Accumulate Apollo Tyres - CMP: Rs.92, TP: Rs.100 - Prabhudas Lilladher

CV cycle likely to turn in H2FY14E : Given that we are already entering the third year of M&HCV downturn, we expect a recovery post Sep'13. As 65% of the standalone revenues for Apollo comes from the CV segment, this augurs well for the company. We expect a 10% CAGR in standalone revenues, mainly led by volume growth for FY13-FY5E period.

Natural Rubber prices likely to remain stable: Natural Rubber prices have declined by ~7-8% in the last one month to Rs160/kg currently, from an average price of Rs205/kg in in FY12. The growth rate of rubber production in CY11 in all ANRPC members is expected to be 4.9%, whereas India's rubber production is anticipated to perk up by 5.6%. We expect the rubber prices to remain range-bound with a negative bias. A 1% decline in the natural rubber prices impacts the EPS by ~3%

APTY to generate Rs4bn of free cash annually for FY14: Capacity expansion at Chennai facility is behind us, with the company already reaching 90% of its planned capacity of 500TPD. Majority of the capex is already incurred in the current fiscal. We believe the QIP issue would continue to remain an overhang on the stock in the near term. However, we don't see much dilution on account of the same, as we believe the company will generate higher cash flows (FY14E FCF of Rs4.0bn) to take care of its expansion plans.

Outlook and Valuation: With Natural rubber prices remaining stable, cost pressures have eased leading to better margin outlook for tyre companies. At the CMP, the stock trades at 6.4x FY14E EPS and 4.2x FY14E EV/EBITDA, which seems attractive. We maintain our 'Accumulate' rating on the stock with a TP of Rs100 based on 7.0x FY14E EPS. We believe the QIP issue would continue to remain an overhang on the stock in the near term. However, we don't see much dilution on account of the same, as we believe the company will generate higher cash flows.

Source : Equity Bulls

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