Apollo Tyres Ltd. - GEPL Capital

Q3FY12 – Strong sequential improvement in performance

- Apollo Tyres Ltd's consolidated revenues grew 36.3% Y-o-Y to Rs.32.3 bn in Q3FY12 against Rs.23.7 bn in Q3FY11 due to strong growth from Indian and European businesses. Sequentially revenues grew 12.4% due strong volume growth and better product mix.

- EBITDA grew 18.7% Y-o-Y to Rs.3.2 bn. The growth was lower as compared to 36% revenue growth due to 54.5% Y-o-Y increase in the raw material costs to Rs.21.5 bn.

- PAT declined 18.6% Y-o-Y to Rs.980 mn in Q3FY12 against Rs.1.2 bn in Q3FY11 due to higher interest expense (Rs.731 mn versus Rs.529 mn) and Rs.294 mn exceptional loss in the current quarter.

Result Highlights

Raw material to sales ratio decline after 10 quarters of upward movement

Raw material to sales ratio declined to 66.6% in the Q3FY12. This decline was seen after 10 quarters. In Q2FY12 it touched 67.5%. The softening of rubber prices led to 200bps improvement in EBITDA margins sequentially to 10.0%.

European business continues its strong growth due to robust demand from winter tyres

European business continues to grow stronger on back of strong demand seen from the winter tyres. Company posted strong winter tyres sales in the month of October and November 2011 but slowed in the month of December 2011. Revenues from the European operations grew 26.3% Y-o-Y to Rs.8.2 bn due to 12% price increase, better product mix and 14% increase in currency movements. Volume growth was flat on account of strong base seen in the third quarter last year.

South African business impacted the consolidated bottom line due to Rs.296 mn EBIT loss

Revenues from the South African operations increased 27.9% Y-o-Y to Rs.3.8 bn due to 23% growth in volumes, 8% price increase and better product mix. EBITDA margins were slightly under 3%. At EBIT level, company posted Rs.296 mn loss due to Rand 45 mn to be paid for the settlement issues over next three years.

Valuation & Viewpoint

With rubber prices beginning to soften and strong growth from the European business, Apollo tyres at CMP of Rs.75.5 is trading at a P/E multiple of 7.3x its consensus FY13E earnings of Rs.10.3 and looks a better player in the tyres segment. The deterrent for the company is the losses from the South African business, any improvement seen from this operation should boost the consolidated bottom line going forward.

Source : Equity Bulls

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