India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Given our expectations of margin expansion arising due to declining rubber
prices and price hikes taken by Apollo, we are raising our price target to `118
and rolling over our valuation estimates to FY 13.
Softening rubber prices to provide traction to margins
Domestic as well as international natural rubber prices have declined by ~12%
and ~34% over the past three months. With supply concerns easing, rubber
prices are expected to fall even further. With the third quarter of the financial year
being the best one for tapping, supply issues will ease up and rubber prices may
witness a further dip. The impact of rubber price decline will not be seen in Q1
FY11 results considering the high prices in April and May. However, we expect
margins of Apollo to improve from Q2 FY12 onwards. We estimate 11.6% and
12.1% margins for Apollo respectively in FY 12E and FY 13E.
Price increases taken over the last few months augurs well for margins
In order to mitigate the impact of higher rubber prices, tyre manufacturers have
taken 3-4 rounds of price hikes in the range of 2-3% each time over the last three
months mainly in the replacement markets. With OEM demand slowing down,
replacement demand is still robust and is expected to be robust on demand
coming from the launches witnessed 2-3 years back (a tyre life is ~3 years). In
the rest of FY 12, we believe it will be difficult for tyre companies to take any further
significant price hike considering rubber price softening and resistance from
clients. However, the price hike which is already taken will be sufficient to take
care of any possible rise in rubber prices.
Chennai plant capacity expansion to provide fillip to margins
through emphasis on radialization
Apollo’s Chennai plant is ramping up production to accommodate the rising
demand in the replacement markets. The capacity at the end of FY 11 was 150
tpd, which is expected to average out at 250 tpd in FY 12 and will move up to 450
tpd in FY 13. The capacity which is completely in TBR tyres will improve the
margins of the company, since radial tyres attract 200-300 bps margins higher
than bias tyres. Apart from that the operating leverage obtained from this plant will
help margin expansion in the coming years. International business is also
expected to perform well on the back of sustained growth in global auto industry
with Apollo expanding it’s capacity in Europe and utilization rates in South Africa.
Outlook and valuation
With significant dependence on replacement markets, the company is well
insulated from the slowdown in the OEM segment. Cooling rubber prices and
significant price hikes would lead to margin expansion from Q2. Expansion at
Chennai plant and steady volume growth from the TBR replacement side will
help volume growth mainly in FY 13. Positive free cash flows from FY 12,
improvement in ROE and reduction in capex from FY 13 will reduce the burden on
the bottomline. We therefore, raise our target price from `82 to `118, based on 8x
times FY 13E EPS of `14.7 and re-iterate our BUY rating.
No comments:
Post a Comment