Apollo Tyre 4Q FY 2013

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    Please refer to important disclosures at the end of this report 1

    Y/ E M arch (consolidated ` cr ) 4Q FY13 4Q FY12 % chg (yoy) 3 Q F Y 1 3 % chg (qoq)

    N et sales 3,0 38 3,2 31 ( 6 . 0 ) 3 , 2 1 7 ( 5 . 6 )

    EBITDA 356 361 (1.5) 382 (6.9)

    EBITDA Marg in (%) 11.7 11.2 53bp 11.9 (16)bp

    Adjusted PAT 1 23 1 58 ( 2 1 . 9 ) 1 8 0 ( 3 1 . 5 )

    Source: Company, Angel Research

    W eak 4Q FY20 13 performance: Apollo Tyres (APTY) reported lower-than-expectedresults for 4Q FY2013 owing to sluggish performance across the threegeographies due to slowdown in demand. The consolidated top-line declined by6% yoy (5.6% qoq) to `3,038cr, which was lower than our expectations, largely

    due to a 9.9% (flat qoq) and 9.3% yoy (24.1% qoq) decline in standalone andSouth Africa revenues respectively. The revenues at the European operationsremained flat in Euro terms due to 3% yoy decline in volumes, however, favorableexchange rates led to a 7.6% yoy (down 10.7% qoq) growth in INR terms. TheEBITDA margins declined 16bp qoq and stood at 11.7%, slightly lower than ourexpectations of 12.2%, despite the 9.1% qoq decline in raw-material expenditure.This was on account of increase in other expenditure which as a percentage ofsales surged 220bp qoq led by higher marketing spends and increase in researchand development expenditure. Consequently, adjusted net profit declined 21.9%yoy (31.5% qoq) to `123cr. A significant increase in the depreciation expense (up32.8% yoy and 30.3% qoq) too impacted the bottom-line results.Better-than-expected standalone performance: APTYs standalone net profit at`

    88cr was ahead of our expectations of`

    81cr driven by a sharp improvement of261bp yoy (201bp qoq) in EBITDA margins to 12.1% as the natural rubber costfor the company declined by 29.4% yoy. Nevertheless, the top-line at `2,036crwas below our expectations of`2,180cr due to a 10% yoy drop in volumes onaccount of the weak OEM demand and also due to slower off-take in thereplacement segment.

    O utlook and valuation: We lower our volume estimates for FY2014/15 to accountfor the continued weak demand environment in India and Europe as guided bythe management. However, we expect the operating margins to remain stable asthe company will continue to benefit from the softening of commodity prices.Given the slowdown in demand and drop in utilization levels across thegeographies, APTY has scaled down the capital expenditure guidance for FY2014to `550cr. Further, the company has also put on hold the proposed US$150mn

    QIP issue. At `94 , the stock is trad ing at 6.3 x FY2 01 5 ea rnings. W e m aintain ourAccumulate rating on the stock with a target price of `1 0 4 .

    Key fina ncials (Co nsolida ted)

    Y/ E Ma rch (` cr) FY20 12 FY20 13 E FY20 14 E FY20 15 E

    N e t Sa le s 1 2 , 1 5 3 1 2 , 7 9 5 1 3 , 8 5 2 1 5 , 4 8 7

    % chg 37.1 5.3 8.3 11.8

    N et Pro f it 41 1 59 6 64 7 75 0

    % chg (4.3) 45.1 8.7 15.9

    EBITDA (%) 9.4 11.4 11.4 11.5

    EPS (`) 8 . 1 1 1 . 8 1 2 . 8 1 4 . 9

    P/E (x) 11.5 8.0 7.3 6.3

    P/BV (x) 1.7 1.4 1.2 1.0

    RoE (%) 15.7 19.1 17.5 17.3

    RoCE (%) 14.9 17.3 17.5 18.0

    EV/Sales (x) 0.6 0.5 0.5 0.4

    EV/EBITDA (x) 6.2 4.6 4.2 3.8

    Source: Company, Angel Research

    ACCUMULATECMP `94

    Target Price `104

    Investment Period 12 Months

    Stock Info

    Sector

    Bloomberg Code

    Shareholding Pattern (%)

    Promoters 43.4

    MF / Banks / Indian Fls 14.4

    FII / NRIs / OCBs 29.2

    Indian Public / Others 13.0

    Abs. (%) 3m 1yr 3yr

    Sensex 3.1 22.3 15.9

    Apollo Tyres 9.3 15.4 36.9

    20,122

    6,065

    APLO.BO

    4,758

    1.2

    102/74

    366,627

    1

    1,947

    Market Cap ( cr)

    Beta

    52 Week High / Low

    Net Debt ( cr)

    APTY@IN

    Face Value ( )

    BSE Sensex

    Nifty

    Reuters Code

    Tyre

    Avg. Daily Volume

    Yaresh Kothari

    022-3935 7800 Ext: 6844

    [email protected]

    Apollo Tyres

    Performance highlights

    4QFY2013 Result Update | Auto Ancillar

    May 10, 2013

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    Apollo Tyres | 4QFY2013 Result Update

