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Rising interest cost dents profit Apollo Tyres’ (APTY) Q1FY21 numbers beat our estimates. Operating

margin was 8.3% (-270 bps QoQ), beating our estimates due to favorable raw material prices, improvement in product mix (high proportion of replacement volume) and cost control measures. However, PAT was suppressed by high interest costs.

Revenue de-grew by 34% YoY to Rs28.2bn, led by 42% fall in APMEA sales, 12% in Europe and 60% YoY in other regions. Management stated that the recovery in the replacement market looks promising, recording a growth of 10% YoY in the month of July led by strong uptick in farm segment and TBR tyres. PCR and 2Ws tyre demand are also picking up gradually. Current inventory stands at 7 days due to production constraints.

Management expects margins to get support from fall in raw material prices and a reduction in employee and marketing expense. The RM cost basket is expected to come down in Q2FY21 by 2% while bouncing back in Q3 due to increasing rubber and crude derivatives prices in July.

We expect the company to face pressure on earnings, due to low utilization, high debt (the total gross debt of Rs 75bn, of which foreign currency loan is Rs 31.45bn), and high capex. Factoring in slow ramp up in European business led by the current COVID-led disruptions and high leveraged BS, we maintain a Reduce rating on the stock with a target price to Rs 127 (14x FY23E EPS).

Replacement demand is picking up well While OEM sales may remain weak in India and globally, we expect recovery in replacement demand from Q2FY21. Replacement volume de-grew 25% YoY in Q1. However sharp uptick was seen in July, recording a growth of 10% YoY. We believe the sharp uptick in OEM volume from 2HFY21, continued replacement market growth, and commodity tailwinds are likely to lead to a sharp recovery in operating profit. However, higher capacity addition, lower utilization, higher depreciation and interest outflow will continue to put pressure on net profit and erode its return ratios. Q1FY21 Result (Rs Mn)

Particulars Q1FY21 Q1FY20 YoY (%) Q4FY20 QoQ (%)

Revenue 28,734 43,313 (33.7) 36,101 (20.4) Total Expense 26,362 38,564 (31.6) 31,351 (15.9)

EBITDA 2,373 4,749 (50.0) 4,750 (50.0)

Depreciation 3,091 2,673 15.7 3,137 (1.4)

EBIT (719) 2,076 (134.6) 1,614 (144.5)

Other Income 268 275 (2.2) (24) (1220.4)

Interest 1,172 584 100.7 912 28.4

EBT (1,622) 1,767 (191.8) 677 (339.4)

Tax (276) 351 (178.6) (101) 172.9

RPAT (1,346) 1,416 (195.0) 779 (272.8)

APAT (1,346) 1,416 (195.0) 779 (272.8)

(bps) (bps) Gross Margin (%) 43.2 43.4 (13) 47.3 (407)

EBITDA Margin (%) 8.3 11.0 (271) 13.2 (490)

NPM (%) (4.7) 3.3 (795) 2.2 (684)

Tax Rate (%) 17.0 19.9 (286) (14.9) 3197

EBIT Margin (%) (2.5) 4.8 (729) 4.5 (697)

CMP Rs 116

Target / Upside Rs 127 / 9%

BSE Sensex 37,710

NSE Nifty 11,102

Scrip Details

Equity / FV Rs 11,372mn / Rs 1

Market Cap Rs 66bn

USD 886mn

52-week High/Low Rs 197/Rs 73

Avg. Volume (no) 89,03,570

NSE Symbol APOLLOTYRE

Bloomberg Code APTY IN

Shareholding Pattern Jun'20(%)

Promoters 41.7

MF/Banks/FIs 18.2

FIIs 21.9

Public / Others 18.3

Valuation (x)

FY21E FY22E FY23E

P/E 67.4 18.8 12.8

EV/EBITDA 7.5 6.2 5.2

ROE (%) 1.0 3.7 5.5

RoACE (%) 2.4 3.8 4.9

Estimates (Rs mn)

