tyre sector sept07

Indi

a R

esea

rch

September 2007

Tyre SectorTread gains...!!!

Navin Matta Harshal PatilResearch Analyst Research Associate+9122 4096 9752 +9122 4096 [email protected] [email protected]

DOLAT CAPITAL

26 September, 2007 1

DOLAT CAPITAL

The tyre industry has witnessed an evident upturn since the beginning of the current year. The primary reasonbeing, the softening of natural rubber prices (42% of total raw material cost). Furthermore, the high capacityutilizations by most of the leading players and small additions in bias capacities in the next 2 to 3 years wouldresult in a better pricing power scenario. The demand environment continues to look positive with high growthexpected from the Replacement and Exports segments.

Buoyant capacity utilizations to render pricing powerThe Indian tyre industry has been operating at a capacity utilization rate of around 90% in the last 3-4 years. Currentlyalmost 70-80% of the vehicles (in terms of weight) in India are on bias tyres. The eventual shift in preference from biasto radial tyres is deterring any player to put up major bias capacities. Going forward for the next 2-3 years, we expectsmall capacity additions in the bias segment only by way of de-bottlenecking. Therefore, the tight demand supply situationwould ensure a better pricing power scenario.

Radialisation in the Truck & bus segment to gather paceThough radial tyres have several benefits such as better fuel efficiency, longer life and better road grip, the higher upfrontcost (around 25%) has limited radial penetration in the T&B segment to 4%.Government’s focus on development of road infrastructure would encourage the use of radial tyres. We expect radialpenetration in the T&B segment to reach at least 12% by 2010, based on which the revenues from T&B radials wouldincrease by 55% CAGR over 2007-10

Natural Rubber prices slipping to comfort zoneThe tyre industry is highly raw material intensive with natural rubber accounting for 42% of the total raw material cost. Inthe last three years, NR prices have been on an unabated up trend, from a yearly average price of Rs 47 per kg in 2003to Rs 89 per kg in 2007. This was mainly on account of tight demand supply dynamics and depleting stock levels in thedomestic market. However, the strong linkage of international and domestic rubber prices would suggest stable NRprices on the back of higher stock levels, both domestically and internationally.

Improving financials healthThe recent price hikes by most players, coupled with softer raw material cost has enabled the industry to post betterfinancial numbers in the past 2-3 quarters. The average operating profit margins have improved to almost 10% from alow of 6.6% in the previous year while the PAT margins are at 4% from a low of 1.50%. The improving financial health ofthe sector would partially fund the capex plans, which have been announced by most of the large players.

Strong financial health coupled with a well thought out growth stratergy makes Apollo Tyres Ltd ( ATL) our toppick amongst its peers. We initiate coverage on ATL with a BUY recommendation and a 12 months price targetof Rs 49 based on 12xFY09E fully diluted earnings.

The consistent financial performance, coupled with a extensive product portfolio in the niche OHT segmentmakes Balkrishna Ltd an interesting play. We expect the stock to be a re-rating candidate on the back of continuedhigh earnings growth coupled with the recent de-merger of the non tyre businesses into separate companies.We initiate coverage on the stock with a BUY recommendation and a 12 months price target of Rs 840 based on12xFY09E fully diluted earnings.

Valuations matrixParticulars CMP MCAP Net Sales OPM-% Net Profit EPS (Rs) PER (X) ROE-% ROCE-%Rs in Mn Rs. FY08E FY09E FY08E FY09E FY08E FY09E FY08E FY09E FY08E FY09E FY08E FY09E FY08E FY09E

Apollo Tyres 38 17,633 47,928 54,203 9.4 10.0 1575 1926 3.1 4.1 12.2 9.4 15.0 17.1 16.2 18.0J K tyres* 127 3,911 29,151 31,175 8.1 8.4 510 607 12.4 14.8 10.5 8.8 7.6 7.9 10.3 10.6

Ceat 164 7,488 23,503 25,456 7.5 7.8 704 817 15.4 17.9 11.0 9.2 17.2 17.5 18.2 18.5Balkrishna Industries 598 11,580 10,851 13,800 21.6 20.7 1124 1462 51.3 70.0 11.7 8.6 23.4 26.0 20.9 25.0

* Fig for Sep07 & Sep08


DOLAT CAPITAL

Porters Five forces Model:

Inter –firm Rivalry • Low value added product

with high competition • 75% of market share with

top 4 players • Consolidation expected

as the industry nearing maturity.

Barriers to Entry: • Highly capital intensive • Long payback period

Buyers Power: • Pricing power with OEM on

account of low switching cost • Low brand loyalty observed as

the Replacement markets offers wide brand choice at comparable price points in each product segment

Threat of substitutes: • Import of Chinese tyres. • Retreading option to postpone repurchase.

Supplier Power: • Possibility of substituting NR

with SR is minimal • Supply concerns weigh on

NR prices. • Crude based raw materials

subject to high price volatility.


DOLAT CAPITAL

Buoyant capacity utilizations to render pricing powerThe Indian tyre industry is operating at high capacity utilization rates of around 90-95% in the past 3-4 years. Excludingthe passenger vehicles segment, a significant proportion of vehicles (approx 75-80% in value terms) are still on biastyres. Majority of the players operating bias capacities are running at near peak capacity (principally in the T&B biassegment).

Furthermore, none of the tyre manufacturers are willing to undertake major capacity expansions in bias tyre facilities,owing to the eventual shift in preference from bias to radial tyres. Going forward for the next 2-3 years, small capacityadditions in bias tyres segment, if any, would be primarily through brown-field expansions or de-bottleneckingroute.Meanwhile radial pentration is expected to increase only upto 12% from the current 4%.

Production and Capacity Utilization Trend

Source: ATMA, Cris Infac, Dolat Research

We expect a steady demand for bias tyres, mainly in the T&B segment to continue for the next 2 to 3 years. Supplygrowth being diminutive in the following years, we anticipate a favorable pricing scenario for bias tyres.

Radialisation in Truck & Bus segment expected to gather paceCurrently the radial penetration in the T&B segment is barely 4%. Although, there are several benefits of using radialtyres, such as better fuel economy, longer life and better road grip, the higher upfront cost compared to bias tyres is themain deterrent . T&B radial tyres cost approximately 25% higher as compared to bias tyres. Radial tyres have softer side-walls because of which they are prone to damage on poor road conditions existing in India.

Radial Penetration trend

Source: ATMA, Dolat Research

20253035404550556065707580

2002 2003 2004 2005 2006 2007 2008E 2009E 2010E

NO

S in

Mn

10%

25%

40%

55%

70%

85%

100%

Production-LHS Cap Utilisation-RHS

0102030405060708090

100

2002 2003 2004 2005 2006 2007

per c

ent

Passenger Car LCV Truck & Bus


DOLAT CAPITAL

The increased emphasis on building road infrastructure and ban on overloading is expected to trigger a higher radialpenetration in the T&B segment. The NHDP has estimated infrastructure spent on roads at Rs 2474 Cr by the year end2012. This would be dedicated towards building of 45,974 kms of road.

Radial tyre sales from Truck & Bus (T&B) Segment:Particulars 2005 2006 2007 2008E 2009E 2010ETyre Volume (mn nos) 60.10 65.93 71.58 74.76 81.41 88.67T & B tyre volume ( mn nos) 11.00 11.90 12.17 12.71 13.84 15.07Share of T & B tyres in Total Tyre production 18% 18% 17% 17% 17% 17%Radial Tyres in Truck & Bus segment-(mn nos) 0.22 0.24 0.49 0.76 1.25 1.81Truck & bus Radialisation penetration* 2% 2% 4% 6% 9% 12%Avg wt(Kg)-Radial tyre 60 60 60 60 60 60Total Wt.-Radial Tyre(Tons) 13,200 14,280 29,205 45,755 74,735 108,531Avg realisation for radial tyre* 145 145 165 165 165 165Sales from T & B radial tyres (Rs Bn) 1.91 2.07 4.82 7.55 12.33 17.91* Dolat Research Estimates, Cris Infac, ATMA

*- realization for radial tyres assumed 25% higher than bias tyres.

We expect radial penetration in the T&B to increase to 12% by 2010 from the current levels of 4%. Our base estimatespeg the demand for radial tyres to reach 1.81 mn tyres in the next 3 years. Based on the average weight and realizationper kg of a radial tyre, we arrive at total sales from radial tyres of around Rs17.9 bn by 2010 (approx ~ 10% of total marketshare). This translates into a 55% CAGR over 2007-10.