    May 10, 2013 2

    Exhibit 1:Quar terly financial performance (Consolida ted)Y/ E Ma rch (` cr) 4Q FY13 4Q FY12 % chg (yoy) 3 Q F Y 1 3 % chg (qoq) FY2013 FY2012 % chg (yoy)

    N et Sales 3,0 38 3,2 31 ( 6 . 0 ) 3 , 2 1 7 ( 5 . 6 ) 1 2 , 7 9 5 1 2 , 1 5 3 5 .3

    Consumption of RM 1,675 1,908 (12.2) 1,842 (9.1) 7,343 7,379 (0.5)

    (% of Sales) 55.1 59.1 57.3 57.4 60.7

    Staff Costs 375 302 24.0 356 5.4 1,471 1,335 10.2

    (% of Sales) 12.3 9.4 11.1 11.5 11.0

    Purchase of traded goods 121 202 (39.8) 168 (27.8) 654 658 (0.6)

    (% of Sales) 4.0 6.2 5.2 5.1 5.4

    Other Expenses 511 458 11.5 469 8.8 1,870 1,615 15.8

    (% of Sales) 16.8 14.2 14.6 14.6 13.3

    Total Expenditure 2,6 82 2,8 7 0 ( 6 . 6 ) 2 , 8 3 5 ( 5 . 4 ) 1 1 , 3 3 8 1 0 , 9 8 7 3 .2

    O perating Profi t 35 6 36 1 ( 1 . 5 ) 3 8 2 ( 6 . 9 ) 1 , 4 5 7 1 , 1 6 6 2 4 . 9

    OPM (%) 11.7 11.2 11.9 11.4 9.6

    Interest 74 78 (5.2) 81 (8.0) 313 287 8.9

    Depreciation 120 90 32.8 92 30.3 397 326 21.8

    Other Income 44 17 163.6 27 63.8 94 33 189.4

    PBT (excl. Extr. Items) 2 0 6 2 1 0 ( 1 . 8 ) 2 3 6 ( 1 2 . 9 ) 8 4 2 5 8 6 4 3 . 7

    Extr. Income/(Expense) (17) - - - - (17) 29 -

    PBT (incl. Extr. Item s) 2 2 3 2 1 0 6 .3 2 3 6 ( 5 . 8 ) 8 5 9 5 5 6 5 4 . 3

    (% of Sales) 7.3 6.5 7.3 6.7 4.6

    Provision for Taxation 82 51 58.5 56 46.2 245 144 69.6

    (% of PBT) 36.7 24.6 23.6 28.5 25.9

    Share in profit/(loss of asso. (1) (0) (1) (0) (0)

    Minority interest 0 0 0 0 0

    Reported PAT 14 0 15 8 ( 1 1 . 2 ) 1 8 0 ( 2 2 . 1 ) 6 1 3 4 1 2 4 9 . 0

    Adjusted PAT 12 3 15 8 ( 2 1 . 9 ) 1 8 0 ( 3 1 . 5 ) 5 9 7 4 4 1 3 5 . 2

    Adj. PATM 4.1 4.9 5.6 4.7 3.6

    Equity capital (cr) 50.4 50.4 50.4 50.4 50.4

    Reported EPS (`) 2 .8 3 .1 ( 1 1 . 2 ) 3 .6 ( 2 2 . 1 ) 1 2 . 2 8 . 2 4 9 . 0

    Adjusted EPS (`) 2 .4 3 .1 ( 2 1 . 9 ) 3 .6 ( 3 1 . 5 ) 1 1 . 8 8 . 8 3 5 . 2

    Source: Company, Angel Research

    Exhibit 2:4QFY2013 Actual vs Angel estimatesY/ E Ma rch (` cr) Actual Estima tes Varia tion (%)

    N et Sales 3,0 38 3,2 28 ( 5 . 9 )

    EBITDA 356 394 (9.6)

    EBITDA marg in (%) 11.7 12.2 (48)bp

    Adj. PAT 12 3 18 1 ( 3 2 . 0 )

    Source: Compa ny, Angel Research

    Lower-than-expected growth in net sales: For 4QFY2013, APTYs consolidated

    top-line declined by 6% yoy (5.6% qoq) to `3,038cr, which was lower than our

    expectations of`3,228cr, largely on account of a 9.9% (flat qoq) and 9.3% yoy

    (24.1% qoq) decline in standalone and South Africa revenues respectively. While

    the revenues at the European operations remained flat in Euro terms due to 3%

    yoy decline in volumes; favorable exchange rate movement led to a 7.6% yoy

    (down 10.7% qoq) growth in INR terms. On the standalone front, the company

    registered a volume decline of 10% yoy on account of the weak OEM demand andalso due to slower off-take in the replacement segment. The Management stated that

    the utilization level across the three geographies remains in the range of 70-80%.

