investors eye

stock update

Apollo Tyres

Reco: Buy

Stock Update

Margins continue to surprise; maintain Buy with an unchanged PT of Rs240

Key points

Company details
Price target:

Rs240

Market cap:

Rs9,545 cr

52 week high/low:

Rs249/155

NSE volume:
(no. of shares)

51.6 lakh

BSE code:

500877

NSE code:

APOLLOTYRE

Sharekhan code:

APOLLOTYRE

Free float:
(no. of shares)

CMP: Rs188

28.2 cr

Revenues under pressure; margins hit an all-time high: For Q1FY2016, Apollo
Tyres (Apollo) witnessed pressure on stand-alone revenues as volumes and
realisations both fell by 3.5%. The influx of cheap imports of truck tyres from
China affected the demand for domestic truck bias tyres. While its European
operations reported an 8% volume growth, the negative effect of rupee
appreciation against euro and price cuts taken led to a 19% fall in revenues in
rupee terms. However, Apollo (in line with the industry trend) continued to
reap benefits of a sharp decline in raw material prices and consolidated margins
touched an all-time high of 17.7%. The high profitability enabled the company
to cut down on debt levels leading to a 54% Y-o-Y fall in interest burden. The
net profit after tax (PAT) rose by 27.5% YoY to Rs291 crore as against our
estimate of Rs298 crore.
Management raises proposed investments in capital expenditure: The
management expects radialisation level in India for truck and bus tyres to
increase significantly from 35% in FY2015 to 70% in the next four to five years.
In keeping with this outlook, the management has raised its planned investment
for truck and bus radial (TBR) tyres at Chennai. It would be investing Rs2,700
crore to raise capacity to 12,000 tyres per day as against an earlier planned
expansion to 8,900 tyres per day. Investments will also be made to convert
part of the low utilisation bias tyre capacity to industrial tyres or a possible reentry into the two-wheeler tyre space. Apollo will be investing Rs4,000 crore
over the next three years in India for capacity expansion in addition to the
400-million-euro investment for the green-field facility in Hungary. As of
Q1FY2016 the company has achieved a cash positive level (consolidated) and
hence is in a position to undertake the large investment plan.

Shareholding pattern

Maintain Buy with a PT of Rs240: We have lowered our revenue estimates for
stand-alone operations due to the weak outlook for both volumes and realisations.
The margin expectations have been raised in tune with the current trend in
margins and the benefit on the raw material front is expected to continue.
Consequently, there is no significant change in our earnings estimates for FY2016
and FY2017. We remain positive on the stock and reiterate our Buy rating with
an unchanged price target of Rs240 discounting the FY2017E earnings by 10x.

Price chart

Results (consolidated)

Rs cr

Particulars

Price performance
(%)

1m

3m

6m 12m

Absolute

5.1

8.1

2.9

8.6

Relative
to Sensex

4.1

5.8

4.2

-1.9

Revenues
EBITDA
EBITDA margin (%)
Depreciation
Interest
Other income
PBT
Tax
Adjusted PAT
Reported PAT
Adjusted EPS (Rs)
Sharekhan

10

Q1FY16

Q1FY15

YoY %

Q4FY15

QoQ %

2,845.4
502.5
17.7
88.6
24.3
25.4
415.0
124.5
290.6
290.6
5.7

3,247.6
428.7
13.2
100.4
53.0
29.0
304.4
76.4
227.9
227.9
4.5

-12.4
17.2

3,117.6
517.9
16.6
87.6
34.8
(5.9)
389.6
78.6
311.0
307.5
6.1

-8.7
-3.0

August 12, 2015

-11.7
-54.1
-12.2
36.4
62.8
27.5
27.5

Home

1.1
-30.0
-531.7
6.5
58.4
-6.6
-5.5

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investors eye

stock update

Fall in stand-alone revenues; however operating margin

continues to climb

operations helped in a 446-BPS margin expansion in

consolidated margins. The consolidated PAT rose by 27.5%
YoY to Rs291 crore as against our estimate of Rs298 crore.

The stand-alone revenues for Apollo were under pressure

in Q1FY2016 with a fall in both volumes and realisations.
The volumes for the quarter were down 3.5% year on year
(YoY) as the truck bias tyres faced competition from
Chinese imports. The company undertook price cuts in
select categories which affected realisations. As a result,
the revenues for the quarter fell by 7.3% YoY to Rs2,137
crore. However, the company continued to witness benefit
at the gross profit margin (GPM) level as prices of raw
materials like natural rubber and crude derivatives
continued to remain soft. The GPM expanded by 361 basis
points (BPS) sequentially. The operating profit margin
(OPM) expanded by 226BPS QoQ (640BPS YoY) to 18.9%.
This is the sixth consecutive quarter of sequential rise in
OPM. The interest cost for the quarter fell by 53% YoY to
Rs23.9 crore given the lowering of debt levels. The net
profit after tax (PAT) for the stand-alone operations rose
by 63.3% YoY to Rs227.1 crore.
Results (stand-alone)
Particulars
Revenues
EBITDA