Natural Rubber prices slipping to comfort zoneThe tyre industry is highly raw material intensive with natural rubber accounting for 42% of the total raw material cost.Consequently, the fortunes of the industry are largely linked to natural rubber prices. In the last three years, prices havebeen on an unabated up trend. This has caused a dent in the margins of the all the tyre manufacturers.

Raw Material profile (percentage in terms of cost)

Source: ATMA

22%

11%

5%

3%

17%

42%

Natu r al Ru bb e r Nylo n Tyre Co r d Fab r ic Car b o n Black PBR SBR Oth e rs


DOLAT CAPITAL

Domestic NR production and consumption

Source: Rubber Board of India, Dolat Research

The past few years have seen a tight demand supply situation at the domestic level, hence NR prices have been movingupwards, from a yearly average price of Rs 47 per kg in 2003 to Rs 89 per kg in 2007. During FY07, although the supplyoutstripped the demand comfortably, prices rose sharply mainly on account of concerns regarding weather disruptions inThailand and certain speculative activities.

Quarterly world stocks and NR prices

Source: IRSG, Dolat Reseach

The world stock levels have been steadily increasing hence pushing NR prices downwards from Q2CY06 onwards. Thestock levels over CY05 have risen by almost 30% at the end of CY06. The average NR prices for Q2CY07 have comedown to Rs 87 per kg.

Domestic Import – Export of NR coupled with domestic and international prices

Source: Rubber board, Dolat Research

3,000

5,000

7,000

9,000

11,000

2003 2004 2005 2006 2007P

(in '0

00 M

T)

-

20

40

60

80

100Production (LHS) Consumption (LHS)Bangkok Intl prices - Rs/kg (RHS)

0

3,000

6,000

9,000

12,000

15,000

18,000

21,000

Apr'0

6

May

'06

June

'06

July

'06

Aug'

06

Sept

'06

Oct

'06

Nov

'06

Dec

'06

Jan'

07

Feb'

07

Mar

'07

Apr'0

7

May

'07

(in m

t)

0

20

40

60

80

100

120

140

(Rs/

kg)

Imports (LHS) Exports (LHS)Domestic prices (RHS)* Bangkok Intl prices - Rs/kg (RHS)*

1,000

1,300

1,600

1,900

2,200

Q1CY06 Q2CY06 Q3CY06 Q4CY06 Q1CY0760

80

100

120

World Stock (LHS) Bangkok Intl prices - Rs/kg (RHS)*


DOLAT CAPITAL

0

30

60

90

120

150

180

210

FY02 FY03 FY04 FY05 FY06 FY07Nylon Tyre cord-LHS Caprolactum

The domestic NR prices are closely linked to the international NR prices. The exports rise when there is a significantparity between international and domestic NR prices. However, since the beginning of the current year, the imports haveincreased substantially while the exports are steadily on a declining trend.

Under the advance license and DEPB drawback scheme, the landed cost of rubber works out lower than domestic pricesfor the Indian tyre manufacturers . Therefore, the comfortable NR stock levels in the international markets, should curbany major rise in NR prices. Also, the high degree of linkage between domestic and international prices, should see theNR prices around the current range of Rs 85 - 95 per kg.

…… however, other raw material prices remain a concern

Source: CMIE, Dolat Research

The continuous rise in crude prices is impacting the crude related raw materials. PBR, SBR, Carbon Black and Caprolactumhave oil based inputs and hence the movement in crude is driving their prices upwards. Crude oil is at its all time high of$ 80 per barrel, hence we expect the crude related raw material prices to remain firm in the near term.

Improving Financial HealthThe tyre industry had been under pressure from 2003 onwards due to their inability to pass on the substantial rise in rawmaterial prices. The operating margins dipped below 6% and the net profit margins were a dismal 1.5 – 2% during thisperiod. The top 4 players sacrificed profitability in an attempt to maintain or increase market share.

Industry Financial Snapshot

Source: CMIE, Dolat Research

However, during the last financial year, the sharp rise in natural rubber prices compelled all the tyre manufacturers totake price hikes of close to 5 to 10% in two tranches (partial roll back subsequently) . Since then, the NR prices havecooled off from its peak of Rs 120 per kg to around Rs 80-85 per kg, consequently improving contribution per ton of tyres sold.

Topline growth has been steady over the last 12 quarters with operating margins almost touching 12% for the quarterended March 07. With most of the frontline tyre manufacturers announcing massive capex plans, the improving cashflow from operations would facilitate part funding through internal accruals.

05

1015202530354045

Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07-2%

0%

2%

4%

6%

8%

10%

12%

Sales (Rs bn)-LHS PBDIT-margin-RHS PAT-margin-RHS

0102030405060708090

100

FY02 FY03 FY04 FY05 FY06 FY070

10

20

30

40

50

60

70

Carbon B lack SBR-LHSPBR-LHS Crude Oil (Brent)-$ -RHS

$ pe

r Bre

nt

Pric

es p

er K

g

Pric

es p

er K

g


DOLAT CAPITALApollo Tyre Ltd.CMP: Rs 38Target Price: Rs 49 Tyre / Buy

Heavy Duty...Favorable industry dynamics coupled with a well thought-out growth strategy for accelerated growth, makesApollo Tyres (ATL) our preferred bet amongst its peers in the industry. We initiate coverage on ATL with a BUYrecommendation and a 12 months price target of Rs 49 based on 12xFY09E fully diluted earnings.

BSE Sensex 16921NSE Nifty 4940

Scrip Details

Equity Rs.464mnFace Value Rs.1/-Market Cap Rs.18.09bn

US$452.4mn52 week High/Low Rs.42.70/251-Month Avg. Volume (Daily) 412483BSE Code 500877NSE Symbol APOLLOTYREBloomberg Code APTY INReuters Code APLO.BO

Business Group - Raunaq Singh

Shareholding Pattern as on June’07(%)Promoter 32.4MF/Banks/FIs 30.2FIIs 9.3Corporate Bodies 6.2Public / Others 21.9

Year Net Sales Growth-% EBITDA OPM-% Net Profit Growth-% EPS (Rs) Growth-% PER (X) ROE-% ROCE-%2005 22,255 16.0% 1,556 7.0% 627 -12.5% 1.6 -12.5% 23.3 10.7 10.72006 26,255 18.0% 2,267 8.6% 897 43.1% 2.3 40.7% 16.2 14.6 12.52007 42,992 63.7% 3,942 9.2% 1,173 30.7% 2.5 8.7% 15.0 15.0 17.12008E 47,928 11.5% 4,523 9.4% 1,575 34.3% 3.1 24.0% 12.2 15.1 16.22009E 54,203 13.1% 5,408 10.0% 2,046 30.0% 4.1 32.3% 9.4 17.1 18.0Rs in Mn

APL relative to BSE Sensex

60

70

80

90

100

110

120

130

Sep-06 Dec-06 M ar-07 Jun-07 Sep-07

APLBSE Sensex

Investment rationaleEarly entrant in the T&B radials segmentATL with the expertise of Dunlop Tyres, South Africa would be one of the earlyentrants in the T&B radials space. We feel that the company has timed its forayinto T&B radials perfectly, considering our expected sales from T&B radial salesto reach Rs 17.91 bn which is an increase of 55% CAGR. (Refer – Sales fromRadial T&B segment – pg 4). ATL has announced a Rs 2.5 bn capex plans to setup a green-field T&B radial facility with an installed capacity of 100 TPD.

Focus to continue on the high growing exports segmentATL would continue to leverage on well established exports markets. Thrust onexports over the last five years has resulted in an increase of 37% CAGR for theperiod. Apollo’s share of exports stands at 18% of the total industry exports,which is driven by the passenger car tyre exports(53% share based on volume)and the Truck & Bus tyre exports(19% share based on volume).

Reinforced Business model with strategic initiativesDunlop Tyres Ltd (DTL) South Africa acquisition: ATL acquired DunlopTyres Ltd (DTL), South Africa, in April 2006. The synergies generated onaccount of this acquisition include product rationalization possibilities, jointsourcing of raw material and sharing of technical know-how.

Entry OTR segment: ATL plans to enter the high growth OTR segment througha tri-party arrangement with BEML & J K tyres. OTR segment yields highmargins on account of higher level of customization required. OTR projectwill require an investment of Rs 100 mn and would host a capacity of 10 TPD.The massive infrastructure investment to be made in the next 3-4 years wouldcall for increased demand for OTR tyres.

Retreading: ATL is the only player in the organized sector to set up a dedicatedfacility for Retreading of tyres. The facility operates with an installed capacityof 10TPD. ATL plans to set up three new Retreading facilities, which will belocated near transport hubs to capture the Retreading opportunities.