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    Apollo Tyres | 4QFY2013 Result Update

    May 10, 2013 3

    Exhibit 3:Lower- than-expected grow th in net sales

    Source: Company, Angel Research

    Exhibit 4:Revenue-mix Geography-wise

    Source: Compa ny, Angel Research

    Exhibit 5:Segmental performanceY/E M ar ch 4Q FY13 4Q FY12 % chg (yoy) 3 Q F Y 1 3 % chg (qoq) FY2013 FY2012 % chg (yoy)

    Revenue (` cr)

    India 2,036 2,259 (9.9) 2,036 0.0 8,507 8,158 4.3

    SA 308 339 (9.3) 406 (24.1) 1,497 1,305 14.8

    Europe 729 677 7.6 816 (10.7) 2,990 2,850 4.9

    Others 32 29 11.1 53 (40.0) 184 105 75.1

    EBIT (` cr)

    India 215 172 25.0 169 27.0 735 499 47.4

    SA (7) (11) - 5 - (1) (43) -

    Europe 86 119 (28.0) 141 (39.2) 432 386 11.9

    Others (2) 5 (134.5) 4 (148.9) (8) 1 (690.1)

    EBIT margin (%)

    India 10.6 7.6 8.3 8.6 6.1

    SA (2.4) (3.3) 1.2 (0.1) (3.3)

    Europe 11.7 17.5 17.2 14.5 13.6

    Source: Company, Angel Research

    EBITDA margins at 11.7%, but still below our expectations of 12.2%: On the

    operating front, EBITDA margins declined 16bp qoq and stood at 11.7%, which

    was slightly lower than our expectations of 12.2%, despite the 9.1% qoq decline inraw-material expenditure. This was on account of increase in other expenditure

    which as a percentage of sales surged 220bp qoq led by higher marketing spends

    and increase in research and development expenditure. Employee expense as a

    percentage of sales too witnessed an increase of 80bp on a sequential basis.

    However, on a yoy basis, EBITDA margins improved 53bp driven by softening of

    natural rubber prices which led to a 12.2% yoy decline in raw-material costs. At

    the standalone level, EBITDA margins witnessed a sharp improvement of 261bp

    yoy (201bp qoq) to 12.1% as the natural rubber cost for the company declined by

    29.4% yoy.

    2,730

    2,822

    2,871

    3,228

    3,231

    3,165

    3,375

    3,217

    3,038

    27.3

    55.0

    47.3

    36.3

    18.4

    12.117.5

    (0.3)

    (6.0)

    (10.0)

    0.0

    10.0

    20.0

    30.0

    40.0

    50.0

    60.0

    0

    500

    1,000

    1,500

    2,000

    2,500

    3,000

    3,500

    4,000

    4QFY11

    1QFY12

    2QFY12

    3QFY12

    4QFY12

    1QFY13

    2QFY13

    3QFY13

    4QFY13

    (%)( cr) Net sales % chg

    1,762

    1,9611,845

    2,0932,259

    2,1522,283

    2,036 2,036

    354 280 302 383 339 393 391 406 308

    623 604749 820 677 650

    795 816 729

    0

    500

    1,000

    1,500

    2,000

    2,500

    4QFY11

    1QFY12

    2QFY12

    3QFY12

    4QFY12

    1QFY13

    2QFY13

    3QFY13

    4QFY13

    ( cr) India South Africa Europe

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    Apollo Tyres | 4QFY2013 Result Update

    May 10, 2013 4

    Exhibit 6:Average natural rubber price trend

    Source: Company, Angel Research

    Exhibit 7:EBITDA margin at 11.7%

    Source: Compa ny, Angel Research

    Adjusted net profit growth at`

    123cr : APTYs adjusted profit at`123cr (down

    21.9% yoy and 31.5% qoq) came in below our expectations of `181cr due to

    lower-than-expected growth in top-line and also due to significant increase in the

    depreciation expense (up 32.8% yoy and 30.3% qoq). During 4QFY2013, APTY

    reported an exceptional gain of`17cr at its South African operations, relating to

    pension fund surplus. As a result, the reported profit stood at `140cr (down 11.2%

    yoy and 22.1% qoq).

    Exhibit 8:Adjusted net profi t at `123cr

    Source: Compa ny, Angel Research

    72

    98 102119

    142

    165 177

    195

    225 229211

    203191 193

    181 174160

    0

    50

    100

    150

    200

    250

    4QFY09

    2QFY10

    4QFY10

    2QFY11

    4QFY11

    2QFY12

    4QFY12

    2QFY13

    4QFY13

    ( / kg)

    11.38.2 8.3 10.3

    11.2 11.1 10.9 11.9 11.7

    64.5 66.067.0 66.3 65.3

    61.866.2

    62.559.1

    5.0

    15.0

    25.0

    35.0

    45.0

    55.0

    65.0

    75.0

    4QFY11

    1QFY12

    2QFY12

    3QFY12

    4QFY12

    1QFY13

    2QFY13

    3QFY13

    4QFY13

    (%) EBITDA margin Raw-material cost/sales

    193

    77

    78

    98

    157

    138

    152

    181

    123

    7.1

    2.7 2.73.0

    4.94.4 4.5

    5.6

    4.1

    0.0

    1.0

    2.0

    3.0

    4.0

    5.0

    6.0

    7.0

    8.0

    0

    50

    100

    150

    200

    250

    4QFY11

    1QFY12

    2QFY12

    3QFY12

    4QFY12

    1QFY13

    2QFY13

    3QFY13

    4QFY13

    (%)( cr) Net profit Net profit margin (RHS)

