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Apollo Tyres Ltd.
Rising demand, falling costs
�� Industry dynamics improve; Reiterate Buy
We spoke to management for update on Apollo’s business. Although recent crash
in natural rubber prices is a huge positive, we believe that sustenance of demand
recovery is equally significant, as it allays concerns of limited pricing power and
oversupply. We see upward risk to forecasts, and therefore PO of Rs 77.
Cost pressure easing
Price of key input, Natural rubber (~50% of operating cost) has declined almost
25% from recent peak. Typically, Apollo does not hedge exposure to
commodities, and is therefore likely to benefit from this. As such, if current trends
sustain, the company may not need to raise tyre prices in fiscal 2012, and yet
beat our existing margin assumptions (at 9.8%, flat yoy). On the other hand,
better demand conditions will be likely to lead to improved pricing power, resulting
in upside risk to our forecasts.
Domestic operations: Better demand and pricing power
After sluggish Q2/Q3, CV replacement demand has recovered and sustained
momentum. This situation is also reflected in improved pricing power with Apollo
hiking prices by ~3% in Jan/Feb (across OEMs/replacement). Also, radial
penetration continues to improve given inherent advantages, a structural positive.
International: Europe to cushion earnings volatility
As highlighted in Q3 results, Apollo’s European business (Vredenstein) continues
to do well with complete pass-through of higher input costs. Along with modest
South African operations, overseas subsidiaries will probably cushion earnings
volatility, accounting for 48% of FY12E consolidated profit.
Price objective basis & risk
Apollo Tyres Ltd (XAPYF)
Our PO of Rs 77 is based on 5x EV/EBITDA FY12E, which is early cycle recovery
multiple (similar to earlier). At our PO, the stock would trade at P/E of 10x FY12E.
Risks: Economic slowdown, which would adversely affect volume growth, and
rising commodity prices, including rubber and petro-based raw materials, which
could hurt profitability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Apollo Tyres Ltd.
Rising demand, falling costs
�� Industry dynamics improve; Reiterate Buy
We spoke to management for update on Apollo’s business. Although recent crash
in natural rubber prices is a huge positive, we believe that sustenance of demand
recovery is equally significant, as it allays concerns of limited pricing power and
oversupply. We see upward risk to forecasts, and therefore PO of Rs 77.
Cost pressure easing
Price of key input, Natural rubber (~50% of operating cost) has declined almost
25% from recent peak. Typically, Apollo does not hedge exposure to
commodities, and is therefore likely to benefit from this. As such, if current trends
sustain, the company may not need to raise tyre prices in fiscal 2012, and yet
beat our existing margin assumptions (at 9.8%, flat yoy). On the other hand,
better demand conditions will be likely to lead to improved pricing power, resulting
in upside risk to our forecasts.
Domestic operations: Better demand and pricing power
After sluggish Q2/Q3, CV replacement demand has recovered and sustained
momentum. This situation is also reflected in improved pricing power with Apollo
hiking prices by ~3% in Jan/Feb (across OEMs/replacement). Also, radial
penetration continues to improve given inherent advantages, a structural positive.
International: Europe to cushion earnings volatility
As highlighted in Q3 results, Apollo’s European business (Vredenstein) continues
to do well with complete pass-through of higher input costs. Along with modest
South African operations, overseas subsidiaries will probably cushion earnings
volatility, accounting for 48% of FY12E consolidated profit.
Price objective basis & risk
Apollo Tyres Ltd (XAPYF)
Our PO of Rs 77 is based on 5x EV/EBITDA FY12E, which is early cycle recovery
multiple (similar to earlier). At our PO, the stock would trade at P/E of 10x FY12E.
Risks: Economic slowdown, which would adversely affect volume growth, and
rising commodity prices, including rubber and petro-based raw materials, which
could hurt profitability.
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