Superior margins and capital efficiency ratiosFrom 2005 onwards, ATL has shown a consistent rise in its operating marginsdespite an unfavorable raw material pricing scenario. . The premium pricing onsome of its established products coupled with tight control on operating expenses,has enabled the company to steadily increase its margins. ROCE for 2007 at17.1% is one of the best in the industry despite continious expansions undertaken.


DOLAT CAPITAL

Investment Rationale:Early entrant in the T&B radials segmentATL is one of the few players to set up a dedicated facility for Truck & bus radials with an installed capacity of 100 TPD(Tones per day) & is expected to commence operations by the end of FY 09. The total cost of the project is Rs 2.5 Bn.

At present, there are very few players who have the technical know-how to manufacture T&B radials. ATL with theexpertise of Dunlop Tyres (DTL), South Africa would be one of the early entrants in the T&B radials space. We feel thatthe company has timed its foray into T&B radials perfectly considering on our estimated sales from T&B radial sales toreach Rs 17.91 bn which is an increase of 55% CAGR. (Refer – Sales from Radial T&B segment – pg 4).

Apollo having a dominant market share in T&B bias tyres segment, we expect the company to leverage the same tocapture a sizable share from the T&B radial segment. Fast paced improvement in road infrastructure, coupled withinstitutionalization of fleet operators could drive faster than expected radial penetration.

Focus to continue on the high growing exports segment :The exports have grown by a 37% CAGR over the past five years on account of a continued focus on growing its nichein the ultra high performance tyre market. Apollo currently exports to Asia-Pacific, Middle-East, South America & Europeancountries & is constantly focusing on new markets.

Apollo’s Share in Industry Exports:(based on volumes)

Source: Company, Dolat Research.

The passenger car segment has been the growth driver for Apollo tyres in the export market with a volume based shareof 53%. To cater to the higher end exports market, ATL has launched the W-speed rated high performance tubeless tyreaimed at enhancing the share in the passenger car tyre segment.

Hence, new product launches in the high growing passenger car segment & Truck & Bus segment, will help Apollo tofurther increase its offering in the export markets. ATL’s continued focus on exports has enabled certain amount of de-risking against domestic demand slowdown.

Reinforced Business model with strategic initiativesSynergies from DTL SA acquisition

Aligned with the goal of being a USD 2 Bn Company by FY 2010, based on expansion through the organic and inorganicroute, ATL acquired Dunlop tyres, South Africa in April 2006 in an all cash deal amounting to Rs 2.90 Bn.

The acquisition is expected to yield several synergies, which include, product rationalization, joint sourcing of raw materialfor better bargaining power, joint research and development for product upgrades and introduction of new products andmost important of all is sharing of technical know-how and best practices.

-

500

1,000

1,500

2,000

2,500

3,000

2003 2004 2005 2006 200710%

20%

30%

40%

50%

60%

Pass Car exports-LHS Truck & Bus Exports-LHSATL's share- Pass Car-RHS ATL's share-T&B -RHS

Thou

sand

's


DOLAT CAPITAL

Entry in the OTR segment:Apollo tyres have entered in the high growth OTR (Off the road) tyre segment through a tri-party agreement with BharatEarth Movers Ltd. & J K tyres. The OTR segment yields a higher margins as greater level of customization is required tobe done. As per the agreement BEML would source its requirement of earthmoving tyres from Apollo. The OTR facilitywould entail an outlay of Rs 100 Mn with an installed capacity of 10 TPD.

Re-treading:Apollo Tyres is the only player in the organized market to set up a dedicated facility for re-treading of tyres. Apollo has are-treading facility with an installed capacity of 10 TPD located at Haryana. ATL plans to set up three new retreadingfacilities, located close to the transport hubs so as to cater to the fleet owners requirement.

Re-treading market consists of just four players in the organized sector who supply retreading material, while the un-organized sector consists of approx. 10,000 players. The organized sector players supply the tread material to theunorganized sector players, who in turn re-tread the tyres.

Superior margins and capital efficiency ratios

*MRF data for FY 2003-2006 *MRF data for FY 2003-2006

From 2005 onwards, ATL has shown a consistent rise in its operating margins despite an unfavorable raw materialpricing scenario. It has the highest margins amongst its competitors in the industry. The premium pricing on some of itsestablished products coupled with tight control on operating expenses, has enabled the company to steadily improve itsmargins. In 2007, the company had margins of 9.2% and the same has moved up to almost 12% during the first quarterof the current financial year.

ATL has also shown its ability to manage capital efficiently. It has the highest ROCE in the industry of around 17% in2007. With major capacity expansions planned for most of the leading players, we feel the ability to maintain decentROCE will be absolutely crucial.

ROCE

2%

5%

8%

11%

14%

17%

20%

2004 2005 2006 2007

Apollo JK tyre Ceat MRF * OPM

1%

3%

5%

7%

9%

11%

2004 2005 2006 2007

Apollo JK tyre ceat MRF *


DOLAT CAPITAL

Company background

ATL is a market leader in the Truck & Bus tyre segment with around 29% market share. The company has an overallmarket share of 22%, making it the second largest player in India. Post the acquisition of DTL in April 2006, ATL is ranked15th on a global level. Apart from two wheeler tyres, the company has presence in all the other major segments. Thecompany operates three plants with an overall capacity of 710 tpd. It has recently sold its tubes facility at Ranjangaon.

ATL has three plants in India with an installed capacity of 710 TPD, which manufactures wide variety of tyres.

Particulars Baroda Cochin Kalamassery TotalInstalled Capacity-Tpd 350 280 80 710Tyres manufactured Pass.car radials Truck bias tyres Truck bias tyres

Truck Bias tyre LCV bias tyres LCV bias tyresTruck Radials Farm bias tyres Farm bias tyres

LCV Bias tyresLight truck radials

* Capacity in tons per day(TPD)

Product Segmentation: Market Segmentation(share based on value) (revenue based)

Source: Company Source: Company

Apollo’s business is dominated by the Commercial Vehicle tyres as they account for 75% of revenues. With the majorgrowth in demand expected from the commercial vehicle tyre segment and the increasing radial penetration in the T&Btyre segment, ATL would be the key beneficiary.“Regal” brand of Truck & Bus radials launched by Apollo is on the technical platform provided by DTL. Regal has madeits foot prints in the Indian markets and is perceived as a high quality product in the Indian markets.

Replacement segment to drive the growth…ATL has its presence in all the three segments, with replacement market accounting for 65% share of the total revenues.Replacement market is lead by the truck & bus segment which generates a repurchase demand as early as 20 months,as compared to the passenger car segment, which generates a repurchase demand after 4 years.Commercial Vehicles sales have grown at a CAGR of 26.38% over FY 03 to FY 07. This sales will boost an equal amountof repurchase demand in the Commercial vehicles tyre segment.

Apollo continues to dominate the T&B segment with a focus on expansion in other segments. Sales in volume haveexhibited a 17% CAGR over the past five years. ATL ensures a prompt delivery of its product through a strong dealer networkof 4032 outlets, of which 3000 are exclusive outlets. This also ensures an enhanced brand value for all of ATL products.

ATL’s OE client base in the Truck & Bus segment, includes Tata Motors, Ashok Leyland, Eicher Motors, etc.In the passenger car tyre segment, ATL caters to Maruti Udyog Ltd., Tata Motors, M&M, General Motors.

75%

8%8%

9%

MHCV LCV Passenger Vehicles Tractor-Rear

9%

26%

65%

OEM Markets Replacement Market Exports


DOLAT CAPITAL

Company Background - Dunlop Tyres Ltd, South AfricaDTL operates two facilities in South Africa with an installed capacity of 150 TPD. The State of the art Durban Facilitymanufactures Truck Radials & bias tyres, OTR (off the road) tyres while the Ladysmith plant manufactures hi speedpassenger car radials. Dunlop Zimbabwe, a wholly owned subsidiary of DTL, South Africa, is in to Radial & bias tyres &also has a re-treading plant in Harare.

Market Shares for DTL South Africa: Market shares of major tyre players in South Africa:(shares based on value) (Shares based on FY 06 Sales.-Value based)

Source: Company Source: Company

DTL dominates the truck & bus tyre segment with a 28% market share followed by passenger car segment with 23%market share. Through a strong distribution network of more than 900 dealers & an esteemed OE client base, DTL ownsa 26% overall market share in the South African markets. DTL‘s OEM client base includes major auto companies likeToyota, Nissan & Volkswagen.

