apollo tyres ltd - kslindia.com report on apollo tyr… · 1 | p a g e 1 7 j u n e 2 0 1 4 apollo...

1 | P a g e 1 7 J u n e 2 0 1 4

Apollo Tyres Ltd Focus back on core business; robust margin to drive cash flows

Apollo Tyres Ltd Focus back on core business; robust margin to drive cash flows

We recommend BUY with a PT of Rs255 based on 11.45x FY15E EPS. We have

increased our FY15E EPS by 22% led by healthier margin visibility amid weak demand.

We maintain our target earnings multiple at 8x vs 10x for global peers. We have

increased our EBITDA margin assumption by ~160bp for both FY14E & FY15E led by

visibility of subdued raw material basket (RMB) prices & steady pricing discipline. We

expect deleveraging to continue even after factoring resumption of capex cycle from

FY15E on back of robust cash flows amid weak demand. With favourable district court

judgment, we don’t expect any liability from Cooper deal call off.

Robust margin and demand recovery in EU to result in strong cash flow generation:

Internationalisation has its benefits

The company expects a) strong performance in Europe (38% of EBITDA) aided by

market recovery and marketshare gains, b) below-trend demand scenario in India

(60% of EBITDA) until 1HFY15, c) overall margins to be maintained at current levels

(c13%) in the medium term driven by stable raw material prices and a virtually

dormant pricing environment. In the medium to long term, the company expects to

drive growth from capacity expansion in Europe and expanding its sales presence in

South-East Asia, Latin America and the Middle East. Standalone business to operate

~80-85% capacity in FY15E; capex in the key markets to be back soon: With Vredestein

running at optimal utilisation and India operations running at ~75-80% utlisation, the

capex cycle is expected to resume from FY15E to take care of the next level of growth

in FY16-17E. As a matter of financial prudency, a APTY may adopt the organic capex

route for the next business cycle by re-initiating plans of green field capacities in east

Europe & Thailand. Standalone capacity is presently around 1,500 TPD with FY14E

expected sales at ~75% of it.

Now with the uncertainity over the Cooper done with; we do not expect any exit

penalty for APTY: With APTY getting an exit from the Cooper merger deal, the only

element of uncertainty remaining will be the quantum of exit penalty. It can be safely

assumed that with APTY getting favorable judgement from local legal authority,

chances of any substantial cash outflow from APTY seems slim. However, one cannot

rule out PTY’s intention of entering any such large ticket deal in future, but

apparently at least for the near term till FY16E, APTY will aim to grow through the

organic capex led route and thus initiate its capex cycle aggressively from FY15E post a

gap of a couple of years.

Valuation: We put a BUY on APTY with a PT of Rs255 from the current Rs203. We have

increased our FY15E EPS by 22%, and we maintain our target earnings multiple at

11.45x, with similar global peers trading at ~14x forward earnings.

Risks: Higher than expected RMB price, continued weak demand in India/EU, fresh

acquisition plans & larger penalty/legal expenses for Cooper deal call off are risks to

our call & estimates.

We recommend BUY with a PT of Rs255 based on 11.45x FY15E EPS. We have

increased our FY15E EPS by 22% led by healthier margin visibility amid weak demand.

We maintain our target earnings multiple at 8x vs 10x for global peers. We have

increased our EBITDA margin assumption by ~160bp for both FY14E & FY15E led by

visibility of subdued raw material basket (RMB) prices & steady pricing discipline. We

expect deleveraging to continue even after factoring resumption of capex cycle from

FY15E on back of robust cash flows amid weak demand. With favourable district court

judgment, we don’t expect any liability from Cooper deal call off.

Robust margin and demand recovery in EU to result in strong cash flow generation:

Internationalisation has its benefits

The company expects a) strong performance in Europe (38% of EBITDA) aided by

market recovery and marketshare gains, b) below-trend demand scenario in India

(60% of EBITDA) until 1HFY15, c) overall margins to be maintained at current levels

(c13%) in the medium term driven by stable raw material prices and a virtually

dormant pricing environment. In the medium to long term, the company expects to

drive growth from capacity expansion in Europe and expanding its sales presence in

South-East Asia, Latin America and the Middle East. Standalone business to operate

~80-85% capacity in FY15E; capex in the key markets to be back soon: With Vredestein

running at optimal utilisation and India operations running at ~75-80% utlisation, the

capex cycle is expected to resume from FY15E to take care of the next level of growth

in FY16-17E. As a matter of financial prudency, a APTY may adopt the organic capex

route for the next business cycle by re-initiating plans of green field capacities in east

Europe & Thailand. Standalone capacity is presently around 1,500 TPD with FY14E

expected sales at ~75% of it.

