Apollo Tyres Ltd - Q3FY12 Result Update - Quantum Securities

Q3FY12 Result highlights

In Q3FY12, Apollo Tyres (APTY) posted a robust growth in consolidated sales, led by all the three operations; India, Europe and South Africa. Indian operations continued posting robust volume growth, though contribution of OEMs kept on rising. Weaker Rand led to muted Chinese imports in South Africa, leading to robust volume growth recorded by South African operation. Despite an early onset of winter, milder winter in December 2011 led to almost no volume growth for European operations. However, currency translation led to robust growth in revenues of European operations. Owing to a decline in Natural Rubber prices, EBITDA margin improved on a Q-o-Q basis, though it remained lower Y-o-Y. Increase in OEM contribution impacted the profitability of the Indian operations as it has lower margins.

In Q3FY12, APTY reported a robust growth of 36.3% Y-o-Y in the consolidated net sales to Rs 32.3bn (higher than our estimates of Rs 26.7bn), led by a 20% growth in volumes and 16% growth due to changes in its prices and mix. Indian operation reported robust sales growth of 46.2% Y-o-Y, led by a 24% growth in volumes and 22% growth due to changes in its price and mix to Rs 20.9bn. Volume growth is largely due to increase in OEM's demand for TBR and PCR tyres. Greenfield plant continued to ramp up its capacity to 275 TPD. European operation reported sales growth of 26.3% Y-o-Y to Rs 8.2bn, with no volume growth. The company reported strong winter tyre sales in October and November 2011, though it was muted in December 2011, due to milder winter during the month. The South African operations reported a 27.9% sales growth to Rs 3.8bn, due to lower bases as well as decline in imports from China due to weaker Rand.

Natural Rubber Prices continued showing sequential decline, though it was still higher on a Y-o-Y basis (Please refer to Table 1: Movement of Average Raw Materials Prices, Page No: 1). Consequentially, EBITDA margin improved by 202bps Q-o-Q, though it declined by 149 bps Y-o-Y to 10% in Q3FY12. EBIT margin of the Indian operations posted a decline of 228 bps Y-o-Y and improved by 136 bps Q-o-Q to 5.8%. Comparatively lower improvement in margin on Q-o-Q was due to higher contribution by OEMs, that grew to 33% of net revenues of Indian operations during this quarter. European operations posted a margin improvement of 213 bps Y-o-Y to 15.7%. However, South African operations reported a sharp decline in margin by 1034bps Yo-Y on account of penalty (Net present Value of penalty, accounted in P&L is Rs 294mn, which will be paid a period of three years) by the Competition Commission of South Africa. Further, net profit grew by 26.1% Q-o-Q though it declined by 18.6% Y-o-Y to Rs 980mn. This was largely in line with our estimates of Rs 996mn.

Outlook & Valuations

TBR-OEMs segment reported revival in demand during this, which will be further pronounced in the coming quarters. PCR-OEM has also seen revival in demand off late. Further, a reversal in the interest rate cycle will lead to pick-up in the industrial activities, leading to improved demand in TBR replacement segment. Winter Tyres sales will keep the sales of European operations buoyant due to prolonged winter in Europe, while the South African operations will benefit from the weaker Rand. Consequently, we have upgraded our revenues estimates for FY12E and FY13E from Rs 112bn and Rs 116bn to Rs 117bn and Rs 124bn respectively. Declining Natural Rubber prices led to sequential improvement in the margins in Q3FY12 and the management expects further marginal improvement in Q4FY12, in line with our earlier expectations. Taking into account a higher interest outgo and higher depreciation, our EPS estimates for FY12E and FY13E stand at Rs 7.6 and Rs 10.8, compared to our previous estimates of Rs 7.9 and Rs 10.3 respectively. At a current price of Rs 75.50, the stock quotes at a P/E of 10.0x FY12E and 7.0x FY13E earnings. A market cap of Rs 38.1bn discounts its consolidated sales by 0.3x both in FY12E and FY13E. On the back of improvement in the business outlook, we reiterate our 'Outperformer' rating on Apollo Tyres.

Source : Equity Bulls

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