Synergies generated on account of acquisition by Apollo tyres, coupled with the better industry and operating condition,have helped Dunlop Tyres improve their EBIDT margins from 7.7% in the first quarter to 12.4% in the second quarter.“Regal”, Truck & Bus radial tyre launched in India from Apollo’s stable is based on the technical know how provided byDTL.

DTL SA Standalone Financials:

Particulars (Rs mn) Dec-03 Dec-04 Dec-05 Mar-07(15m)Net Sales 7,504 9,907 9,504 10,120EBIT 502 487 549 545PAT 197 146 223 192EBIT % 6.7% 4.9% 5.8% 5.4%NPM % 2.6% 1.5% 2.3% 1.9%Source : Apollo QIP Document, Dolat Reseach

DTL SA performance has been modest in the 15 month period ended Mar’07. While the topline growth has been moderate,the EBIT has fallen marginally on account of increasing raw material prices. With ATL’s ability to improve operationalperformance, DTL SA is expected to show better results from this year onwards.

27%

26%

29%

18%

Dunlop Bridgestone Goodyear Continental

0%10%

20%30%40%

50%60%70%

80%90%

FY02 FY03 FY04 FY05 FY06

PCR LCV Truck Farm


DOLAT CAPITAL

Capacity to increase to more than 1000 MT per day by 2010Particulars Capacity-TPD Capex - Rs mn Est. completionATL IndiaCurrent capacity 710Greenfield T&B Radials 100 2,500 FY 2009OTR 10 800 -Brown Field Project* 17 700 FY 2008ATL India - Total 837DTL SACurrent capacity 150De-bottlenecking 50 500 FY 2008DTL SA - Total 200Total Capacity (FY 2010) 1037

*- De-bottle necking at Baroda Facility in the PCR segment.

Financial Outlook – Consolidated FinancialsRevenues growth for the next two years estimated to be 12.5% CAGRWe expect the revenue growth to be driven primarily by volumes growth. During FY07-09E, we estimate a 10% CAGRgrowth in tonnage sales. On the back of recent price hikes in FY07, we feel the realizations in FY08 would remain moreor less flat. However, in FY09, with the inclusion of radial T&B into ATL’s product portfolio, weighted realizations shouldmove up.

Revenue and Tonnage trend between FY07 – FY09E

ATL has spelt out its ambition to reach USD 2 bn revenues by 2010. For achieving this aggressive target, the companymay look at acquiring companies in and outside of India.

Margin expansion by around 100 bps by FY09The softening of NR prices should see a further expansion in operating margins. Furthermore, the joint raw materialsourcing strategy with DTL SA should enable the company to have a better bargaining power. The company has around9% revenues coming from exports. Therefore, the company has a choice to procure from international markets underAdvance Licesnce/DDB or from domestic markets based on whichever is cheaper at any point in time.

20,000

30,000

40,000

50,000

60,000

FY'07 FY'08E FY'09E

(in R

s m

n)

200

250

300

350

400

450

(in '0

00 M

T)

Net Sales (LHS) Tonnage sold (RHS)


DOLAT CAPITAL

OPM viz-a-viz RM/Sales movement

Source: Company

Even a marginal improvement in operating margins has a significant impact on the high revenue base. We expect RM/Sales ratio to reduce marginally from 63.1% in 2007 to 62.3% in 2009.

ValuationsATL has carved out an impressive growth strategy which includes product portfolio expansion, by way of its foray intoT&B radials and OTR segment. Acquisition of DTL South Africa has enabled the company to expand into differentgeographic locations. Furthermore, ATL’s continued focus on exports to de-risk against domestic slowdown is also paidoff well by way of gaining 19% share in total T&B exports and 53% share in total PCR exports from India.

Favorable industry dynamics coupled with a well thought out growth strategy for accelerated growth, makes ATL ourpreferred bet amongst its peers in the industry. We initiate coverage on ATL with a BUY recommendation and a 12months price target of Rs 49 based on 12xFY09E fully diluted earnings.

4%

6%

8%

10%

12%

FY'05 FY'06 FY'07 FY'08 E FY'09 E58%

60%

62%

64%

66%

68%OPM (LHS) RM/Sales(RHS)


DOLAT CAPITAL

INCOME STATEMENT Rs.mn

Particulars Mar’06 Mar’07 Mar’08E Mar’09ENet Sales 26,255 42,992 47,928 54,203

Operating Expenses 23,988 39,050 43,405 48,795

Operating Profit (excluding O.I) 2,267 3,942 4,523 5,408

Other income 56 157 165 217

Operating Profit (including O.I) 2,323 4,099 4,687 5,624

Interest 505 962 1,019 1,035

Gross Profit 1,818 3,137 3,669 4,589

Depreciation 730 1,172 1,318 1,535

Profit Before Tax 1,214 1,965 2,350 3,054

Tax 317 792 776 1,008

Profit After Tax 897 1,173 1,575 2,046

Earnings per share 2.3 2.5 3.1 4.1

BALANCE SHEET

Particulars Mar’06 Mar’07 Mar’08E Mar’09ESources Of FundsEquity Capital 383 464 504 504

Reserves 5,957 8,767 10,083 11,903

Share Premium Account - 117 1015 -

Net Worth 6,340 9,348 11,602 12,407

Secured Debt 3,810 6,500 6,500 6,250

Unsecured Debt 3,690 1,732 2,250 2,250

Loan Funds 7,500 8,232 8,750 8,500

Deferred Tax Liability 1,052 1,701 2,000 2,100

Total Sources of Funds 14,892 19281 22352 23007

Application Of FundsGross Block 13,106 19,734 21,975 25,975

Depreciation 4,699 6,812 8,130 9,666

Net Block 8,407 12,922 13,844 16,309

Cap. Work-in-Progress 779 801 2,250 500

Investments 5 54 54 54

Current Assets

Inventories 4,194 6,387 7,146 8,022

Sundry Debtors 1,751 3,674 4,333 4,901

Cash and Bank Balance 2,314 1,935 1,695 385

Loans and Advances 1,844 2,133 2,346 2,698

Other Current Assets 2 1 1 1

Current Assets-Sub total 10,105 14,130 15,522 16,007

Current LiabilitiesCurrent liabilities 4,157 7,939 8,570 9,001

Provisions 250 688 750 863

Current Liabilities Sub Total 4,407 8,628 9,320 9,863

Net Current Assets 5,698 5,502 6,202 6,144

Misc. Expenses 3 1 2 0

Total Assets 14,892 19,281 22,352 23,007E-estimates

IMPORTANT RATIOS Rs.mn

Particulars Mar’06 Mar’07 Mar’08E Mar’09ECost Analysis (%)Excise/Gross Sales 12.5 10.1 10.0 10.0

Net Raw Material Cost/net sales 67.4 63.1 62.9 62.3

Employee Cost/net sales 6.3 9.5 9.8 9.8

Selling & Distribution & Admin exp/net sales 7.5 8.4 8.2 8.3

Power & Fuel/net sales 4.6 3.5 3.5 3.5

Other Mfg exp/net sales 5.6 6.4 6.2 6.3

Operational Performance (%)Operating Profit Margin (excl. O.I.) 8.6 9.2 9.4 10.0

Operating Profit Margin (incl. O.I.) 8.8 9.5 9.8 10.4

Other Income/net sales 0.2 0.4 0.3 0.4

Interest / Sales (x) 1.9 2.2 2.1 1.9

Dep/Gross Block 5.6 6.0 6.0 5.9

Gross Profit Margin 6.9 7.3 7.7 8.5

Tax/PBT 26.1 40.3 33.0 33.0

Net Profit Margin 3.4 2.7 3.3 3.8

Financial PerformanceAverage Cost Of Debt (%) 7.8 12.2 12.0 12.0

Debtors Period (days) 24.3 31.2 33.0 33.0

Closing stock (days) 75.1 74.3 75.0 75.0

Fixed Assets Turnover (x) 3.1 3.4 3.5 3.3

Creditors Period (days) 82.3 106.6 100.0 95.0

Working Capital Turnover (days) 17.2 -1.1 8.0 13.0

Cash Collection Period (days) 17.2 -1.1 8.0 13.0

Non-Cash Working Capital 338.5 356.7 450.7 575.9

Current Ratio (x) 2.3 1.6 1.7 1.6

Other RatiosDebt / Equity (x) 1.2 0.9 0.8 0.7

Interest Coverage (x) 4.6 4.3 4.6 5.4

ROE (%) 14.6 15.0 15.1 17.0

ROCE (%) 12.5 17.1 16.2 18.0

Per Share DataEPS 2.3 2.5 3.1 4.1

CEPS 4.2 5.1 5.7 7.1

Dividend Payout (%) 19.2 17.8 14.4 11.1

Book Value (Rs.) 16.4 20.1 23.0 24.6

E-estimtes


DOLAT CAPITALBalkrishna Industries Ltd.CMP: Rs 598Target Price: Rs 840 Tyre / Buy

Its different...Balkrishna Industries (BIL) currently has 3% market share in the $7.5 bn OHT market. BIL has displayed itsability to consistently deliver strong growth in the past few years. The company is present in a niche segmentand has a definite competitive advantage in terms of low employee cost as compared to its international peers.The company has built a strong product portfolio with over 1700 SKU’s, which acts as a key entry barrier in theOHT segment. The recent introduction of OTR radials would further strengthen its offerings and profitability.