FY21E FY22E FY23E

Revenue 1,50,582 1,71,496 1,91,193

EBITDA 16,533 20,602 23,096

PAT 1,092 3,905 5,754

EPS (Rs.) 1.7 6.2 9.1

Analyst: Abhishek Jain Tel: +9122 40969739

E-mail: abhishekj@dolatcapital.com

Associate: Ketul Dalal Tel: +91 22 4096 9770

E-mail: ketuld@dolatcapital.com

Apollo Tyres

Reduce

August 06, 2020

August 06, 2020 2

High Debt continue to suppress earnings The current total outstanding gross debt of Rs 75n while net debt stands at Rs 52bn with Net DE ratio at 0.52 (vs 0.39 for FY19). APTY incurred a capex of Rs 28bn in FY20 and a negative FCF of Rs 1.7bn. The company is undergoing major capacity addition which is likely to complete by FY22 end, which impacts its ability to generate free cash flows. The company has guided for a capex for India operations Rs 10.5bn (of which RS 6-7bn towards AP Greenfield plant) and Europe Rs 2bn for FY21. With massive debt funded capacity additions underway, the heavily levered Balance sheet will have an impact on the profitability and return ratios.

Actual vs DART Estimates

(Rs mn) Actual DART Estimates Var (%) Comments

Revenue 28,282 18,776 51 Better than anticipated pick up in replacement demand and cost control initiatives offset by high interest costs.

EBITDA 2,373 726 227

EBITDA Margin 8.4 3.9 452bps

PAT (1,346) (2,398) (44)

Source: Company, DART

Change in Estimates

Rs Mn FY21E FY22E

New Previous % Cng New Previous % Cng

Net sales 1,50,582 1,61,789 (6.9) 1,71,496 1,77,440 (3.3)

EBITDA 16,533 18,191 (9.1) 20,602 20,455 0.7

EBITDA margin(%) 11.0 11.2 (26.4) 12bps 11.5 49bps

APAT 1,092 3,605 (69.7) 3,905 4,823 (19.0)

EPS 1.9 6.3 (69.7) 6.2* 8.4 (27.1)

Source: Company, DART, *Diluted EPS

Assumption table (%)

Particulars FY18 FY19 FY20 FY21E FY22E FY23E

Standalone

Revenue Growth (YoY) 15.3 19.9 (10.5) (14.3) 16.6 12.8

EBITDA Margin 12.1 12.0 12.6 12.4 13.0 12.9

Subsidiary

Revenue Growth (YoY) 7.0 14.3 1.3 6.0 9.2 9.2

EBITDA Margin 8.9 9.2 9.9 8.5 10.2 10.5

Consolidated

Revenue Growth (YoY) 12.6 18.2 (7.0) (7.8) 13.9 11.5

EBITDA Margin 11.1 11.2 11.7 11.0 12.0 12.1

Source: Company, DART

August 06, 2020 3

Key conference call takeaways

Domestic revenue decline of 43% YoY was entirely attributed to volumes.

Recovery in replacement demand is significantly better than anticipated. Replacement volume for Q1 was lower 25% YoY, however June month recorded a growth of 10% YoY and anticipates strong replacement demand in the medium term. Demand revival was majorly led by the rural region.

Replacement demand from farm segment (+50% YoY) outperformed TBR demand (+15-20%). PCR and 2w tyre demand has picked up gradually and company has gained market share in the replacement segment.

For Q1FY21, OEM contributed 7% of overall revenue share (vs normal of 20%). Normalcy in OEM contribution expected from Q3FY21. While there are signs of recovery in PCR OEM segment, truck OEM demand is far slower than anticipated.

Demand for Bias tyres sales have seen an uptick due to import restrictions placed on Chinese tyres.

Raw material costs declined 3% sequentially (landed price/kg for NR was Rs139, SR was Rs105, carbon black was Rs66 and steel cord Rs139). RM cost basket to come down by 2% Q2FY21, while Q3 is expected to back to Q1 levels due to increasing natural rubber and crude derivatives prices in July. APTY is a net importer and hence weak rupee impacts RM prices adversely.

APTY has taken several cost optimization measures to streamline fixed input costs, reduced travel and SG&A expenses through digital launches, consultancy expenses and rationalization of real estate costs. There has been significant reduction of inventory levels across operations and top management has taken salary cuts.

With modernization of plants and technology upgradation, the manpower requirement is likely to reduce for domestic operations.

AP plant has commenced PCR tyre production. Commercial production of TBR to begin from September. Capex and ramp up will be completed in FY22.

Overall capacity utilization across plants is 67% as of June.

Inventory reduced to Rs 2.5bn (25% lower than normal) (7 days of sales). Current level of inventory lower because of production constraints. At factory level, company has very low inventory of Farm, TBR and PCR tyres.