Now with the uncertainity over the Cooper done with; we do not expect any exit

penalty for APTY: With APTY getting an exit from the Cooper merger deal, the only

element of uncertainty remaining will be the quantum of exit penalty. It can be safely

assumed that with APTY getting favorable judgement from local legal authority,

chances of any substantial cash outflow from APTY seems slim. However, one cannot

rule out PTY’s intention of entering any such large ticket deal in future, but

apparently at least for the near term till FY16E, APTY will aim to grow through the

organic capex led route and thus initiate its capex cycle aggressively from FY15E post a

gap of a couple of years.

Valuation: We put a BUY on APTY with a PT of Rs255 from the current Rs203. We have

increased our FY15E EPS by 22%, and we maintain our target earnings multiple at

11.45x, with similar global peers trading at ~14x forward earnings.

Risks: Higher than expected RMB price, continued weak demand in India/EU, fresh

acquisition plans & larger penalty/legal expenses for Cooper deal call off are risks to

our call & estimates.

BUY Rs 197 Reuters: APLO.BO Bloomberg: APTY IN

12-month price target Rs 255

Chandraveer Singh

[email protected]

+91 22 4076 7373

Pranav Khandwala

[email protected]

+91 22 4076 7373

Market cap Rs 10236.74Cr 52 week high/low Rs 206.65/54.60 Share o/s: 504 mn Share o/s (fully diluted) : 504 mn Avg daily trading vol (3m) : 9,375 ('000) Source: Bloomberg

KHANDWALA vs Consensus (Rs) PT EPS

(FY14) Mean 133.25 17.10 High 211.90 19.40 Low 54.60 13.62 KHANDWALA 255 18.3

Buy(s) Hold(s) Sell(s) Nos 16 6 6 Source: Bloomberg

Shareholding pattern (%) Sep 13 Jun 13 Mar 13 Promoters 43.5 43.4 43.4 FIIs 34.5 28.94 33.48 MF/s/FIs/Banks 7.86 9.21 8.04 Others 14.14 18.35 14.98 Source: BSE

Price movement (Rs) vs the Sensex

Source: Bloomberg

BUY Rs 197 Reuters: APLO.BO Bloomberg: APTY IN

12-month price target Rs 255

Chandraveer Singh

[email protected]

+91 22 4076 7373

Pranav Khandwala

[email protected]

+91 22 4076 7373

Market cap Rs 10236.74Cr 52 week high/low Rs 206.65/54.60 Share o/s: 504 mn Share o/s (fully diluted) : 504 mn Avg daily trading vol (3m) : 9,375 ('000) Source: Bloomberg

KHANDWALA vs Consensus (Rs) PT EPS

(FY14) Mean 133.25 17.10 High 211.90 19.40 Low 54.60 13.62 KHANDWALA 255 18.3

Buy(s) Hold(s) Sell(s) Nos 16 6 6 Source: Bloomberg

Shareholding pattern (%) Sep 13 Jun 13 Mar 13 Promoters 43.5 43.4 43.4 FIIs 34.5 28.94 33.48 MF/s/FIs/Banks 7.86 9.21 8.04 Others 14.14 18.35 14.98 Source: BSE

Price movement (Rs) vs the Sensex

Source: Bloomberg

Exhibit 1: Consolidated financials and valuation

Year Ended (Cr's) 12-Mar 13-Mar 14-Mar 15-Mar (E) 16-Mar (E)

Revenue 12153.29 127946.3 133103.3 142928 159636

EBITDA 15571.9 20664.6 18756 19291 21327

EBITDA growth (%) 12.81 16.15 14.1 13.50 13.36

Net Income 412.12 613.8 1005.06 10168 11316

EPS 8.18 12.15 19.94 19.1 21.3

P/E 21.65 14.53 8.88 13.35 11.97

Adj PAT 11,662 14,569 10,521 18,517 32,590

PAT margin 9.6 11.4 7.8 13 20.41

Exhibit 1: Consolidated financials and valuation

Year Ended (Cr's) 12-Mar 13-Mar 14-Mar 15-Mar (E) 16-Mar (E)

Revenue 12153.29 127946.3 133103.3 142928 159636

EBITDA 15571.9 20664.6 18756 19291 21327

EBITDA growth (%) 12.81 16.15 14.1 13.50 13.36

Net Income 412.12 613.8 1005.06 10168 11316

EPS 8.18 12.15 19.94 19.1 21.3

P/E 21.65 14.53 8.88 13.35 11.97

Adj PAT 11,662 14,569 10,521 18,517 32,590

PAT margin 9.6 11.4 7.8 13 20.41

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Apollo Tyres: focus back on core business; robust margin to drive cash flows

Source KHANDWALA Research





E E

E E

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Source KHANDWALA Research Source KHANDWALA Research



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Key financials

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Rating history - Apollo Tyres

Future prospects

Apollo Tyres is planning to expand its capacity at its Chennai facility. Moreover, the company is also in the process of setting up a R&D centre in

the same complex. The new Centre will take up R&D works related to commercial vehicles for all the Apollo plants, across the World.

