Apollo Tyres - 2QFY2013 Result Update - Angel Broking

Slight dip in qoq margin surprises negatively: Apollo Tyres (APTY) registered a strong top-line performance led by a robust volume growth of ~20% yoy at the standalone level; however disappointment came on the operating margin front, as the expected benefits of lower natural rubber prices did not materialize due to higher cost rubber inventory. The consolidated top-line posted a strong growth of 17.5% yoy (6.6% qoq) to Rs.3,375cr driven by a strong revenue growth of 23.7% (6.1% qoq) and 29.5% yoy (flat qoq) in India and South Africa operations respectively. Europe operations recorded a 6.2% yoy (22.4% qoq) revenue growth led by better product-mix (volumes down ~10% yoy). The EBITDA margin contracted 24bp qoq to 10.9%, which was lower than our estimate of 11.4%, led by 434bp qoq increase in raw-material cost as a percentage of sales. The raw-material cost increase was on account of higher cost rubber inventory. Nonetheless, the net profit surged 95.7% yoy (10.3% qoq) to Rs.152cr, ahead of our estimates of Rs.143cr.

Strong volume growth at standalone level: APTY's standalone operations benefitted from a strong volume growth of ~20% yoy (8.8% qoq) leading to a better-than-expected top-line growth of 23.7%. However, the EBITDA margin at 9.9%, down 41bp qoq sequentially, was lower-than-expected due to higher cost rubber inventory resulting in a flat bottom-line performance.

Outlook and valuation: APTY plans to raise capital via a QIP issue (US$150mn) and through an allotment of preferential convertible warrants (upto 27.5mn) to the promoter group. The management indicated that it intends to use the funds to a) build a greenfield facility in Southeast Asia and East Europe b) convert the existing cross ply tyre capacity to OHT/industrial tyres and c) tap possible inorganic opportunities. We remain positive on the tyre industry in view of the structural shift that the industry is witnessing and due to softening natural rubber prices. At Rs.85, the stock is trading at 5.7x FY2014E earnings. We recommend Buy on the stock with a target price of Rs.104 valuing it at 7x FY2014E earnings.

Source : Equity Bulls

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