BSE Sensex 16921NSE Nifty 4940

Scrip Details

Equity Rs.193mnFace Value Rs.10/-Market Cap Rs.11.5bn

US$289mn52 week High/Low Rs.690/4151-Month Avg. Volume (Daily) 4302BSE Code 502355NSE Symbol BALKRISINDBloomberg Code BILINReuters Code BLKI.BO

Business Group - Poddar

Shareholding Pattern as on June’07(%)Promoter 54.1MF/Banks/FIs 13.0FIIs 23.1Corporate Bodies 1.2Public / Others 8.6

Investment RationalePresence in the niche segment with high entry barriersOff highway tyres (OHT) is a niche segment in the overall tyre industry. The OHTsegment focuses on highly customized requirements as compared to the standardspecifications of a highway tyre. Over the years, Balkrishna Tyres (BKT) hasdeveloped over 1700 SKU’s to offer a wide range of offerings. With strong R&Dcapabilities, the company rolls out around 150 new products/sizes every year.Since revenues are primarily being driven by replacement demand, the companyhas established a robust distribution network in Europe, USA and Middle Eastcountries. Collectively, these factors have enabled BKT to be well placed in thesegment

Margins well above international peersBKT’s margins are far superior as compared to its international peers. This beingthe case despite BKT’s aggressive pricing strategy in the export markets. Theprimary reason for BKT’s higher margins is on account of lower employee costof around Rs 4500 per ton as compared to excess of Rs 25,000 per ton in thedeveloped countries. Additionally, the company has been able to bring down itspower and fuel cost from Rs 13,400 per ton in 2005 to Rs 9,700 per ton in 2007.

Established brand and competitive pricing driving market sharegrowth in export marketsThe company has customers spread out across in more than 100 countries.BKT has established its brand in some of its key markets including Europe andthe USA. . It sells 82% of its tyres under the ‘BKT’ brand name. BKT’s competitivepricing strategy (almost 25% lower than its competitors), has enabled the companyto penetrate some of the established export destinations.

The company is currently trading at 8.2xFY09E fully diluted earnings of Rs70. We expect the stock to be a re-rating candidate on the back of continuedhigh earnings growth coupled with the recent de-merger of the non tyrebusinesses into separate companies. We initiate coverage on the stockwith a BUY recommendation and a 12 months price target of Rs 840 basedon 12xFY09E fully diluted earnings.

Year Net Sales Growth-% EBITDA OPM-% Net Profit Growth-% EPS(Rs) Growth-% PER(x) ROE-% ROCE-%2005 4,884 34% 1,066 22 573 82 46.3 82% 12.4 36.3 26.62006 6,200 27% 1,400 23 700 22 36.2 -22% 16.5 31.4 24.02007 8,777 42% 1,775 20 876 25 45.3 25% 13.2 20.0 21.32008E 10,851 24% 2,228 21 1,029 18 51.3 13% 11.7 23.4 20.92009E 13,805 27% 2,826 20 1,405 36 70.0 36% 8.6 26.0 25.0Rs in Mn

BIL relative to BSE Sensex

60

70

80

90

100

110

120

130

Sep-06 Dec-06 M ar-07 Jun-07 Sep-07

BILBSE Sensex


DOLAT CAPITAL

Investment RationalePresence in the niche segment with high entry barriersThe company manufactures Off Highway Tyres (OHT) for agricultural, industrial and certain other specialty applications.The OHT segment is approximately 10% of the total world tyre sales. The industry is highly concentrated with top threeplayers contributing 50-55% of the market. Tyres are designed to suit particular vehicle specification in each of thesegments. The low volume coupled with high customization requirements makes OHT a niche segment.

Over the years, Balkrishna Tyres (BKT) has developed over 1700 SKU’s to offer a wide range of offerings. The companyrolls out around 150 new products/sizes every year. Export revenues contribute 90% of the total tyre sales. Since revenuesare primarily being driven by replacement demand, the company has established a robust distribution network in Europe,USA and Middle East countries. Collectively, these factors have enabled Balkrishna to be well placed in this nichesegment. With a market share of 3%, BKT ranks amongst the top 10 OHT manufacturers.

Margins well above international peersOwing to the nature of the business, OHT margins are better as compared to regular highway tyre manufacturers. In theOHT segment, BKT has superior margins as compared to its international peers including Michelin and Titan International.

In India, besides BKT, there are no major players in the OHT segment. Even in the international markets, there are veryfew pure play OHT manufacturers. Large tyre manufacturers such as Michelin and Bridgestone include these tyres intheir wide range of offerings under the specialty tyre segment.

Operating margins for some Off highway tyre manufacturers

Source: Company Annual Reports, CMIE

* Michelin and Titan Intl - Y/E December (CY 2006)

In comparison to some of its global peers, BKT’s operating margins are far superior at around 20% for the financial yearended March 2007. The primary reason for BKT’s higher margins is on account of lower employee cost of around Rs4500 per ton as compared to excess of Rs 25,000 per ton in the developed countries. Additionally, the company has beenable to bring down its power and fuel cost from Rs 13,400 per ton in 2005 to Rs 9,700 per ton in 2007.

During the last year, natural rubber prices were up by 35% at Rs 88 per kg, however BKT has managed to maintain itsoperating margins above 20%. In the June 07 ended quarter, natural rubber prices had come down to an average of Rs85 per kg which provides an opportunity to the company to increase its inventory of natural rubber (as per the company’spolicy) and hence benefit from lower raw material cost going forward.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2005 2006 2007

BKT Michelin (Speciality tyres) Titan International


DOLAT CAPITAL

Established brand and competitive pricing driving market share growth in export marketsBKT has been steadily expanding its presence in the export markets. In 2007, exports sales contributed 74% of the totalsales of the company and 90% of its total tyre sales. Almost 65% of the export sales are derived from the Europeanmarkets. The company is consciously looking to diversify its geographical presence in-order to de-risk itself from demanddownturn in any one region. It currently has customers in over 100 countries worldwide.

Exports as percentage of Sales Geographical Revenue Break-up

Source: Company Annual Report, Presentation

The company has strengthened its brand visibility in most of the above export markets. It sells 82% of its tyres under the‘BKT’ brand name. The high growth in exports to Europe, which is a highly quality conscious market is testimony of thefact that the company is capable of delivering desired quality.

Another reason for the high growth in exports is the aggressive pricing strategy adopted by the company. Owing to its lowcost manufacturing destination, Balkrishna is able to price its products lower by around 20-25% as compared to itsinternational counterparts. These key factors have enabled the company to corner a market share of 3% of the OHTmarket till date and going forward it is looking to expand its share in an industry which is expected to grow at approximately3 to 5% in the following few years.

2,000

4,000

6,000

8,000

10,000

FY03 FY04 FY05 FY06 FY07

Sale

s (m

n)

20%

30%

40%

50%

60%

70%

80%

Expo

rts a

s %

of s

ales

LHS RHS

65%

10%12%

13%

Europe USA Aus,NZ & ME Others


DOLAT CAPITAL

Company BackgroundBIL is a flagship company of the Rs 18 bn Siyaram Poddar Group. It is leading tyre manufacturers from India focused onthe off highway tyres segment. The company has established its presence in this segment with over 1700 SKU’s forAgricultural, Industrial & Construction and Earthmoving applications. With a current capacity of 1 lac tones per annum,BKT exports almost 90% of its total tyre production.

The company operates in three business segment i.e. Tyres, Paperboard and Textile processing. The tyre business isthe key segment which contributed 84% of revenues in FY07. In the last three years the tyre segment has grown by 51%on a CAGR basis. However, the other two segments have witnessed sluggish growth rates with thin margins.