The company has a consolidated net debt of Rs 52bn in Q1FY21 (versus Rs 61bn in FY20), and net debt-to-EBITDA of 3.1x (vs 3.15x for FY20). Standalone net debt down to Rs 41bn from Rs 48bn

No plans to raise further debt in FY21. Consolidated gross debt stands at Rs 75bn and Standalone gross debt is Rs 58bn.

Foreign currency borrowings and interest costs are fully hedged and 50% of operational exposure is hedged.

Restrictions on import of tyres imposed by the government is beneficial for domestic players. Overall import percentage for PCR tyres is 15% while Truck is in high single digit. TBR import was largely from China, while PCR share from China was marginal. APTY sees potential entry in premium segment of 2w and PCR tyres in the domestic market.

Pricing environment has remained stable.

August 06, 2020 4

Europe

Revenue from the operations in Europe was € 90mn (-28% YoY) for Q1FY21. Company has gained market share in TBR and PCR segment. There was a 5% improvement in Agri while PCR declined by 3-4%. The overall European PCR market declined by 32% YoY.

In Q1FY21, Europe EBITDA was € 1mn and EBITDA margin was 1.1% (versus 6% in Q1FY20) attributable to adverse operating leverage.

Reifencom revenue improved +14% YoY in Q1FY21 with EBITDA margin at 5%, similar to last year.

Demand is expected to be 90% of normal levels in Q2FY21. Expect margin recovery in European operations on the back of cost control measures and benign raw material prices.

APTY is streamlining its Netherlands operations over two years leading to redundancies of 528 saving € 50mn in cost. Overall manpower strength in Europe is 2,500 (before reducing 528). Shift in production from Netherlands to Hungary and India will lead to some manpower addition at the AP plant.

The Netherlands government has provided a subsidy of about €6mn up to Q1FY21 for employee salaries (90% of wage expenses).

Capex guidance

Management had earlier deferred capex guidance by Rs 4bn. For FY21, capex for India operations to be Rs 10.5bn (of which Rs 6-7bn is towards AP Greenfield plant) and Rs 2bn for Europe. The company is evaluating economic conditions to further reduce capex.

Maintenance capex is Rs 2.5-3bn for India and Rs 1.5-2bn for Europe.

With all major capex to be completed by FY22, APTY is likely to become FCF positive by FY23-24.

Consol revenue declined due to COVID-19 Gross margin declined YoY/QoQ

Source: DART, Company Source: DART, Company

(40)(30)(20)(10)010203040

25,000

30,000

35,000

40,000

45,000

50,000

Q1

FY1

9

Q2

FY1

9

Q3

FY1

9

Q4

FY1

9

Q1

FY2

0

Q2

FY2

0

Q3

FY2

0

Q4

FY2

0

Q1

FY2

1

Revenue (Rs mn) Revenue Growth (YoY %)

404142434445464748

10,000

12,000

14,000

16,000

18,000

20,000

Q1

FY1

9

Q2

FY1

9

Q3

FY1

9

Q4

FY1

9

Q1

FY2

0

Q2

FY2

0

Q3

FY2

0

Q4

FY2

0

Q1

FY2

1

Gross Profit (Rs mn) Gross Margin (%)

August 06, 2020 5

EBITDA margin de-grew YoY/QoQ PAT loss due to high depreciation and int.

Source: DART, Company Source: DART, Company

Other Expenses (Rs mn vs % of Sales) Key Raw Materials price trend (Rs/kg)

Source: DART, Company Source: DART, Company

Revenue Breakup by Market (%) (Q1FY21) Revenue Breakup by Product (%) (FY20)

Source: DART, Company Source: DART, Company

789101112131415

1,500

2,500

3,500

4,500

5,500

6,500

Q1

FY1

9

Q2

FY1

9

Q3

FY1

9

Q4

FY1

9

Q1

FY2

0

Q2

FY2

0

Q3

FY2

0

Q4

FY2

0

Q1

FY2

1

EBITDA (Rs mn) EBITDA Margin (%)

(6)

(4)

(2)

0

2

4

6

8

(1,500)

(750)

0

750

1,500

2,250

3,000

Q1

FY1

9

Q2

FY1

9

Q3

FY1

9

Q4

FY1

9

Q1

FY2

0

Q2

FY2

0

Q3

FY2

0

Q4

FY2

0

Q1

FY2

1

PAT (Rs mn) PAT Margin (%)