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    Apollo Tyres | 4QFY2013 Result Update

    May 10, 2013 5

    Exhibit 9:Quar terly financial performance (Standalone)Y/ E Ma rch (` cr) 4Q FY13 4Q FY12 % chg (yoy) 3 Q F Y 1 3 % chg (qoq) FY2013 FY2012 % chg (yoy)

    N et Sales 2,0 36 2,2 59 ( 9 . 9 ) 2 , 0 3 6 0 .0 8 , 5 0 7 8 , 1 5 8 4 .3

    Consumption of RM 1,346 1,652 (18.6) 1,373 (2.0) 5,860 5,997 (2.3)(% of Sales) 66.1 73.1 67.5 68.9 73.5

    Staff Costs 100 95 5.6 110 (9.3) 427 369 15.8

    (% of Sales) 4.9 4.2 5.4 5.0 4.5

    Purchase of traded goods 52 53 (1.7) 71 (26.4) 254 238 6.5

    (% of Sales) 2.6 2.3 3.5 3.0 2.9

    Other Expenses 292 245 19.3 277 5.7 1,069 888 20.4

    (% of Sales) 14.4 10.9 13.6 12.6 10.9

    Total Expenditure 1,7 90 2,0 45 ( 1 2 . 5 ) 1 , 8 3 1 ( 2 . 2 ) 7 , 6 0 9 7 , 4 9 2 1 .6

    O perating Profit 24 6 21 4 1 5 . 0 2 0 5 2 0 . 0 8 9 8 6 6 6 3 4 . 8

    OPM (%) 12.1 9.5 10.1 10.6 8.2

    Interest 63 67 (5.6) 67 (5.9) 261 241 8.2

    Depreciation 56 52 6.8 55 1.6 220 186 18.5

    Other Income 25 10 141.5 19 29.4 57 18 215.4

    PBT (excl. Extr. Items) 1 5 2 1 0 6 4 4 . 3 1 0 3 4 8 . 5 4 7 5 2 5 8 8 4 . 3

    Extr. Income/(Expense) - - - - - - - -

    PBT (incl. Extr. Item s) 1 5 2 1 0 6 4 4 . 3 1 0 3 4 8 . 5 4 7 5 2 5 8 8 4 . 3

    (% of Sales) 7.5 4.7 5.0 5.6 3.2

    Provision for Taxation 64 33 92.4 29 122.8 162 76 112.6

    (% of PBT) 42.0 31.5 28.0 34.1 29.6

    Reported PAT 8 8 7 2 2 2 . 1 7 4 1 9 . 5 3 1 3 1 8 1 7 2 . 4

    Adjusted PAT 8 8 7 2 2 2 . 1 7 4 1 9 . 5 3 1 3 1 8 1 7 2 . 4

    Adj. PATM 4.3 3.2 3.6 3.7 2.2

    Equity capital (cr) 50.4 50.4 50.4 50.4 50.4

    Reported EPS (`) 1 .8 1.4 2 2 . 1 1 .5 1 9 . 5 6 . 2 3 . 6 7 2 . 4

    Adjusted EPS (`) 1 .8 1 .4 2 2 . 1 1 .5 1 9 . 5 6 . 2 3 . 6 7 2 . 4

    Source: Company, Angel Research

    N et sa les dow n on 1 0% yoy decline in volumes: On a standalone basis, APTY

    posted a 9.9% yoy (flat qoq) decline in the top-line to `2,036cr, which was lower

    than our expectations of`2,180cr. The top-line performance was mainly impacted

    due to the slowdown in the OEM demand for medium and heavy commercial

    vehicle and passenger car tyres which led to a ~10% yoy (~1% qoq) decline in

    standalone volumes. Though the replacement segment witnessed a slight up-tick,

    the growth was not meaningful and failed to negate the impact of slowdown in

    OEM demand. The net average realization remained flat on a yoy as well as qoq

    basis led by better product-mix.

    Effective March 15, 2013, APTY undertook an average price cut of ~1%. While the

    prices in the passenger car segment were slashed by ~2%; a 0.5% price cut was

    taken in the truck and light commercial vehicles cross ply tyres. The company

    indicated that there were no price cuts in the truck and bus radial tyres segment.

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    Apollo Tyres | 4QFY2013 Result Update

    May 10, 2013 6

    Exhibit 10:Top-line down due to slowdown in demand

    Source: Compa ny, Angel Research

    O perating m argin recovers sharply to 1 2. 1%: APTYs EBITDA margins witnessed a

    sharp recovery to 12.1%, an expansion of 261bp yoy (201bp qoq) largely driven

    by softening of natural rubber prices. Due to the softening of natural rubber prices,

    the natural rubber cost of the company declined by 29.4% yoy leading to a ~18%

    yoy decline in raw-material expenses. The other expenditure however, grew by a

    significant 19.3% yoy (5.7% qoq) led by higher advertisement expenses (to

    enhance the brand visibility) and increase in research and development cost.

