Apollo Tyres - Acquisition overhang clears; Buy - Anand Rathi

3Q another good quarter for India operations. Apollo Tyres' domestic operation is expected to continue to grow decently, backed by higher EBITDA margin and sanguine commodity costs. We expect 10% yoy revenue growth, to Rs. 22.4bn, with a 12.9% EBITDA margin (up 280bps yoy, 90bps qoq). Replacement demand growth is likely to be good. Our EBITDA growth expectation is 40.5% yoy. We expect 58.8% yoy profit growth, to Rs. 1.2bn.

Consolidated profit growth at a slower pace. The slowdown in the European market would bear heavily on the consolidated results. Being the peak period for winter tyre demand, this would help sales growth. Yoy, currency depreciation would also benefit. But in 2Q, the company had taken price reduction due to competitive pressures. As a result, we expect consolidated revenues to grow 12% yoy to Rs. 36bn, with a 12.8% EBITDA margin (up 90bps yoy, 50bps qoq). We expect EBITDA to grow 20.8% yoy. We expect 15.5% yoy profit growth to Rs. 2.1bn.

Cooper acquisition overhang over. The proposed Cooper acquisition was a near-term overhang. With recent events now clearing the potential financial burden that a leveraged buyout posed, the outlook is much brighter. The only threat remains from the possibility of penal break-up fees being imposed by the courts. In our view, given the nature of the break-up, this seems unlikely.

Our take. With the Cooper overhang over, we upgrade the stock to Buy on continued strong financial performance of the company. While future expansion plans may include overseas capex or another acquisition, so long as the scale is not as big as Cooper, it would not pose a severe threat. At CMP, the stock trades at 6.6x FY15e EPS. Our target price is at 8x earnings. Risks. Increase in rubber prices, above-expected impact of the European slowdown, unfavourable forex movements.

Source : Equity Bulls

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