14

16

18

20

4,0004,5005,0005,5006,0006,5007,0007,5008,000

Q1

FY1

9

Q2

FY1

9

Q3

FY1

9

Q4

FY1

9

Q1

FY2

0

Q2

FY2

0

Q3

FY2

0

Q4

FY2

0

Q1

FY2

1

Other Operating Exp (Rs mn) % of Sales

APMEA58%

Europe34%

Others8%

PV39%

Truck & Bus 43%

LCV6%

OHT/Other12%

August 06, 2020 6

Profit and Loss Account

(Rs Mn) FY20A FY21E FY22E FY23E

Revenue 1,63,270 1,50,582 1,71,496 1,91,193

Total Expense 1,44,115 1,34,050 1,50,895 1,68,097

COGS 90,756 85,614 97,832 1,09,937

Employees Cost 24,822 23,416 25,439 27,478

Other expenses 28,537 25,020 27,623 30,682

EBIDTA 19,155 16,533 20,602 23,096

Depreciation 11,381 12,057 12,791 13,140

EBIT 7,774 4,475 7,811 9,957

Interest 2,808 3,517 3,370 3,064

Other Income 469 550 578 606

Exc. / E.O. items 0 0 0 0

EBT 5,434 1,508 5,019 7,499

Tax 670 417 1,113 1,745

RPAT 4,764 1,092 3,905 5,754

Minority Interest 0 0 0 0

Profit/Loss share of associates 0 0 0 0

APAT 4,764 1,092 3,905 5,754

Balance Sheet

(Rs Mn) FY20A FY21E FY22E FY23E

Sources of Funds

Equity Capital 572 11,372 635 635

Minority Interest 0 0 0 0

Reserves & Surplus 98,728 99,426 1,02,061 1,05,943

Net Worth 99,300 1,10,798 1,02,696 1,06,578

Total Debt 74,048 71,048 65,548 59,048

Net Deferred Tax Liability 14,215 14,215 14,215 14,215

Total Capital Employed 1,87,563 1,96,061 1,82,459 1,79,841

Applications of Funds

Net Block 1,52,350 1,51,292 1,46,001 1,39,362

CWIP 16,420 16,420 16,420 16,420

Investments 148 148 148 148

Current Assets, Loans & Advances 63,138 67,963 62,036 68,836

Inventories 32,069 30,955 31,767 35,772

Receivables 9,399 9,888 11,030 12,421

Cash and Bank Balances 7,496 11,897 2,497 2,659

Loans and Advances 2,867 3,153 3,469 3,815

Other Current Assets 9,126 9,888 11,093 11,987

Less: Current Liabilities & Provisions 44,491 39,762 42,146 44,924

Payables 4,421 4,078 4,644 5,177

Other Current Liabilities 40,070 35,685 37,502 39,747

sub total

Net Current Assets 18,646 28,201 19,890 23,911

Total Assets 1,87,563 1,96,061 1,82,459 1,79,841

E – Estimates

August 06, 2020 7

Important Ratios

Particulars FY20A FY21E FY22E FY23E

(A) Margins (%)

Gross Profit Margin 44.4 43.1 43.0 42.5

EBIDTA Margin 11.7 11.0 12.0 12.1

EBIT Margin 4.8 3.0 4.6 5.2

Tax rate 12.3 27.6 22.2 23.3

Net Profit Margin 2.9 0.7 2.3 3.0

(B) As Percentage of Net Sales (%)