    Exhibit 11:Average raw-material cost trendParticulars 4 Q FY13 4 Q FY12 % chg (yoy) 3 Q F Y 1 3 % chg (qoq)

    Natural rubber 180 255 (29.4) 190 (5.3)

    Nylon tyre cord fabric 230 210 9.5 235 (2.1)

    Carbon black 78 75 4.0 80 (2.5)

    Source: Compa ny, Angel Research

    Standalone net profit at `88cr: The standalone net profit grew strongly by 22.1%

    yoy (19.5% qoq) to `88cr largely on the back of the better-than-expected EBITDA

    margins. Higher other income (up 141.5% yoy and 29.4% qoq) also benefited the

    profitability during the quarter.

    Exhibit 12:EBITDA margin improves to 12.1%

    Source: Company, Angel Research

    Exhibit 13:Net profit gr ows strongly

    Source: Compa ny, Angel Research

    1,7

    62

    1,9

    61

    1,8

    45

    2,0

    93

    2,2

    59

    2,1

    52

    2,2

    83

    2,0

    36

    2,0

    36

    34.2

    74.9

    56.946.2

    28.2

    9.823.7

    (2.7)(9.9)

    (20.0)

    (10.0)

    0.0

    10.0

    20.0

    30.0

    40.0

    50.0

    60.0

    70.0

    80.0

    0

    500

    1,000

    1,500

    2,000

    2,500

    4QFY11

    1QFY12

    2QFY12

    3QFY12

    4QFY12

    1QFY13

    2QFY13

    3QFY13

    4QFY13

    (%)( cr) Net sales yoy change (RHS)

    7.6 7.6 7.3 8.1 9.5 10.3 9.9 10.112.1

    75.3 77.0 77.0 76.5 75.5 72.9 74.6 70.9 68.6

    0.0

    10.0

    20.0

    30.0

    40.0

    50.0

    60.0

    70.0

    80.0

    90.0

    4QFY11

    1QFY12

    2QFY12

    3QFY12

    4QFY12

    1QFY13

    2QFY13

    3QFY13

    4QFY13

    (%) EBITDA margin Raw material cost/sales

    66

    44

    22

    43

    72

    75

    75

    74

    88

    3.8

    2.3

    1.2

    2.0

    3.23.5

    3.33.6

    4.3

    0.0

    0.5

    1.0

    1.5

    2.0

    2.5

    3.0

    3.5

    4.0

    4.5

    5.0

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    100

    4Q

    FY11

    1Q

    FY12

    2Q

    FY12

    3Q

    FY12

    4Q

    FY12

    1Q

    FY13

    2Q

    FY13

    3Q

    FY13

    4Q

    FY13

    (%)( cr) Net profit Net profit margin (RHS)

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    Apollo Tyres | 4QFY2013 Result Update

    May 10, 2013 7

    Investment arguments

    Tyre industry set for a structural shift: Currently, manufacturing radial tyres isfar more capital intensive than manufacturing cross-ply tyres. The investment

    required for radial tyres per tpd is 3.2x that of cross-ply tyres at `6.1cr/tpd.

    On the other hand, the selling price of radial tyres is ~20% higher than that of

    cross-ply tyres. Thus, to generate a similar RoCE and RoE, tyre companies

    would need to earn EBITDA margin of ~21% compared to ~9% earned on

    cross-ply tyres, considering the difference in capital requirements and the

    consequent impact on asset turnover, interest cost and depreciation.

    Therefore, higher capital requirements will help protect margins from

    upward-bound input costs, as the business model evolves, bearing in mind

    final RoEs rather than margins. With the sector set for a structural shift and the

    apparent pricing flexibility, RoCE and RoE of tyre manufacturers are expected

    to improve going forward.

    Riding on high domestic demand: The Indian tyre industry is currentlywitnessing a slowdown in demand from the replacement as well as OEM

    markets, primarily due to macro-economic concerns. However the demand

    scenario in the long term remains encouraging which will aid APTY to operate

    at optimal capacities.

    Strategic overseas investment offers synergies in the long term: Acquisitionsdone by the company in the past two-three years are increasingly contributing

    to its revenue. We estimate Vredestein Banden combined with Dunlop SA to

    contribute close to ~35% to the companys overall consolidated revenue,helping it to further strengthen its foothold in the Indian tyre industry.

    Acquisitions offer synergies by way of access to radial tyre technology, wider

    product portfolio and presence in newer geographies.

    O utlook and valuation

    We lower our volume estimates for FY2014/15 to account for the continued weak

    demand environment in India and Europe as guided by the management.

    However, we expect the operating margins to remain stable as the company will

    continue to benefit from the softening of commodity prices.

