,844

Depreciation 31,203 35,007 40,106 43,844 47,667

Net block 24,425 33,943 40,238 40,500 41,177

Capital work-in-progress 5,360 3,578 3,305 3,305 3,305

Intangible assets 1,175 1,250 1,338 1,338 1,338

Long-term investments 59 112 158 158 158

Inventories 9,929 17,538 19,991 19,334 21,542

Debtors 7,869 9,517 11,458 13,134 14,342

Cash 3,490 1,909 1,730 3,238 4,753

Other current assets 44 - 153 153 153

Loans and advances 2,372 5,215 5,548 5,271 5,587

Total current assets 23,704 34,179 38,881 41,129 46,377

Creditors 13,122 16,651 17,811 16,153 17,745

Other current liabilities 2,337 4,312 5,028 5,180 5,357

Total current liabilities 15,459 20,963 22,839 21,333 23,103

Net current assets 8,245 13,216 16,041 19,796 23,274

Total Assets 39,264 52,098 61,081 65,097 69,253


Exhibit 3: Exhibit 37: Cash flow


EBIT 9,206 6,932 8,405 11,342 12,510

(Inc.)/dec in working capital (1,148) (6,552) (3,004) (2,246) (1,963)

Cash flow from operations 8,059 380 5,401 9,096 10,547

Other income 214 509 327 192 211

Depreciation 2,542 2,719 3,256 3,738 3,823

Interest paid (-) (1,154) (1,970) (2,873) (2,779) (2,467)

Tax paid (-) (2,607) (1,063) (1,444) (2,447) (2,805)

Dividends paid (-) (255) (293) (293) (293) (293)

Net cash from operations 6,800 283 4,375 7,508 9,015

Capital expenditure (-) (12,013) (11,465) (11,034) (4,000) (4,500)

Net cash after capex (5,213) (11,182) (6,659) 3,508 4,515

Inc./(dec.) in short-term borrowing (6,301) 7,331 (599) - -

Inc./(dec.) in long-term borrowing 14,465 400 4,517 (2,000) (3,000)

Inc./(dec.) in preference capital - - - - -

Inc./(dec.) in borrowings 8,164 7,731 3,918 (2,000) (3,000)

(Inc.)/dec. in investments (11) (53) (46) - -

Equity issue/(buyback) - - - - -

Cash from financial activities 8,153 7,677 3,872 (2,000) (3,000)

Others (3,071) 1,923 2,609 - -

Opening cash 3,621 3,490 1,909 1,730 3,238

Closing cash 3,490 1,909 1,730 3,238 4,753

Change in cash (131) (1,581) (179) 1,508 1,515


Exhibit 4: Exhibit 39: Key ratios

Y/E March FY10 FY11 FY12 FY13E FY14E

Profitability & return ratios

EBITDA margin (%) 14.5 10.9 9.6 11.3 11.2

EBIT margin (%) 11.3 7.8 6.9 8.5 8.6

Net profit margin (%) 7.0 5.0 3.6 4.7 5.1

ROE (%) 35.0 20.1 16.6 20.1 19.6

ROCE (%) 22.0 14.5 13.1 14.1 14.6

Working capital & liquidity ratios

Receivables (days) 22.7 35.8 31.5 33.7 34.5

Inventory (days) 64.7 94.2 85.2 86.4 81.6

Payables (days) 46.5 50.4 42.1 44.3 44.4

Current ratio (x) 1.8 2.1 2.2 2.5 2.6

Quick ratio (x) 0.6 0.6 0.6 0.8 0.8

Adjusted debt/equity (x) 0.9 1.0 1.0 0.8 0.6

Valuation ratios

EV/Sales (x) 0.9 0.8 0.6 0.6 0.5

EV/EBITDA (x) 6.3 7.6 6.3 4.9 4.5

P/E (x) 8.9 8.1 11.3 7.9 6.7

P/BV (x) 2.6 2.0 1.7 1.4 1.2



Apollo Tyres 19

Disclaimer

Stock Ratings Absolute Returns

BUY > 15%

HOLD 0-15%

SELL < 0%

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