At present, the Chennai plant manufacture radial tyres for truck and capacity of the plant is 6,000 trucks tyres and 15,000 passenger car tyres a

day and the capacity utilisation of around 70-75%. The facility caters to both domestic and export markets.

Apollo Tyres produces the entire range of automotive tyres for ultra and high speed passenger cars, truck and bus, farm, off-the-road, industrial

and specialty applications like mining, retreaded tyres and retreading material. These are produced across Apollo’s eight manufacturing locations

in India, Netherlands and Southern Africa.

As of Jun 06, 2014, the consensus forecast amongst 44 polled investment analysts covering Apollo Tyres Ltd advises that the company will

outperform the market. This has been the consensus forecast since the sentiment of investment analysts improved on February 16, 2014. The

previous consensus forecast advised investors to hold their position in Apollo Tyres Ltd.

NOW, Sectors having high EVF should benefit the most during a recovery We use fixed costs/PBT ratios of bear and bull cycles to arrive at an

Earnings Volatility Factor (EVF). Sectors with high operating leverage, inability to control fixed costs during downcycles, and low margins have

typically witnessed high EVF. Typically, sectors having EVF above 1.4x demonstrate this characteristic. This implies that if one has an outlook of an

improving business cycle, operating leverage for sectors/stocks with high EVF should improve materially. These sectors should thus witness the

highest improvement in earnings with improving business cycles.

However, we believe even in the event of a recovery, stock performance will vary. We prefer stocks that meet two criteria: high EVF (Earnings

Volatility Factor), to identify stocks that would witness high earnings recovery, and high ECS (Early Cycle Score) to identify stocks that would

respond fastest to a recovery. Apollo tyres fits both the criteria.

We prefer early cyclicals. As per our analysis, companies with high ECS respond quickly to even short cycles of an economic recovery:

stocks within durables, commercial vehicles (CV), four-wheelers (4W) stand out, while investment cycle-driven sectors recover with a

lag, indicating that the full negative impact of their operating leverage may not have played out as yet.

We prefer stocks with high fixed costs. We note that companies with high fixed costs, inability to control them during downcycles and

low margins witness a disproportionate increase in earnings during upcycles. We measure this through EVF. Sectors with high EVF: CVs,

4Ws, Durables, Cement, Retailing, Construction and Industrial Products stand out on this parameter.

Likely winners and losers. Assuming India is at the cusp of an economic recovery, we would invest in stocks with high ECS and high EVF.

We screen companies with ECS>5x and EVF>1.4x; Apollo Tyres should be a key beneficiary of a potential economic recovery.

6 | P a g e 1 7 J u n e 2 0 1 4

Institutional Equities Research coverage

Ratings and other definitions universe - distribution of ratings

Stock rating system

BUY. We expect the stock to deliver >15% absolute returns. ACCUMULATE.

We expect the stock to deliver 6-15% absolute returns. REDUCE. We expect

the stock to deliver +5% to -5% absolute returns. SELL. We expect the stock

to deliver negative absolute returns of >5%. Not Rated (NR). We have no

investment opinion on the stock.

Sector rating system

Overweight. We expect the sector to relatively outperform the Sensex.

Underweight. We expect the sector to relatively underperform the Sensex.

Neutral. We expect the sector to relatively perform in line with the Sensex.

Analyst certification

“We, Chandraveer Singh and Pranav Khandwala, hereby certify all of the views expressed in this report accurately reflect our personal views about

the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be,

directly/indirectly, related to the specific recommendations or views expressed in this report."

7 | P a g e 1 7 J u n e 2 0 1 4

IMPORTANT DISCLOSURE

Khandwala Securities Limited and its affiliates are a full-service, integrated investment banking, investment management and

brokerage group. We along with our affiliates are leading underwriter of securities and participants in virtually all securities

trading markets in India. We and our affiliates have investment banking and other business relationships with a significant

percentage of the companies covered by our Investment Research Department. Our research professionals provide

important input into our investment banking and other business selection processes. Investors should assume that

Khandwala Securities Limited and/or its affiliates are seeking or will seek investment banking or other business from the

company or companies that are the subject of this material and that the research professionals who were involved in

preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based

on the profitability of Khandwala Securities Limited, which include earnings from investment banking and other business.

Khandwala Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households

from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally,

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This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction

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