    Exhibit 14:Change in estimatesY/ E Ma rch (` cr) Ear lier Estim a tes Revised Estima tes % chg

    FY2014E FY2015E FY2014E FY2015E FY2014E FY2015E

    N e t sa l es 1 4 , 4 0 1 1 5 , 8 4 1 1 3 , 8 5 2 1 5 , 4 8 7 (3 .8 ) (2 .2 )

    OPM (%) 11.4 11.5 11.4 11.5 4bp 4bp

    EPS (`) 1 3 . 6 1 5 . 9 1 2 . 8 1 4 . 9 (5 .6 ) (6 .3 )

    Source: Compa ny, Angel Research

    Given the slowdown in demand and drop in utilization levels across the

    geographies, APTY has scaled down the capital expenditure guidance for FY2014to `550cr. Further, the company has also put on hold the proposed US$150mn

    QIP issue. Nevertheless, we remain positive on the domestic tyre industry in view of

    the structural shift that the industry is witnessing and also due to the softening of

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    Apollo Tyres | 4QFY2013 Result Update

    May 10, 2013 8

    natural rubber prices. We expect the company to register a 10% and 12.2% CAGR

    in net sales and net profit respectively over FY2013-15. At `94, the stock is trading

    at 6.3x FY2015 earnings. We maintain our Accumulate rating on the stock with a

    target price of`

    1 0 4 .

    Key downside risks to our call: A sharp rise in input costs from current levels,

    slower growth in international business and lower-than-anticipated domestic

    replacement demand pose downside risks to our estimates.

    Exhibit 15:Angel vs consensus forecastAngel estima tes C onsensus Variation (%)

    FY2014E FY2015E FY2014E FY2015E FY2014E FY2015E

    N et sa les (` cr) 1 3 , 8 5 2 1 5 , 4 8 7 1 4 , 2 8 3 1 5 , 5 8 3 (3 .0 ) (0 .6 )

    EPS ( ) 12.8 14.9 13.8 15.6 (6.9) (4.6)

    Source: Compa ny, Angel Research

    Exhibit 16:One-year forward P/ E band

    Source: Company, Angel Research

    Exhibit 17:One-year fo rward P/ E chart

    Source: Compa ny, Angel Research

    Exhibit 18:One-year fo rward EV/ EBITDA band

    Source: Company, Angel Research

    Exhibit 19:One-year forward EV/EBITDA chart

    Source: Compa ny, Angel Research

    0

    20

    40

    60

    80

    100

    120

    140

    160

    Apr-03

    Mar-04

    Jan-05

    Dec-05

    Dec-06

    No-07

    Oc-08

    Sep-09

    Aug-10

    Jul-11

    Jun-12

    Ma-13

    ( ) CMP (`) 2.0 5.0 8.0 11.0

    0.02.0

    4.0

    6.0

    8.0

    10.0

    12.0

    14.0

    16.0

    18.0

    20.0

    Jul-05

    Apr-06

    Dec-06

    Sep-07

    May-08

    Feb-09

    Oc-09

    Jul-10

    Mar-11

    Dec-11

    Aug-12

    May-13

    (x) One-yr forward P/E Five-yr average P/E

    0

    2,000

    4,000

    6,000

    8,000

    10,000

    12,000

    14,000

    Apr-03

    Feb-04

    Dec-04

    Oc-05

    Aug-06

    Jun-07

    Apr-08

    Feb-09

    Dec-09

    Oc-10

    Aug-11

    Jun-12

    Ma-13

    (` cr) EV (`cr) 2.0 4.0 6.0 8.0

    0.0

    1.0

    2.0

    3.0

    4.05.0

    6.0

    7.0

    8.0

    Jul-05

    Apr-06

    Dec-06

    Sep-07

    May-08

    Feb-09

    Oc-09

    Jul-10

    Mar-11

    Dec-11

    Aug-12

    May-13

    (x) One-yr forward EV/EBITDA Five-yr average EV/EBITDA

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    Exhibit 20:Auto Ancillary Recommendation summaryCompany Reco.

    C M P(`)

    Tgt. price(`)

    Upside

    (%)

    P/ E (x) EV/ EBITD A (x) RoE (%) FY13 -15 E EPS

    FY14 E FY15 E FY14 E FY1 5 E FY14 E FY15 E C AG R (%)

    Apollo Tyres* Accumulate 94 10 4 1 0 . 6 7 . 3 6 . 3 4 . 2 3 . 8 1 7 . 5 1 7 . 3 1 2 . 2 Ceat Buy 114 170 49.3 2.8 2.3 2.3 1.8 17.3 17.6 11.3

    JKI* Buy 115 154 34.0 3.1 2.6 4.1 3.9 16.4 16.6 4.4

    Source:Company, Angel Research; N ote: *Consolida ted

    Company background

    Apollo Tyres (APTY) is India's second largest tyre manufacturer with an overall tyre

    market share of ~18%. The company has a leadership position in the heavy and

    light commercial vehicle tyre segments, with a 23% and 26% market share

    respectively. APTY acquired Dunlop's South African operations in 2006 and

    Vredestein Branden BV (Netherlands) in May 2009. These acquisitions now

    account for ~35% of APTY's consolidated revenue. The company has eight

    manufacturing plants located across India (1,400TPD), South Africa (175TPD) and

    Europe (170TPD), with a total installed capacity of 1,750TPD. APTY's main brands

    include Apollo(India); Dunlop(South Africa); and Maloya, Regaland Vredestein

    (Europe).

