>APOLLO TYRES (ANAGRAM)

We like Apollo Tyre due to its dominance in tyre market (28% market share in T&B vs. 19% of closest competitor) and capacity addition, ahead of its peers, to leverage on the structural shift from cross-ply to radial. The company has already taken 12-15% hike in tyre prices (as per price hikes taken by industry) and we believe even further price hikes wont taper demand for tyres. We initiate coverage with “ Accumulate” rating on the stock.

RADIALISATION TO WITNESS S-CURVE EFFECT.
In past markets have exhibited growth along S-curve once the level of 11-12% is breached. Going by that trend and coupled with thrust on road development put forth by the ministry of road we expect T&B tyre market to witness inflection point in 2011 and reach at 25% radialisation level by 2013. To leverage upon this opportunity company is expanding its radial manufacturing capacity by 440 MT/day at Chennai with an aggregate capex of Rs 2000 crores.

SOARING RUBBER PRICES: MARGIN HEADWINDS ONLY FOR SHORT TERM.
Rubber prices are hovering at Rs 160/kg and we expect rubber prices to become favorable from 2012 while the current capacity constraints coupled with buoyant demand will remain in favor for tyre manufacturers to raise prices and maintain margins. It has been observed that EBITDA margin remains impacted for some quarters when rubber prices are on rise as manufacturers pass-on the prices gradually while Apollo tyres has shown better margins than its peer during rising rubber price scenario and the difference between company’s and industry margins has widen during such situation.

SUBSIDIARIES TO DRIVE EARNINGS
We expect South African facilities acquired in 2006 and acquisition in Vredestian Banden in 2009 will contribute 30% of overall business in FY11 from 18% in FY09 and report sales growth of 5% CAGR over FY10- 13. Acquisitions offers cross leveraging benefits of technology, marketing network and low cost production, which will drive profitability of the overall business.

VALUATION
We expect sales to grow at 15% CAGR over 2010-13 and PAT to grow at 17% over the same period, mainly due capacity addition, increase in gross realization due to rubber price increase and change in product mix. Since rubber price volatility translates into volatile earnings we believe that looking at EV/Sales is better indicator and show a better picture. The stock trades at 0.53x and 0.45x its FY11E sales of Rs 9080 cr and FY12 E sales of Rs 10624 cr. Our target price of Rs 80 implies a 1 yr fwd P/E of 6 (Hist. 1yr Fwd P/E of 8.3 and 1 yr fwd EV/ sales of 0.57 (Hist. 1yr Fwd EV/sales of 0.45). Hence we are extremely positive on the medium term prospects of Apollo Tyres considering the fact it is the market leader in the CV segment where a major portion of its sales accrue and where overall demand traction continues to remain
strong.

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