Apollo Tyres 3Q FY11: Strong all-round performance;TARGET Rs90: Standard Chartered

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Apollo Tyres
3Q FY11 results: Strong all-round performance; Maintain OUTPERFORM


 Low-priced raw material contracts and improved
revenue help maintain standalone margins qoq  
 Vredestein posts strong earnings growth, Dunlop SA
performance also improves qoq
 Consolidated earnings more than doubled qoq to
Rs1.2bn
 Synergies with Vredestein and the Chennai plant ramp
up likely to mitigate input cost pressures
 Attractively valued at 4.5x FY12E earnings and at 3.9x
FY12E EV/EBITDA, maintain OUTPERFORM
Standalone performance – Apollo was able to maintain its
standalone operating margin qoq at 10.4% led by low-priced
raw material contracts entered in 2Q FY11. This coupled
with improved revenue growth resulted in robust 45% qoq
earnings growth to Rs541m.
Subsidiary performance also improved qoq – Given the
seasonally best quarter for winter tyres, Vredestein posted a
sharp 24% qoq growth in revenue and 540bps qoq EBIT
margin improvement to 13.6%. Dunlop SA also posted an
improved operational performance with segmental margins
at 2.6% (from operational loss in 2Q FY11).
Consolidated earnings more than double qoq – Led by
an improved all-round performance, consolidated earnings
more than doubled to Rs1.2bn in 3Q FY11.
Apollo, MRF outperform peers in Oct-Dec quarters –
While JK Tyres’ and Ceat’s operating margins declined by
80-100bps qoq, Apollo Tyres was able to maintain its
margin at 10.4% (+10bps qoq). MRF also reported an
improved operational performance with +150bps
improvement qoq to 11.2%. Apollo has also gained its lost
market share in 3Q FY11.
Valuations – Robust tyre demand, export potential,
synergies with Vredestein and Chennai plant ramp up are
likely to mitigate rising input cost pressures. At current
valuations of 4.5x FY12E earnings and at 3.9x EV/EBITDA,
the stock is attractively valued. Maintain OUTPERFORM.


Standalone 3Q FY11 results
 Apollo Tyres’ standalone net sales were up 8% yoy to Rs14.3bn primarily on account of the
price hikes of about 14% taken in 9MFY11 even as sales offtake slowed down during the
quarter. While average realizations were up 20% yoy (flat qoq), estimated tonnage sales
declined 10% yoy. However, demand has now picked up since February 2011 and the outlook
appears encouraging.


 Apollo was able to maintain its margins qoq despite the significant rise in raw material (rubber)
prices. This could be achieved due to the lower priced raw material contracts booked in 2Q.
As a result, average rubber prices for the quarter increased only by 6% qoq to Rs185 per kg.
Prices for key raw materials have been highlighted below.


 Apollo has taken a marginal 1% price hike across categories in January 2011 and is
contemplating another price hike in the near term to pass on the sharp input cost push.
 Led by much improved offtake as well as pre-booked contracts, Apollo was able to maintain its
margins at 10.4%. Absolute EBITDA for the quarter was up 23% qoq (down 27% yoy over a
high revenue base) to Rs1.5bn.


 While demand had slowed down during the quarter, the company has built-up finished goods
inventory of about Rs6.5bn by 3Q-end at lower raw material costs. This would also help
improve earnings in 4Q


 Apollo has now regained market share to 27% levels (in production terms) by 3Q end.
 On account of the higher working capital requirement (led by a sharp rise in inventory levels),
interest burden for the quarter rose to Rs434m (from Rs362m in 2Q FY11).
 The average tax rate for the quarter declined to 25%. Driven by an improved offtake qoq, net
profit increased 45% qoq (declined 47% yoy over a high base) to Rs541m.


Vredestein performance (Europe subsidiary)
 Being the seasonally best quarter for Vredestein, revenue was up 25% qoq (flat yoy) to
Rs6.5bn. EBIT margin for the quarter came in at 13.6%. Apollo has taken a cumulative 8%
price hike (divided equally in May and October) in CY10 in Vredestein.
 The Apollo brand has been introduced below the Vredestein brand in 4 countries in Europe
since June10 and has received encouraging response.
Dunlop SA performance (South Africa subsidiary)
 Revenue for the quarter was up 2% yoy (up 15% qoq) to Rs3bn. The company has
taken cumulative price hikes of ~12% in FY11.
 EBIT margin for the quarter stood at 2.6% (against an operational loss in 2Q FY11).


Consolidated 3QFY11 results
 Consolidated revenue was up 3% yoy (up 22% qoq) to Rs23.7bn. Tonnage sales for the
quarter increased 22% qoq (down 11% yoy) to 111,000 tonnes.
 Consolidated operating margin improved 200bps qoq to 11.5% driven by an improved
performance from Vredestein. Absolute EBITDA for the quarter increased 47% qoq to
Rs2.7bn.
 Led by an improved operational performance, earnings for the quarter were up 126% qoq to
Rs1.2bn.
Apollo & MRF outperformed the tyre industry in Oct-Dec quarter
While JK Tyres’ and Ceat’s operating margins declined by 80-100bps qoq, Apollo Tyres was able
to maintain its margins at 10.4% (+10bps qoq). MRF also reported an improved operational
performance with +150bps improvement qoq to 11.2%. Apollo has also gained its lost market
share in 3Q FY11