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    Prof it and loss statement (Consolida ted)

    Y/ E Ma rch (` cr ) FY2010 FY20 11 FY20 12 FY2013 E FY20 14 E FY20 15 E

    Tota l opera t ing income 8 ,12 1 8 ,86 8 12 ,153 12 ,79 5 13 ,852 15 ,487

    % chg 62.6 9.2 37.1 5.3 8.3 11.8Tota l expend itu re 6 ,93 6 7 ,89 5 11 ,007 11 ,338 12 ,267 13 ,699

    Net raw material costs 4,581 5,322 8,037 7,997 8,657 9,718

    Other mfg costs 539 629 746 910 956 1,070

    Employee expenses 1,088 1,134 1,335 1,471 1,601 1,734

    Other 727 810 889 960 1,053 1,177

    EBI TD A 1 , 1 8 5 9 7 2 1 , 1 4 6 1 , 4 5 7 1 , 5 8 5 1 , 7 8 7

    % chg 180.7 (18.0) 17.9 27.1 8.8 12.8

    (% of total op. income) 14.6 11.0 9.4 11.4 11.4 11.5

    Depreciation & amortization 254 272 326 397 417 442

    EBI T 9 3 1 7 0 0 8 2 1 1 , 0 6 0 1 , 1 6 7 1 , 3 4 5

    % chg 216.9 (24.8) 17.2 29.2 10.1 15.3

    (% of total op. income) 11.5 7.9 6.8 8.3 8.4 8.7

    Interest and other charges 134 204 297 313 322 362

    Other income 177 62 32 94 55 61

    Recurr ing PBT 97 3 55 8 55 6 84 2 90 1 1 ,04 4

    % chg 357.3 (42.6) (0.5) 51.5 7.0 15.9

    Extraordinary items 59 11 (1) (17) - -

    PBT (r eported ) 91 4 54 7 55 6 85 9 90 1 1 ,04 4

    Tax 261 106 144 245 252 292

    (% of PBT) 28.5 19.4 25.9 28.5 28.0 28 .0

    PAT (reported) 6 5 3 4 4 1 4 1 2 6 1 4 6 4 9 7 5 2

    Minority interest 0 1 2 1 1 1

    PAT (r eported ) 65 3 44 0 41 0 61 3 64 7 75 0

    A D J. PA T 5 9 4 4 2 9 4 1 1 5 9 6 6 4 7 7 5 0

    % chg 325.3 (27.8) (4.3) 45.1 8.7 15.9

    (% of tota l op. income) 7.3 4.8 3.4 4.7 4.7 4.8

    Ba sic EPS (`) 1 3 . 0 8 . 7 8 . 1 1 2 . 2 1 2 . 8 1 4 . 9

    Adj. EPS (`) 1 1 . 8 8 . 5 8 . 1 1 1 . 8 1 2 . 8 1 4 . 9

    % chg 325.3 (27.8) (4.3) 45.1 8.7 15.9

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    Balance sheet statement (Consolidated)

    Y/ E Ma rch (` cr ) FY20 10 FY20 11 FY20 12 FY20 13 E FY20 14 E FY20 15 E

    SOU RCES O F FUN DS

    Equity share capital 50 50 50 50 50 50Reserves & surplus 1,917 2,362 2,782 3,350 3,938 4,629

    Shareho lders Funds 1 ,96 8 2 ,41 3 2 ,83 3 3 ,40 1 3 ,98 9 4 ,68 0

    Minority Interest 0 1 1 0 0 0

    Total loans 1,707 2,222 2,550 2,282 2,382 2,682

    Deferred tax liability 251 316 403 493 493 493

    Other long term liabilities - 21 45 27 27 27

    Long term provisions - 107 94 109 109 109

    Tota l Liab i li ties 3 ,92 6 5 ,07 9 5 ,92 5 6 ,31 2 7 ,00 0 7 ,99 1

    APPLICATIO N O F FUN DS

    Gross block 5,563 6,895 8,034 8,545 9,073 9,601

    Less: Acc. depreciation 3,120 3,501 4,011 4,407 4,824 5,266

    N e t Blo ck 2 , 4 4 3 3 , 3 9 4 4 , 0 2 4 4 , 1 3 8 4 , 2 4 8 4 , 3 3 5

    Capital work-in-progress 536 358 331 352 373 395

    Goodwill 118 125 134 144 144 144

    Investments 6 11 16 55 10 9 10 9

    Long term loans and advances 264 221 181 181 181

    Other noncurrent assets - - - - - -

    Cur rent assets 2 ,43 9 3 ,15 4 3 ,66 7 3 ,65 7 4 ,24 1 5 ,14 1

    Cash 349 191 173 335 402 547

    Loans & advances 310 258 349 301 416 465

    Other 1,780 2,705 3,145 3,022 3,424 4,130

    Current liabilities 1,614 2,227 2,467 2,214 2,297 2,314

    N et cur ren t assets 82 4 92 8 1 ,20 0 1 ,44 4 1 ,94 4 2 ,82 7

    Tota l Assets 3 ,92 6 5 ,07 9 5 ,92 5 6 ,31 2 7 ,00 0 7 ,99 1

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    Cash flow statement (Consolidated)

