Apollo Tyres Ltd. Weak quarter, but worst could be behind: BofA ML

Visit http://indiaer.blogspot.com/ for complete details �� ��


Apollo Tyres Ltd.
Weak quarter, but worst could
be behind


􀂄 Cut forecasts/PO, Reiterate Buy
Q2 consolidated profit at Rs 533mn was below our expectations of Rs 760mn,
mainly due to overseas businesses (SA, Europe), even as standalone profit was
predictably weak, but in line. EBITDA declined 36% at Rs 1.85bn (est Rs 2.2bn),
due to (1) rising input costs, (2) unit strike/closure both in India and South Africa,
and (3) slower than expected replacement sales. We cut EPS forecasts by 19% in
FY11E and 9% in FY12E. Our PO is similarly cut by 9% to Rs 92.


Replacement demand starting to recover
Q2 sales declined 5% yoy at Rs 19.5bn due to (1) slower than expected demand
in domestic tyre market, and (2) strike in South Africa. Both these variables have
turned favourable with replacement demand also picking up from Nov. We still cut
tonnage sales estimates for domestic operations by 2%-3% over FY11/FY12E.

Margin outlook muted
Q2 margins declined 450bps to 9.5% (est 11%), but standalone margin was only
30bps below est at 10.3%. We expect global subsidiaries to register a sharp
rebound in H2, due to 10% price hike and re-opening of unit in South Africa as
well as seasonal demand in Europe, but domestic operations will be impacted by
sustained rise in natural rubber prices. However, we expect margins to expand
next fiscal with assumed hike in tyre prices (5%) on the back of stronger demand.

Attractive valuations, Reiterate Buy
Our revised PO reflects cut in forecasts, but maintains similar multiple of 4.5x
EV/EBITDA FY12E, in line with historical average. This is due to cyclical factors
impacting profitability even as structural positives remain unaltered.