Apollo Tyres::: Price improves, demand soft --CLSA

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Price improves, demand soft
We spoke to the management of Apollo Tyres earlier this week to get an
update on progress in the various businesses. Whilst raw material
pressures have eased amidst softening rubber and replacement price
hikes, demand is becoming an increasing source of worry with volume
growth in CVs in particular under pressure. Among the international
businesses, Europe has remained steady while South Africa continues to
struggle. We maintain our forecasts and U-PF recommendation given
worries around a demand slowdown.
Input cost pressures moderating
Cost pressures from high rubber costs are moderating. Domestic natural
rubber prices have eased 14% from their peak in April while international
prices, which had risen more, have eased 23%. Whilst synthetic rubber prices
are still running high, recent moderation in crude oil prices should drive
softening. The impact of this softening should be visible from 2Q.
India – pricing disciplined but demand softening
In the domestic business, the trend of price discipline which became visible in
April-May has persisted with a 3% price hike in truck replacement (bias) in
June and a 3.5% price hike across replacement segments in July. However,
demand worries have heightened with PCR growth slowing in the OEM
segment and CV demand softening in OEM as well as replacement. Whilst PCR
growth should remain in double digits, CV growth may drop into mid single
digits. This implies that the capacity being added at Chennai cannot be
absorbed in the domestic market. Whilst exports are a viable option for PCR,
Apollo has not exported truck/bus radials before and margin visibility in the
area is low. Overall, whilst raw material pressures are easing, demand
pressures are strengthening and overall visibility remains mixed.
Overseas – Europe fine, Africa still struggling
The Vredestein business has not felt any pressure from the European
macroeconomic environment as yet, protected by its niche position. Progress
in Africa is slow with the company struggling somewhat in efforts to gain back
the market share lost to low cost imports during the strike.
Demand worries prevent upgrades, retain U-PF
We build in 23% volume growth in the India business at Apollo, which is at
risk given the soft demand environment. This offsets upside risk to our
estimates from softening rubber prices and prevents us from upgrading
forecasts. Whilst the share price has moved up 15% in the past month on
easing rubber prices and news of price hikes, we see this is as overdone given
worries around demand softening. We retain U-PF on Apollo Tyres.