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Apollo Tyres ------------------------------------------------------------------- Maintain OUTPERFORM
3Q11 beats estimates; signs of revival in truck replacement market
● Apollo Tyres’ 3Q11 results surprised us positively. While revenue
was 6% below, gross margin was 200 bp ahead. Lower rubber
realisations (5% lower than spot) lead to the beat in margins.
● Domestic volumes declined around 10% in 3Q11 (versus our
estimate of flat volumes). The weakness in truck tyre replacement
market (around 50-60% of APTY’s sales) witnessed in 2Q11
extended to 3Q as well. Pricing power in this segment therefore
has been limited. With the recent improvement in demand, we
expect a revival in volumes and price increases in the near future
(also indicated by management).
● With the resolution of strikes in South Africa, APTY’s operations in
the region are back to profitability. EU operations performed well in
a seasonally strong quarter. However, revenue declined 5% YoY –
dealer restocking in previous quarters due to an exceptionally
strong winter last year had led sales coming in earlier.
● We update our estimates post 3Q11 and cut our consolidated
revenue 2-4% for FY11-13E; our consolidated EPS declines 1-5%
while target price reduces to Rs94.5. Maintain OUTPERFORM.
Apollo Tyres: 3Q11 better than expected
Apollo Tyres reported 3Q11 numbers above our expectations. While
revenue was 6% below, gross margin was 200 bp ahead. Overall,
EBITDA was 4% and PAT was 8% higher than our estimates.
Helped by raw material inventory management, average rubber
realisation for the company (Rs185/kg) was lower than spot prices for
the December quarter (average Rs195/kg). Consolidated volumes
dropped 11%, led by a decline in both India and South Africa.
APTY’s South African operations have reverted to profitability after the
resolution of industry-wide strikes in 2Q11. The EU operations
performed well in a seasonally strong quarter. However, a mismatch
in dealer inventory levels caused by an exceptionally strong winter last
year had resulted in winter tyre sales coming in earlier this year. 3Q11
revenue from Europe, therefore, dropped 5% YoY
Extended weakness in domestic replacement market
Domestic revenue grew 8% YoY (versus our estimate of 15%), led by
a 20% increase in realisations and an estimated 10% decline in
volumes. The truck tyre replacement market (50-60% of APTY’s
revenue) has been weak in the past few months due to extended
monsoons in 2Q11 and some slowdown in freight movement in 3Q11.
The industry is growing at 7-8% compared with 15-16% last year.
Pricing power in this environment, therefore, has been limited. APTY
recently took a small price increase (1-1.5%) across most of its
portfolio, except the truck replacement segment.
The company did not cut production despite the slowdown and has
hence seen a meaningful increase in inventory levels (Rs2-3 bn above
normal). With the recent signs of a revival, management hopes to get
back to normal inventory levels and is also considering a price
increase this month.
Changes to estimates
We update our estimates after the 3Q11 results. We cut our FY11-
13E forecast for domestic (1-2%) and international revenues (5-7%).
We keep our margin assumptions largely unchanged. Our FY11-13E
consolidated EPS declines 1-5%, while our target price for APTY
decreases to Rs94.5. We find APTY attractive at 4.8x FY12E EPS
and believe the current adverse environment is the best time to buy
this stock. We maintain our OUTPERFORM rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Apollo Tyres ------------------------------------------------------------------- Maintain OUTPERFORM
3Q11 beats estimates; signs of revival in truck replacement market
● Apollo Tyres’ 3Q11 results surprised us positively. While revenue
was 6% below, gross margin was 200 bp ahead. Lower rubber
realisations (5% lower than spot) lead to the beat in margins.
● Domestic volumes declined around 10% in 3Q11 (versus our
estimate of flat volumes). The weakness in truck tyre replacement
market (around 50-60% of APTY’s sales) witnessed in 2Q11
extended to 3Q as well. Pricing power in this segment therefore
has been limited. With the recent improvement in demand, we
expect a revival in volumes and price increases in the near future
(also indicated by management).
● With the resolution of strikes in South Africa, APTY’s operations in
the region are back to profitability. EU operations performed well in
a seasonally strong quarter. However, revenue declined 5% YoY –
dealer restocking in previous quarters due to an exceptionally
strong winter last year had led sales coming in earlier.
● We update our estimates post 3Q11 and cut our consolidated
revenue 2-4% for FY11-13E; our consolidated EPS declines 1-5%
while target price reduces to Rs94.5. Maintain OUTPERFORM.
Apollo Tyres: 3Q11 better than expected
Apollo Tyres reported 3Q11 numbers above our expectations. While
revenue was 6% below, gross margin was 200 bp ahead. Overall,
EBITDA was 4% and PAT was 8% higher than our estimates.
Helped by raw material inventory management, average rubber
realisation for the company (Rs185/kg) was lower than spot prices for
the December quarter (average Rs195/kg). Consolidated volumes
dropped 11%, led by a decline in both India and South Africa.
APTY’s South African operations have reverted to profitability after the
resolution of industry-wide strikes in 2Q11. The EU operations
performed well in a seasonally strong quarter. However, a mismatch
in dealer inventory levels caused by an exceptionally strong winter last
year had resulted in winter tyre sales coming in earlier this year. 3Q11
revenue from Europe, therefore, dropped 5% YoY
Extended weakness in domestic replacement market
Domestic revenue grew 8% YoY (versus our estimate of 15%), led by
a 20% increase in realisations and an estimated 10% decline in
volumes. The truck tyre replacement market (50-60% of APTY’s
revenue) has been weak in the past few months due to extended
monsoons in 2Q11 and some slowdown in freight movement in 3Q11.
The industry is growing at 7-8% compared with 15-16% last year.
Pricing power in this environment, therefore, has been limited. APTY
recently took a small price increase (1-1.5%) across most of its
portfolio, except the truck replacement segment.
The company did not cut production despite the slowdown and has
hence seen a meaningful increase in inventory levels (Rs2-3 bn above
normal). With the recent signs of a revival, management hopes to get
back to normal inventory levels and is also considering a price
increase this month.
Changes to estimates
We update our estimates after the 3Q11 results. We cut our FY11-
13E forecast for domestic (1-2%) and international revenues (5-7%).
We keep our margin assumptions largely unchanged. Our FY11-13E
consolidated EPS declines 1-5%, while our target price for APTY
decreases to Rs94.5. We find APTY attractive at 4.8x FY12E EPS
and believe the current adverse environment is the best time to buy
this stock. We maintain our OUTPERFORM rating.
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