Apollo Tyres Q2FY13 Results Update: Higher revenues; disappointing margins - PhillipCapital

Apollo Tyres PAT was broadly inline with our expectations. While the revenues were above estimates; the EBITDA margins, which declined sequentially, fell short of expectations. The demand outlook in India/Europe remains hazy; in addition concerns revolve around a potential dilution to raise capital for capex (details of which are yet to be revealed). Hence, despite reasonable valuations, we maintain a NEUTRAL rating with a target price of Rs84.

PAT in line with estimates: APTY's Q2FY13 consolidated PAT at Rs1.52bn (up 96% Y-o-Y) was in line with our estimates. While, revenues came above expectations, they were offset by lower than expected EBITDA margins.

Revenues ahead; EBIDTA margins below estimates: Revenues at Rs 33.7bn (up 18% YoY, 6% QoQ) were ahead our expectations. India reported strong volume growth (+20% Y-o-Y) as production at the Chennai plant was ramped up. Revenues from Vredestein in Europe (up 6% YoY) grew despite a volume de-growth of 10% on account of an improved product mix. After a small EBIT profit last quarter, the South African subsidiary again slipped into negative territory.

Consolidated EBITDA margins at 10.9% (up 280 bps Y-o-Y, down 20bps Q-o-Q) were 1 below our estimates. Sequentially, raw material costs jumped 430bps Q-o-Q on a consolidated level and 170 bps on a standalone level - the management indicated that the average rubber prices for the company was flat, partially on higher cost inventory. This offset the operating leverage benefits.

Management Outlook & Concall highlights:

- Capital raising: The company will seek shareholders approval to raise capital for upto USD200mn (including warrants to be issued to the promoters). While the timing and quantum of capital raising is still unclear; if the entire approved amount is raised, it would lead to an addition of 127mn shares (or 2 to the equity base. Significantly, the application of the raised funds seems to be unclear - the management indicates it would be utilized for setting up capacities in ASEAN and later in Europe. However, detailed plans are yet to be communicated.

- Raw material prices/ revenue mix: The management expects raw material costs (Natural rubber) to remain stable in the range of 170-190/kg. The revenue mix for the Indian business remains at 60/30/10 for replacement/OEM/Exports remains stable.

Valuation and Outlook: We remain concerned about demand pressures on the Indian and European business in view of the slowing economy. In addition, we view radialisation as a structural negative. Most importantly, we seek clarity on the capital raising plans as well as its utilization. We revise our estimates upwards by 9%/4% for FY13/14 to factor in lower rubber prices. We rollover to FY14, however given the potential equity dilution, we cut our target multiple to 6.5X (from 7.5X previously) implying a value of Rs84/ share. Maintain our Neutral stance on the stock.

Source : Equity Bulls

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