COGS 55.6 56.9 57.0 57.5

Employee 15.2 15.6 14.8 14.4

Other 17.5 16.6 16.1 16.0

(C) Measure of Financial Status

Gross Debt / Equity 0.7 0.6 0.6 0.6

Interest Coverage 2.8 1.3 2.3 3.2

Inventory days 72 75 68 68

Debtors days 21 24 23 24

Average Cost of Debt 4.6 4.8 4.9 4.9

Payable days 10 10 10 10

Working Capital days 42 68 42 46

FA T/O 1.1 1.0 1.2 1.4

(D) Measures of Investment

AEPS (Rs) 7.5 1.7 6.2 9.1

CEPS (Rs) 25.4 20.7 26.3 29.8

DPS (Rs) 3.3 0.6 2.0 2.9

Dividend Payout (%) 43.4 36.1 32.5 32.5

BVPS (Rs) 156.4 174.5 161.7 167.8

RoANW (%) 4.8 1.0 3.7 5.5

RoACE (%) 4.3 2.4 3.8 4.9

RoAIC (%) 4.6 2.5 4.3 5.6

(E) Valuation Ratios

CMP (Rs) 116 116 116 116

P/E 15.4 67.4 18.8 12.8

Mcap (Rs Mn) 66,301 66,301 66,301 66,301

MCap/ Sales 0.4 0.4 0.4 0.3

EV 1,30,672 1,23,271 1,27,171 1,20,508

EV/Sales 0.8 0.8 0.7 0.6

EV/EBITDA 6.8 7.5 6.2 5.2

P/BV 0.7 0.7 0.7 0.7

Dividend Yield (%) 2.8 0.5 1.7 2.5

(F) Growth Rate (%)

Revenue (7.0) (7.8) 13.9 11.5

EBITDA (2.2) (13.7) 24.6 12.1

EBIT (32.2) (42.4) 74.5 27.5

PBT (38.8) (72.2) 232.8 49.4

APAT (41.5) (77.1) 257.8 47.3

EPS (41.5) (77.1) 257.8 47.3

Cash Flow

(Rs Mn) FY20A FY21E FY22E FY23E

CFO 25,173 10,962 18,463 17,492

CFI (27,959) (10,450) (6,923) (5,894)

CFF 4,510 3,889 (20,940) (11,436)

FCFF (3,188) (38) 10,963 10,992

Opening Cash 5,627 7,496 11,897 2,497

Closing Cash 7,496 11,897 2,497 2,659

E – Estimates

DART RATING MATRIX

Total Return Expectation (12 Months)

Buy > 20%

Accumulate 10 to 20%

Reduce 0 to 10%

Sell < 0%

Rating and Target Price History

Month Rating TP (Rs.) Price (Rs.)

Nov-19 Reduce 192 180

Feb-20 Buy 210 168

Mar-20 Buy 153 89

Mar-20 Buy 153 82

Apr-20 Buy 126 83

May-20 Reduce 96 90

*Price as on recommendation date

DART Team

Purvag Shah Managing Director purvag@dolatcapital.com +9122 4096 9747

Amit Khurana, CFA Head of Equities amit@dolatcapital.com +9122 4096 9745

CONTACT DETAILS

Equity Sales Designation E-mail Direct Lines

Dinesh Bajaj VP - Equity Sales dineshb@dolatcapital.com +9122 4096 9709

Kapil Yadav VP - Equity Sales kapil@dolatcapital.com +9122 4096 9735

Yomika Agarwal VP - Equity Sales yomika@dolatcapital.com +9122 4096 9772

Jubbin Shah VP - Derivatives Sales jubbins@dolatcapital.com +9122 4096 9779

Ashwani Kandoi AVP - Equity Sales ashwanik@dolatcapital.com +9122 4096 9725

Lekha Nahar AVP - Equity Sales lekhan@dolatcapital.com +9122 4096 9740

Equity Trading Designation E-mail

P. Sridhar SVP and Head of Sales Trading sridhar@dolatcapital.com +9122 4096 9728

Chandrakant Ware VP - Sales Trading chandrakant@dolatcapital.com +9122 4096 9707

Shirish Thakkar VP - Head Domestic Derivatives Sales Trading shirisht@dolatcapital.com +9122 4096 9702

Kartik Mehta Asia Head Derivatives kartikm@dolatcapital.com +9122 4096 9715

Dinesh Mehta Co- Head Asia Derivatives dinesh.mehta@dolatcapital.com +9122 4096 9765

Bhavin Mehta VP - Derivatives Strategist bhavinm@dolatcapital.com +9122 4096 9705

70

100

130

160

190

220

Aug-1

9

Sep-1

9

Oct-

19

Nov-1

9

Dec-1

9

Jan-2

0

Fe

b-2

0

Mar-

20

Apr-

20

May-2

0

Jun-2

0

Jul-20

Aug-2

0

(Rs) APTY Target Price

Dolat Capital Market Private Limited. Sunshine Tower, 28th Floor, Senapati Bapat Marg, Dadar (West), Mumbai 400013

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Dolat Capital Market Private Limited.

Corporate Identity Number: U65990DD1993PTC009797 Member: BSE Limited and National Stock Exchange of India Limited.

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