>APOLLO TYRES: Result Update 1QFY2011

Apollo Tyres reported modest results for 1QFY2011, despite a sharp jump in rubber prices and lockout at one of its plant. Standalone top-line registered a decline of 5% yoy to Rs1,121cr (Rs1,180cr) in 1QFY2011. Tonnage sold for the quarter declined 20% qoq to 66,000MT on account of the lockout at its Permabra facility due to labor unrest. The Perambara plant shut down resulted in revenue loss of around ~Rs300cr (15,000MT of production loss) during the quarter. On
the operating front, the company reported 603bp yoy contraction in operating margin at 10.4% (16.4%). During 1QFY2010, net profit registered a substantial decline of 57.1% to Rs40.6cr (Rs95cr).

■ Decent consolidated performance: The company however, reported healthy performance at the consolidated level with both the subsidiaries reporting good growth and also supported the company’ overall OPM. On a consolidated basis, the company recorded 11.4% yoy jump in top-line and marginal 1% increase in net profit at Rs74cr. Consolidated tonnage volume for the quarter was 93,000MT. Operating margins at the consolidated level stood at 10.9% (12.6%) in 1QFY2011.

■ Outlook and Valuation: The tyre industry, during FY2010, benefited largely from the substantial decline in raw material prices and spike in replacement demand. Going ahead, we are positive on the sector as the OEM off-take is expected to improve on better overall auto industry volume growth. The recent run up in raw material prices is however, a concern and expected to exert pressure on OPMs. We expect the company to clock EPS of Rs7.9 in FY2011E and Rs9.8 in FY2012E. We believe that strong demand, prevailing high capacity utilisation levels and higher investment requirements, would help the Indian tyre Industry to arrest the sharp decline in margins despite the upward move in input costs (rubber and carbon black). Thus, we maintain a Buy on Apollo Tyres, with a Target Price of Rs79, at which level the stock would trade at 8x, 5x and 1.4x FY2012E EPS, EV/EBITDA and P/BV, respectively.

To read the full report: APOLLO TYRES