Monday, February 13, 2012

>APOLLO TYRES: “Business outlook improves…”

Standalone business surpasses expectations, RM benefits to deliver from Q4
Apollo’s standalone net sales grew by 46% yoy, 24% out of which came from volume improvement and the rest from product mix and price hikes. While on qoq basis, the net sales grew 13.5%, above our expectations. Management said that they have seen slight improvement in demand in this quarter when compared sequentially, mainly on the low margin OEM side in the TBR segment. Although this pulled down
the overall profitability, the standalone EBITDA margins came in at 8%, v/s 6.8% qoq. This was due to the partial impact of softening of rubber prices seen in this quarter, though it was largely offset by adverse currency movement. In spite of higher depreciation on account of the ramp up in Chennai plant and higher tax expenses, adj.PAT still managed to pull a growth of 93% qoq to Rs425 mn, which was a decline of 21% yoy.

Going forward, the impact of falling rubber prices will be seen starkly in Q4 and in the ensuing quarters. The plantation of significant amount of natural rubber plantation in India and China done in 2005-06 will started yielding from 2012 (it takes 6-7 years for a rubber plant to get matured and start producing). This may reduce the demand supply gap, thus resulting in a further price fall. Replacement demand is expected to pick up on both TBR as well as PCR sides in FY 13, though not significantly in Q4. Increasing radialization on the TBR (3-4% per year) will also help margin improvement, however, under utilization of bias capacities will be a concern. Chennai plant is expected to get completely ramped up by September 2012 and will function at optimum capacity of 450 MTPD from current levels of 275 MTPD. Apollo will be through with its capex plans by March 2012 and has no plans of any significant capex for FY 13. We have increased our volume and margin estimates for the standalone business going forward.

Europe and South Africa post a slightly soft performance
On a consolidated basis, the performance was mainly driven by the domestic performance, while Europe and South Africa posted results slightly below our expectations. Although Europe showed a growth of 27% and 9% in sales yoy and qoq respectively, it was suppressed by the not so cold winter in December over there, due to which sales of winter tyres were low in December. However, harsh January will ensure that the dealer inventories are cleared up, thus improving margins in Q4. EBIT margins in Europe came in good at 15.7%. No significant capacity expansion in Europe is slightly stagnating Vredestein’s business, however, strong inflows of Apollo branded tyres (expected to grow at 100% in Europe on a small base of •10 mn in a couple of years) will ensure that the momentum remains intact. Also entry into new geographies like Switzerland in March and other European countries apart from its existing geographies like the UK, Holland, Germany and Italy in the next one year will also improve European business revenues.

South Africa witnessed revenue growth of 13% yoy and 12% qoq on 23% volume increase and 8% price and mix which got slightly negated by 3% due to adverse currency. In spite of a good performance at the topline the company incurred loss at the EBIT level of Rs296 mn which when adjusted for a onetime expense of ZAR45 mn, EBIT comes at slight loss of Rs3mn, due to higher RM costs and declining currency. However, management is very confident of breaking even at the operating level in Q4 as RM costs are softening and further price hike will lead to improvement in margins.

Consolidated margins jump to 10% on domestic strength
Consolidated revenues grew by 36% yoy and 12% qoq to Rs32 bn, while EBITDA margins came in at 10%, 200 bps above the sequential margins of 8%. This was again due to domestic strength and European margins which came in at 18%, however, South African EBITDA margins were at 3%. Adjusted PAT was at Rs1.3bn, a growth of 6% yoy and 64% qoq.

Outlook and valuation
Apollo came out with a good set of numbers in the quarter, where domestic business led from the front. With expectations of rubber prices moving slightly down, Chennai capacity coming on stream, radialization in the TBR segment improving and replacement demand kicking in from FY 13, we are increasing our domestic volume as well as margin estimates for both FY 12 and FY 13. In Europe, geographical expansion of Apollo branded tyres and steady volumes will act as drivers, while South Africa, which has shown some signs of improvement is expected to breakeven in the ensuing quarters. With the company through with its capex cycle, we expect it to get a boost to the bottomline. Hence, we raise our target price to Rs91(@8x times FY 13E consol EPS of Rs11.4) from Rs77, and are maintaining our BUY rating on the stock.