Segmental revenue break-up

Source: Company Annual Report

Paper DivisionThe Paper and Paper Board segment operates in the “Coated Duplex/Triplex Boards “. The segment has an installedcapacity of 54,000 MT per annum and turnover of Rs 118 crores in FY07. Operating margins have been falling in thelast three years from 8% in FY05 to 4% in F07. During the year, the company has introduced “Premium Super ChromoBoard” that is considered as a premium product. The company plans to increase focus on value added products whichhave better margins and lesser competition.

Textile Processing DivisionThe division primarily undertakes job work from Siyaram Silk Mills (group company). With capacity of 24 mn meters perannum, the turnover is a modest Rs 28.5 crores and operating margins are negative for the year ended 2007.

Transfer of non tyre businesses to separate subsidiariesThe company has announced its plans to transfer its Paperboard and Textile processing business to two separatewholly owned subsidiaries – Balkrishna Paper Mills and Balkrishna Synthetics respectively. Each of the newly formedsubsidiaries would be run by separate management teams.

This move is in line with the company’s strategy to have a greater focus on the tyre business. Furthermore, the financialperformance ex non tyre businesses would bring to light the impressive growth rates and margins of the tyre business.This would act as a trigger for better valuations.

Tyre DivisionBKT is the largest producer and exporter of “Off Highway Tyres” from India. The tyre segment contributes 84% of thetotal revenues of the company. During FY04-07, the division’s revenues have grown by a CAGR of 44%. The totalinstalled capacity in FY07 is 1 lac tones per annum spread across three plant locations – Bhiwadi, Chopanki and Waluj.

Paperboard13%

Tyre84% Textile

processing3%


DOLAT CAPITAL

Focus on the core businessBIL enjoys around 3% market share in the world off highway tyres segment. The company operates in a niche productrange containing more than 1700 SKU’s. The company primarily caters to Agriculture, Industrial and Construction tyres.With high degree of customization requirement, every year BKT adds 150 to 160 new products/sizes to its existing offering.

Product Category Wise Revenue Split BKT – Product Mix by Segment

Source: Company, Dolat Research

Agricultural segment contributes 62% of the revenues of the company. Increasing need for productivity improvements isa driving factor for using sophisticated applications, consequently boosting demand for Off highway tyres. In Europe thefarmer population is on the decline while the farms are large in size hence necessitating usage of Tractors and otheragriculture related applications.

BKT has identified this opportunity and hence already started manufacturing Agri Radial Tyres. Currently there are onlyeight players in the global Agri Radial tyre market and since BKT has a comparative cost advantage, the growth from thissegment should be robust. The company has outlined an expansion plan which includes setting up an OTR Radial facilityof 11,500 tonnes per annum. (Refer Annex - 2)

Capacity Expansion PlansBKT has been continuously adding capacity on a step basis in the preceding years. From 40,000 MT in FY04, thecapacity has been increased by 2.5x to 100,000 MT as on June ’07.

The company has outlined another round of capex of Rs 1.4 bn to take the capacity upto 1.29 lac MT by the financial yearended 2008. Expansion plan includes, setting up an 11,500 MT OTR radial plant at Chopanki along with increasing thecurrent capacity by 13,500 MT. The Bhiwadi plant capacity would also be augmented by 4,500 MT to 52,500 MT.

BKT – Production capacity build-up

Source: Company Annual Report

62% 4%

34%

Agriculture Indl. Others

Agricultural Industrial/Construction OthersSteering Wheel (Tractor) Forklift Truck High Speed TrailerImplement & Tralier Skid Steer ATVFlotation Excavator Lawn & GardenTractor Bias Compactor Golf cartTractor Radial Backhoe LoaderFlotation Radial Earth Mover

Source: Company

34% CAGR

20,000

40,000

60,000

80,000

100,000

120,000

140,000

FY04 FY05 FY06 FY07 Q1FY08 FY08E

capa

city

(in

mt)


DOLAT CAPITAL

Separation of Key Management PersonnelBKT has witnessed separation of its key management resource – Mr Yogesh Mahansaria (wef – July 8, 2006), whowas primarily looking after the OHT business. Being the operational kingpin and the face to the outside world, the exitof Mr Mahansaria does remain an adverse development for the company.

However, our interactions with the industry suggest that the fundamentals of the business are well entrenched.Furthermore, the current management is well equipped to carry forward, the good work done by Mr Mahansaria (salesand profit growth momentum).

We believe, the key ingredients i.e. product innovation, service, distribution network and technology are not privy toany one key personnel, hence the company should continue to perform well based on sound fundamentals.

Acquisition of Alliance Tire CompanyYogesh Mahansaria along with Warbug Pincus have acquired Alliance for a consideration of USD 150 mn (22xAnnualizedMar’07 Qtr). Alliance operates in the OHT and derives 79% of its revenues from Europe. The company has around 8%operating margins at present.

BIL should not be adversely affected by this development since it is a small player with only 3% market share.Furthermore, the company has a well established brand in its export markets, which would be difficult to displace.

Financial OutlookStrong revenue growth to continue with 22% CAGR over FY07-09As per our estimates, the company’s topline growth would primarily be fueled by tonnage sales of 26% CAGR over FY07-09. We expect the realizations to be more or less constant on account of the company’s strategy to maintain its pricingadvantage against its peers. Furthermore, BIL’s expansion in the OTR tractor radials should fetch higher realizations;however any increase in realizations would be negated by the impact of the appreciating local currency.

Revenue viz-a-viz tonnage sales trend

OPM expected to increase marginally by FY09We expect a marginal improvement in operating margins from 20.2% in FY07 to 21.5% in FY09. Expansion in marginsis on account of further saving in power and fuel cost. The installation of windmills has contributed to savings on accountof power and fuel cost.

2,000

5,000

8,000

11,000

14,000

FY05 FY06 FY07 FY08E FY09E

(in R

s m

n)

20,000

40,000

60,000

80,000

100,000

(in M

T)

Net Sales (LHS)

Tonnage Sales (RHS)


DOLAT CAPITAL

Power Cost saving to drive margin expansion

Power cost per MT has been brought down from Rs 13,394 per ton in FY05 to Rs 9,675 per ton in FY07. Going forward,we estimate the power cost per ton to lessen to Rs 8,264 by FY09.

Net profits growth for the next two years are expected to be very healthyWe expect the net profits to grow from Rs 870 mn in 2007 to Rs 140 mn by 2009 ~ CAGR 26%. The growth is expectedto be driven by the recently introduced OTR radials. The penetration of radials in agri tyres is expected to increase rapidlyin the two key markets – Europe and North America.

For the other two divisions, we have assumed flattish growth rates for the next two years. However, the transfer of thetwo businesses with separate managements into separate companies may result into better performance from each ofthe divisions

ValuationsBIL’s has displayed its ability to consistently deliver strong growth in the past few years. The company is present in aniche segment and has a definite competitive advantage in terms of low employee cost as compared to its internationalpeers. The company has built a strong product portfolio with over 1700 SKU’s, which acts as a key entry barrier in theOHT segment. The recent introduction of OTR radials would further strengthen its offerings and profitability.

The company is currently trading at 8.5xFY09E fully diluted earnings of Rs 70. We expect the stock to be a re-ratingcandidate on the back of continued high earnings growth coupled with the recent de-merger of the non tyre businessesinto separate companies. We initiate coverage on the stock with a BUY recommendation and a 12 months price target ofRs 840 based on 12xFY09E fully diluted earnings

3,000

6,000

9,000

12,000

15,000

FY05 FY06 FY07 FY08E FY09E5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

Pow er Cost per MT (Rs) - LHS Pow er & Fuel cost/Net sales - RHS


DOLAT CAPITAL

INCOME STATEMENT Rs.mn

Particulars Mar’06 Mar’07 Mar’08E Mar’09ENet Sales 6,200 8,777 10,653 13,139

Operating Expenses 4,800 7,001 8,425 10,314

Operating Profit (excluding O.I) 1,400 1,775 2,228 2,826

Other income 53 89 64 79

Operating Profit (including O.I) 145 186 229 290

Interest 117 170 248 271

Gross Profit 1,335 1,694 2,044 2634

Depreciation 273 360 485 537

Profit Before Tax 1,062 1,334 1,560 2097

Tax 362 458 530 692

Net Profit 700 876 1,029 1405

Earnings per share 36.2 45.3 51.3 70.0

BALANCE SHEET

Particulars Mar’06 Mar’07 Mar’08E Mar’09ESources Of FundsEquity Capital 193 193 201 201

