Apollo Tyres - Target price Rs. 109 - Dolat Capital

- In the tyre industry, the primary difference between India and the world is the radialisation of commercial vehicle tyres. Globally, it is ~65%, whereas in India, it is only about 10%. We believe the Indian commercial vehicle tyres to soon catch up to the world standards and expect radialiasation to be between 25-30% in the next three years.

- The company has set up a radial plant in Chennai. Production of passenger car radials (PCR) started in March 2010 and truck-bus radials (TBR) started in May 2010. It has also planned a capex to increase capacity for cross-ply and radial farm tyre capacity in its Kerela plant by 48000 units p/a in rear tractor and 34000 units p/a in front tractor tyres.

- The company is the market leader in the organized replacement market. Even if the OEM demand slows down, the company can divert its production to the replacement market and improve margins.The company has gained market share in the replacement market.

- In 4QFY13, Apollo's consolidated revenue declined 6%YoY at Rs. 30.4bn. This was mainly due to ~10% YoY decline in India and South African operations. Its European subsidiary reported a 8%YoY revenue growth. The company took a price correction of ~1% in some segments (PCR), cross-ply to pass on the advantage of lower rubber prices.

- Apollo reported EBITDA at Rs. 3,559mn, down 1% YoY. Rubber declined by almost 9% as a result the input costs came down by 340bps QoQ to 59.1%. However, other expenses were up 220bps and staff costs were up 120bps QoQ. The management mentioned all the high cost inventory has been adjusted in the quarter and expect input benefits to continue in the coming quarters. The other expenses were higher on account of higher R&D expenses and marketing costs. They will continue to remain high in the coming quarters as well.

We expect the revenue for FY13-15 to grow at a CAGR of ~11% and margins to remain ~11.7%. The stock currently trades at 6.1x FY15E.

Source : Equity Bulls

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