    Y/ E Ma rch (` cr ) FY20 10 FY20 11 FY20 12 FY20 13 E FY20 14 E FY20 15 E

    Profit before tax 973 558 556 842 901 1,044

    Depreciation 254 272 326 397 417 442Change in working capital (115) (261) (291) (81) (465) (770)

    Others 637 16 345 114 - -

    Other income (177) (62) (32) (94) (55) (61)

    Direct taxes paid (261) (106) (144) (245) (252) (292)

    Cash F low f rom O pera tions 1 ,31 2 41 6 75 9 93 2 54 6 36 3

    (Inc.)/Dec. in fixed assets (3,627) (1,161) (1,121) (531) (550) (550)

    (Inc.)/Dec. in investments (1) (5) (5) (39) (55) 0

    Other income 177 62 32 94 55 61

    Ca sh Flow f rom Invest ing (3,45 2) (1,10 5) (1,09 4) (476 ) (550 ) (489 )

    Issue of equity - - - - - -

    Inc./ (Dec.) in loans 816 515 328 (268) 100 300

    Dividend paid (Incl. Tax) 44 29 29 29 29 29

    Others 1,266 (14) (59) - - -

    Cash F low f rom Financing 2 ,12 6 53 0 29 9 (29 7) 71 27 1

    Inc./(Dec.) in cash (13) (158) (18) 162 67 145

    O p e nin g C a sh b a la n ce s 3 6 2 3 4 9 1 9 1 1 7 3 3 3 5 4 0 2

    C losing Cash ba lances 34 9 1 91 17 3 33 5 40 2 54 7

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    Key ratios

    Y/E M ar ch FY20 10 FY20 11 FY20 12 FY20 13 E FY20 14 E FY2015 E

    Valuation Ratio (x)

    P/E (on FDEPS) 7.3 10.8 11.5 8.0 7.3 6.3P/CEPS 5.6 6.8 6.5 4.7 4.5 4.0

    P/BV 2.4 2.0 1.7 1.4 1.2 1.0

    Dividend yield (%) 0.8 0.5 0.5 0.5 0.5 0.5

    EV/Sales 0.8 0.8 0.6 0.5 0.5 0.4

    EV/EBITDA 5.2 7.0 6.2 4.6 4.2 3.8

    EV / Total Assets 1.6 1.3 1.2 1.1 0.9 0.8

    Per Sha re Da ta (`)

    EPS (Basic) 13.0 8.7 8.1 12.2 12.8 14.9

    EPS (fully diluted) 11.8 8.5 8.1 11.8 12.8 14.9

    Cash EPS 16.8 13.9 14.6 20.0 21.1 23.6

    DPS 0.7 0.5 0.5 0.5 0.5 0.5

    Book Value 39.0 47.9 56.2 67.5 79.1 92.8

    Dupont Analysis

    EBIT margin 11.5 7.9 6.8 8.3 8.4 8.7

    Tax retention ratio 0.7 0.8 0.7 0.7 0.7 0.7

    Asset turnover (x) 2.9 2.1 2.3 2.2 2.2 2.2

    ROIC (Post-tax) 23.6 13.3 11.4 12.9 13.4 13.8

    Cost of Debt (Post Tax) 7.4 8.4 9.2 9.3 9.9 10.3

    Leverage (x) 0.6 0.8 0.8 0.7 0.5 0.4

    Operating ROE 32.7 17.1 13.3 15.4 15.1 15.4

    Returns (%)

    ROCE (Pre-tax) 29.3 15.6 14.9 17.3 17.5 18.0

    Angel ROIC (Pre-tax) 26.0 14.3 14.3 17.7 17.7 18.1

    ROE 35.8 19.6 15.7 19.1 17.5 17.3

    Turnover ratios (x)

    Asset Turnover (Gross Block) 2.1 1.4 1.6 1.5 1.6 1.7

    Inventory / Sales (days) 36 57 56 57 57 61

    Receivables (days) 23 36 31 30 33 37

    Payables (days) 41 65 59 49 47 42

    WC cycle (ex-cash) (days) 19 25 26 30 35 45

    Solvency ratios (x)Net debt to equity 0.7 0.8 0.8 0.6 0.5 0.4

    Net debt to EBITDA 1.1 2.1 2.1 1.3 1.2 1.1

    Interest Coverage (EBIT / Int.) 6.9 3.4 2.8 3.4 3.6 3.7

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    Apollo Tyres | 4QFY2013 Result Update

    Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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    Disclosure of Interest Statement Apollo Tyres

    1. Analyst ownership of the stock No

    2. Angel and its Group companies ownership of the stock No

    3. Angel and its Group companies' Directors ownership of the stock No

    4. Broking relationship with company covered No

    Rating s (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral -5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

    Note: We have not considered any Exposure below1 lakh fo r Angel, its Group companies and Director