Reserves 2,682 3,281 4,110 5,314

Share Premium - - 997 -

Net Worth 2,875 3,474 5,308 5,515

Secured Loans 1,781 2,927 2,927 2,927

Unsecured Loans 1,188 1,081 681 681

Loan Funds 2,969 4,008 3,608 3,608

Deferred Tax Liability 374 451 451 451

Total Sources of Funds 6,218 7,933 9,366 9,573

Application Of FundsGross Block 3,904 5,643 7,601 7,901

Depreciation 1,307 1,650 2,134 2,672

Net Block 2,598 3,994 5,467 5,229

Cap. Work-in-Progress 689 758 300 100

Investments 51 22 22 22

Current Assets

Inventories 1,069 1,224 1,456 1,762

Sundry Debtors 796 1,687 1,815 2,145

Cash and Bank Balance 768 54 365 396

Loans and Advances 1,490 1,949 2,144 2,358

Other Current Assets 4 1 1 1

Current Assets-Sub total 4,127 4,915 5,782 6,661

Current Liabilities & Provision

Current Liabilities 531 747 1,095 1,220

Provisions 716 1,008 1,109 1,220

Current Liabilities & Provisions-Sub total 1,247 1,755 2,204 2,440

Net Current Assets 2,880 3,160 3,578 4,222

Total Assets 6,218 7,933 9,366 9,573

E-estimates

IMPORTANT RATIOS Rs.mn

Particulars Mar’06 Mar’07 Mar’08E Mar’09ECost Analysis (%)Excise/Gross Sales 2.0 2.4 2.4 2.3

Net Raw Material Cost/net sales 50.1 54.8 54.4 53.6

Employee Cost/net sales 3.2 2.8 2.8 3.0

Power & Fuel/net sales 7.0 6.3 6.0 6.0

Other Expenses/net sales 17.2 15.9 15.9 15.9

Operational Performance (%)

Operating Profit Margin (excl. O.I.) 22.6 20.2 20.9 21.5

Operating Profit Margin (incl. O.I.) 23.4 21.2 21.5 22.1

Other Income/net sales 0.8 1.0 0.6 0.6

Interest / Sales (x) 1.9 1.9 2.3 2.1

Dep/Gross Block 7.0 6.4 6.4 6.8

Gross Profit Margin 21.5 19.3 19.2 20.0

Tax/PBT 34.1 34.4 34.0 33.0

Net Profit Margin 11.3 10.0 9.7 10.7

Financial PerformanceAverage Cost Of Debt (%) 5.0 4.9 6.5 7.5

Debtors Period (days) 42.5 51.6 60.0 55.0

Closing stock (days) 88.5 78.0 76.0 75.0

Fixed Assets Turnover (x) 2.4 2.2 1.9 2.5

Creditors Period (days) 59.4 57.7 58.0 60.0

Non-Cash Working Capital 211.2 310.6 321.2 382.6

Current Ratio (x) 3.3 2.8 2.6 2.7

Other RatiosDebt / Equity (x) 1.0 1.2 0.7 0.7

Interest Coverage (x) 12.4 11.0 9.3 10.7

ROE (%) 31.4 20.0 23.4 26.0

ROCE (%) 24.0 21.3 20.9 25.0

Per Share Data

EPS 36.2 45.3 51.3 70.0

CEPS 50.4 63.9 75.5 96.8

Dividend Payout (%) 0.0 23.2 19.5 14.3

Book Value (Rs.) 16.4 20.1 23.0 24.6

E-estimates


DOLAT CAPITAL

Annexure-1:

Industry BackgroundThe world tyre market is estimated to be USD 100 bn and is expected to be growing at 2 to 3% per annum. The world tyreIndustry is highly concentrated with the three largest manufacturers, Bridgestone, Michelin and Goodyear accounting for55% of the total world sales.

The Indian tyre industry is estimated to be Rs 164 bn. In the last three years, the industry has grown at a CAGR of 13%on the back of strong growth of the automobile sector. Going forward, during the Eleventh Plan, the tyre industry isexpected to grow at an average rate of 7% per annum. The Automotive Mission Plan 2006-2016 has laid down in itsvision statement a targeted output of USD 145 bn by 2016 from the current level of USD 45 bn, a growth of almost 14%on CAGR basis. With the overall economy remaining buoyant and the high growth expected from the auto sector, theoutlook for the tyre industry also appears positive.

No. of Passenger Cars Per 1000 Inhabitants

Country/Region 2006 2011EWestern Europe 507 532Eastern Europe 186 217Brazil 102 116China 12 23India 8 12Source: Michelin Annual Report – 2006

The under penetration of passenger vehicles population of 8 per thousand provides a vast opportunity for the automobilesector. Tyre being derived demand from automobiles is well placed to ride the opportunity wave.

Product Segmentation(percentage in terms of value)

Source; Cris Infac

In value terms, T&B segment accounts for almost 60% of the entire industry. The growth of this segment being highlycorrelated to the economic trends of the country, should witness above average growth for the next 2 to 3 years. Passengercars and LCV segment together is peculiarly lower at 19.3% as compared to the world standard of 61%.

59.6

10.5

9.1

8.8

8.73.3

Truck & bus Passenger Car Tractor LCV 2 Wheelers others


DOLAT CAPITAL

Market Segmentation

Source: Cris Infac

The replacement market accounts for a substantial share of 60% of the total tyre sales. This being the case, the tyresector is subject to less cyclicality as compared to the automobile industry. However, the homogeneity of the final productmakes switching relatively easier in the replacement market. Brand loyalty being low, pricing policy becomes a keydeterminant for a customer. The growth in this segment is currently higher than the OEM and export markets.

The OEM segment is not as lucrative as the replacement market in terms of margins. Additionally, the current slowdownin auto sales have led to reduced traction in this segment. For the June’07 ended quarter, the overall sales were down by0.5% on a YoY basis. The two wheeler segment showed a negative growth of 6.7% for the quarter. The industry isexpected to revive during the second half of the current financial year.

Replacement Demand CycleParticulars T&B Passenger CarLife of new tyre-(kms) 60,000 48,000Average running per day (kms) 200 30Running per Month-(kms) 6,000 1,050Life of a new tyre -(months) 10.0 45.7Avg Retreaded tyre life (kms) - 2 times retreading 58,500 -Life of Retreaded tyre (months) 9.8 -Probable Replacement demand after (months) 20 46Source: Industry, Dolat Research

We carried out a basic calculation to determine the replacement demand cycle for the T&B and Passenger cars segments.For T&B bias tyres, the life of the tyre including retreading is estimated to be 20 months, whereas it is 46 months for apassenger car tyre. Based on these ballpark figures, the CV growth witnessed in the past two years should reflect to acertain extent in the following year.

17%

60%23%

Replacement Market OEM Exports


DOLAT CAPITAL

Tyre Exports Segmental OEM Tyre Sales – April to June’07

Source: ATMA

Source: ATMA, Dolat Research

In the previous year, exports took a back seat in light of the growing domestic demand. In the T&B segment, most tyremanufacturers were operating at peak capacities and hence preferred catering to domestic requirement. Having establishedits presence in more than 65 countries and quality acceptance in most of the developed nations, there is immense scopefor accelerating exports in the future. However, exports have exhibited a 21.23% CAGR in value terms over the past five years

The exports segment has shown moderate growth in the last 4 to 5 years. For the last 10 years the growth in value termshas been approximately 12% on CAGR basis. In the T&B category, the exports have been in the range of 18-20% of thedomestic production whereas only 6% for the passenger car segment.

The OEM segment is not as lucrative as the replacement market in terms of margins. Additionally, the current slowdownin auto sales have led to reduced traction in this segment. For the June’07 ended quarter, the overall sales were down by0.5% on a YoY basis. The two wheeler segment showed a negative growth of 6.7% for the quarter. The industry isexpected to revive during the second half of the current financial year.

Oligopolistic constitutionThe tyre industry in India is highly concentrated where the top 4 players constitute 70-75% of total market share. Primafacie, if these players collaborate, they could pass on the increase in raw material cost to the end users. However, all theplayers appear to be in a quest for gaining market share by keeping prices constant and thereby suffering on the margins front.

0

500

1000

1500

2000

2500

3000

2003 2004 2005 2006 2007

Rs

in C

r.