Q1
FY16

Q1
FY15

2,137.3 2,306.5

YoY
%

Q4
FY15

QoQ
%

-7.3

2,259.8

-5.4

40.1

375.8

7.4

288.1

EBITDA margin (%)

18.9

12.5

Depreciation

59.6

60.6

-1.6

58.7

1.6

Interest

23.9

51.3

-53.4

30.0

-20.3

17.8

21.7

-18.1

(14.4)

-223.7

337.9

197.8

70.8

272.8

23.9

PBT

Q1
FY16

Q1
FY15

YoY
%

Q4
FY15

2,155.0
770.7

QoQ
%

2,328.2

-7.4

2,245.5

-4.0

950.3

-18.9

849.0

-9.2

Segmental revenues
India
Europe
Others
Total

175.7

195.9

-10.3

175.3

0.2

2,870.8

3,276.5

-12.4

3,111.7

-7.7

Segmental EBIT
India

361.8

249.1

45.2

302.8

19.5

Europe

85.4

106.9

-20.2

102.9

-17.0

Others

(4.9)

4.2

442.2

360.3

16.8

10.7

Total

0.9
22.7

406.6

8.8

EBIT margin (%)

India

13.5

Europe

11.1

11.3

12.1

Total

15.4

11.0

13.1

Company adds to already planned investments at

Chennai plant
The radialisation levels in the domestic truck segment have
been steadily rising. The management expects the level to
increase from 35% in FY2015 to 70% in the next five years.
The domestic tyre manufacturers are witnessing a strong
demand for TBR tyres. Apollo currently has a capacity
utilisation of more than 90% in the segment. The
management had already announced plans to increase TBR
capacity at Chennai to 8,900 tyres per day (current capacity
of 5,600 tyres per day) which is being revised to 12,000
tyres per day which will cater to the demand for TBRs for
the next four to five years. The company will be investing
Rs2,700 crore for the expansion of its Chennai facility. The
overall capital expenditure over the next three years for
Indian operations is pegged at Rs4,000 crore.

16.6

Tax

110.8

58.8

88.5

90.4

22.6

Adjusted PAT

227.1

139.1

63.3

182.4

24.5

Reported PAT

227.1

139.1

63.3

182.4

24.5

4.5

2.7

Adjusted EPS (Rs)

Particulars

(Rs cr)

(Rs cr)

403.7

Other income

Segmental performance

3.6

Performance of European operations marred by

currency impact
Apollos European operations reported a volume growth
of 8% for Q1FY2016. The revenue growth for European
operations in terms of euro was 2% as the company
undertook price cuts, given the competitive intensity and
plans to expand its market share in the summer tyre
segment. However, due to the translational effect of
rupees appreciation against the euro, the revenues in
terms of rupee fell by 18.9% YoY. The OPM for its European
operations contracted by 250BPS YoY to 13.5% due to the
price cuts taken by the company.

Outlook
Apollo witnessed a 3.5% drop in volumes for the quarter
primarily on account of the low capacity utilisation for
truck & bus bias (TBB) tyres. The segment has been
negatively affected by a sharp increase in cheap imports
from China. We expected a muted volume performance
by the company in FY2016 and recovery in volumes in
FY2017 on the back of some capacity addition at its
Chennai facility. The management is in the process of
firming up plans to convert the bias capacity to industrial
tyres and also to enter the two-wheeler tyre segment.
The outlook for the European operations is stable and

Apollos consolidated revenues fell by 12.4% YoY to Rs2,871

crore. The strong operating performance in the Indian

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August 12, 2015

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investors eye

stock update

some improvement in OPM is expected in H2FY2016 during

the sale of winter tyres, a segment wherein it specialises.

in tune with the current trend in margins and the benefit

on the raw material front is expected to continue.
Consequently, there is no significant change in our
earnings estimates for FY2016 and FY2017. We remain
positive on the stock and reiterate our Buy rating with an
unchanged price target of Rs240 discounting the FY2017E
earnings by 10x.

Valuations
We have lowered our revenue estimates for stand-alone
operations due to the weak outlook for both volumes and
realisations. The margin expectations have been raised
Valuations (consolidated)
Particulars
Net sales (Rs cr)
Growth (%)
EBITDA (Rs cr)
OPM (%)

FY2013

FY2014

FY2015

FY2016E

FY2017E

12,798.9

13,412.0

12,785.2

12,710.7

14,059.4

5.3

4.8

-4.7

-0.6

10.6

1,460.9

1,875.5

1,933.0

2,085.2

2,293.9

11.4

14.0

15.1

16.4

16.3

PAT (Rs cr)

594.2

1,051.8

1,060.1

1,140.1

1,224.5

Growth (%)

35.3

77.0

0.8

7.5

7.4

FD EPS (Rs)

11.7

20.7

20.8

22.4

24.1

P/E (x)

15.9

9.0

9.0

8.4

7.8

P/B (x)

2.8

2.1

1.9

1.6

1.3

EV/EBITDA (x)

8.1

5.6

5.2

5.2

5.2

RoE (%)

19.1

26.4

22.0

20.5

18.5

RoCE (%)

18.1

23.5

23.8

23.0

20.1

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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