Apollo Tyres - Europe outperforms... SA strength unsustainable... India steady - LKP Research

Good quarter despite too many one-offs

Apollo's standalone net sales grew by 5.3% yoy and 1.7% qoq to Rs 21.4bn on the back of weak OEM volumes and flat realizations. Replacement demand showed good improvement but could not make a meaningful impact on the topline as OEM pulled down much of its upside. The company had also taken a 1% price hike in the quarter. At the EBITDA levels, profits grew by 30% yoy to Rs2.68 bn and EBITDA margins firmed up to 12.5% from 10.1%% yoy and slightly moved down from 12.7% qoq as natural rubber prices moved down in the range of Rs145-150/kg. EBITDA margins are adjusted for Rs740 mn of one-off benefit from TN government in other operating income and Rs350 mn of contingent excise duty liability in other expenses. Adjusted margins are above reported ones at 10.4%. Other expenses as a % of sales remained at 14.4% qoq, while RM to sales ratio scaled down to 67.3% from 67.7% qoq and 70.9% yoy as NR prices dwindled further. Other income moved up to Rs421 mn, while depreciation expenses were higher at Rs 649mn on the complete ramp-up of Chennai plant. Considering stable other non-operating parameters, adjusted PAT grew by 91% yoy and 15.4% qoq mainly on margin accretion.

Consolidated net sales grew by 7% yoy and flattish qoq to Rs 34.4 bn as subdued domestic volume growth in India and South Africa was somewhat offset by European strength. The topline included one-off benefits of ZAR75 mn from the SA government and income service of ZAR9 mn, which without adjusting would give us growth close to 8% yoy. European operations sales grew by 33.3% yoy and 2.5% qoq on good sales of summer tyres more than winter tyres. At the EBIT levels India performed well, and European business showed a seasonal sharp growth in margins at 18.5% from 17.2% yoy and 9.5% yoy. South African margins were unusually high at 9.3% due to the one off benefit given by the SA government, in absence of which it would have reported slight loss at EBIT level. Consol adjusted EBITDA margins came in at 14.1% slightly down from 15.7% qoq and flattish yoy. Consolidated adjusted PAT came in at Rs2.8bn, 28% qoq and 63% yoy growth on strength in Europe and Indian operations.

Outlook and Valuation

Apollo's Q3 results were satisfactory given profitability surge in India as well as Europe. With replacement demand increasing in India, we believe that post elections certainty, we may witness recovery in the auto industry thus increasing OEM demand as well. Going forward, we believe Indian operations will continue to benefit from the tailwinds of natural rubber prices softening. Also downward movement of crude is expected to soften the prices of other crude based derivatives like synthetic rubber. European demand growth is expected to help margin improvement along with expectations from South Africa improving slightly with the hiving off of some of its investments there. With capacity expansion in Europe along with Greenfield plants in Eastern Europe and SE Asia coming up, we believe that there is a huge upside to volumes from the global businesses and exports. With debt expected to move up slightly, we believe that the company is still well placed to maintain its leverage at comfortable levels. With the overhang of Cooper deal no longer there and not much litigation expenses expected going forward, we believe the company is back on track to move on strongly on fundamental basis. In line with strong margin performance in India, replacement demand moving up and Europe touching new highs, we have slightly raised our estimates for both FY 14E and FY 15E. We maintain BUY on the stock with a revised target of Rs 140.

Source : Equity Bulls

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