CAGR-21.23%

- 1,000 2,000 3,000 4,000 5,000

T&B

PV

LCV

Tractor

2 Wheeler

April-June 2006 April-June 2007

fig in ('000 nos)

15.24%

13.24%

0.06%

-6.74%

-4.01%


DOLAT CAPITAL

Assuming A&B are the top two major players, the above table illustrates the result of collaboration versus acting on standalone basis. For the precedent periods, the industry functioning could be represented by the bottom right quadrant,where the incessant increase in raw material prices was not being passed on with the apprehension of loss of market share.

However, the last year saw most players take price hikes to cover for the rising raw material costs. The effect of thesehikes has visibly improved the financial performance of most of the tyre manufacturers. The direction of the arrow in theabove table reflects the result of collaboration for common benefit. Although the industry has shown indications of movingto the top left quadrant, the shift cannot be established until the trend can be observed for a reasonable period of time.

Industry Market Share

Source: Company Annual Reports, Dolat Research

The market share of the top four players have increased from 64% in 2001 to 74% in 2006. The increased market shareof Apollo and JK in 2003-4 is partially on account of acquisition of Premier tyres and Vikrant tyres respectively.

Low product differentiation and comparable price points in each product category have resulted in an even market sharetrend over the years. MRF is a market leader with a strong hold in the passenger car (17%) and two wheeler (28%)segment. Apollo has a substantial share of 28% in the T&B segment.

Imports scenarioImports from China have been rising at an alarming pace. The price differential between an Indian and Chinese T&B tyreis around 25 to 30%. Approximately 5.5 lac T&B tyres were imported from China between April and December 2006against 3 lac units during the entire financial year 2005-06.

Radial Tyre Imports vis-à-vis Total Radial Tyre Sales Bias Tyre Imports vis-à-vis Total Bias Tyre Sales

Source: ATMA, Industry, Dolat Research

0102030405060708090

100

2001-02 2002-03 2003-04 2004-05 2005-06

MRF Tyres Apollo Tyres JK Industries CEAT Others

0%

2%

4%

6%

8%

10%

2003-04 2004-05 2005-06 2006-070%

10%

20%

30%

40%PCR T&B

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%20.0%

2003-04 2004-05 2005-06 2006-070.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%

Passenger Car (LHS) T&B (RHS)


DOLAT CAPITAL

The T&B radial tyre imports in 2006-07 have crossed 30% of total T&B radial tyre sales in India. Some of the major IndianCV manufacturers have off late started importing Chinese radial tyres. The apparent reason for tyre imports by CV OE’sis more with the view to establish a back up supplier in China, rather than seeking for cheaper alternatives. The currentT&B radial manufacturing capacity in India is only 100 tpd. Going forward, some of the major Indian tyre manufacturershave already announced expansion plans of approximately 170-180 tpd, which are expected to come up by 2009-10.

In the bias tyre segment, the imports are much lower as a percentage of total sales for both the passenger car and T&Bsegment. The share of imports in the passenger segment has come down considerably from 18% in 2003-04 to 10% in2006-07. In 2005-06, the CV segment witnessed an unexpectedly high growth, which resulted into a high demand forT&B bias tyres. Since most tyre manufactures were operating at near peak capacities, the supply could not be metdomestically. Consequently imports jumped up from 1.5% in 2004-05 to 4% in 2005-06.

Brakes on Imports…Ø Incentives withdrawn by Chinese government: - Recently the Chinese government has withdrawn 5% export

subsidy and simultaneously increased the freight charges by 20%. This would lead to an approximate 15% increasein the landed cost of the tyres from China.

Ø Anti-Dumping duty increase: - Under the reference pricing formula for Anti-Dumping duty calculation, the referenceprice has been increased from USD 99 per unit to USD 135. Although the revised price is redundant in light of thesharp rise in raw materials through the last year, the regulators have showed willingness to revisit these referencerates.

Ø Quality concerns: - A New Jersey based importer was directed by the federal authorities to recall 4.5 lac Chineseradial tyres based on quality issues. This incident has highlighted the safety concerns regarding Chinese tyres. Tyresexported to India have complains of cheap raw material usage to maintain the price differential of 30%.


DOLAT CAPITAL

Mining Quarrying Earth Moving Construction Agricultural

Major OHT Applications

Annexure-2:

Off Highway Tyres – Industry OverviewThe global Off Highway Tyres (OHT) market accounts for 10% of world sales and estimated to be around USD 7.5 bn.Akin to regular highway tyre industry, the OHT segment is highly concentrated with top 3 players enjoying 50-55% of theindustry market share. Contrasting for the highway tyres, OHT requires high degree of customization depending on theapplication. Consequently, having a variety of product offering and strong R&D competence for new product developmentis extremely crucial.

The growth of this segment is highly correlated to the economic growth rate. On a global level, the growth is expected tobe in the range of 3 to 5%, developing countries are expected to have a much higher growth rate. Driven by growinginternational trade, strong raw material demand and infrastructure development, the handling equipment market offersbright prospects, as does the large earthmover tire market, in particular those used in mining operations. Opportunitiesto equip high-powered agricultural machinery, extra-large or highly compact equipment, and, more generally, radial tireapplications are also substantial.

Radialisation in Agricultural Tyre Markets Segmental World Agricultural Tyre Market

Source: Michelin Factbook 2007

Besides Europe and North America, radialisation has barely reached 7% level for the Agricultural tyre market. In Europeand North America, agri-tyre radialisation is expected to increase to 69% and 32% respectively by 2010 as compared to56% and 26% respectively in 2004.


DOLAT CAPITAL

This report contains a compilation of publicly available information, internally developed data and other sources believed to be reliable. While all reasonable care has been taken toensure that the facts stated are accurate and the opinion given are fair and reasonable, we do not take any responsibility for inaccuracy or omission of any information and will not be liablefor any loss or damage of any kind suffered by use of or reliance placed upon this information. For Pvt. Circulation & Research Purpose only.

The ratings are based on the absolute upside of our target price from the current price.

Upside Ratings> 25 % Buy15% - 25% Accumulate0% - 15% Reduce< 0 % Sell

DolaDolaDolaDolaDolattttt Capital Market Pvt. Ltd. 20, Rajabahadur Mansion, 1st Floor, Ambalal Doshi Marg, Fort, Mumbai - 400 001

Sector / Tel. No.

[email protected]

Sanjeev Patkar Head of Research, [email protected] 91-22- 4096 9745

Mehul Mehta FMCG, Power, [email protected] 91-22-4096 9748Ritesh Poladia Media, [email protected] 91-22-4096 9753Darpin Shah Banking, Finance & [email protected] 91-22-4096 9754Navin Matta Auto, Auto Ancilliaries/[email protected] 91-22-4096 9752Indrajeet Kelkar IT, [email protected] 91-22-4096 9751Ram Modi Metals, [email protected] 91-22-4096 9756Priyank S. Chandra Telecom, Auto / Auto [email protected] 91-22-4096 9737Ankit Babel Textile, [email protected] 91-22-4096 9732Bhavin Shah Pharma, [email protected] 91-22-4096 9731Nadeem Parkar [email protected] 91-22-4096 9736Kapil Yadav Hotel, [email protected] 91-22-4096 9735

AssociatesBindal J. [email protected] 91-22-4096 9724Jaynee [email protected] 91-22-4096 9723Harshal [email protected] 91-22-4096 9725Namrata [email protected] 91-22-4096 9726Gracy [email protected] 91-22-4096 9722Mayur [email protected] 91-22-4096 9721

Manpreet Singh [email protected] 91-22-4096 9720

Support StaffRajesh Shinde 91-22-4096 [email protected] Girkar 91-22-4096 [email protected]

Tel. No.

[email protected]

Mayur [email protected] 91-22-4096 9796Vikram [email protected] 91-22-4096 9746

Equity Sales [email protected] 91-22-4096 9797

R. Sriram 91-22-4096 [email protected]. Sridhar 91-22-4096 [email protected] Dalal 91-22-4096 [email protected] Shahukar 91-22-4096 [email protected] Shah 91-22-4096 [email protected]

Derivatives TeamVijay Kanchan 91-22-4096 [email protected]

Derivatives Sales TradersChirag Makati 91-22-4096 9702 / [email protected] Thakar 91-22-4096 [email protected]

Quantitative [email protected]

Aalap Shah [email protected] 91-22-4096 9733Sachin Mulay [email protected] 91-22-4096 9720

Bloomberg [email protected]

Board Lines 91-22- 2265 9200Fax : 91-22- 2265 0410 / 1278

DOLADOLADOLADOLADOLAT T T T T TEAM

tyre sector sept07

Documents

fy09e fy08e

bias tyres

bias segment

high capacity utilizations

eps rs fy08e

pacethough radial tyres

use of radial tyres

high growth