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EARNINGS REVIEW
Apollo Tyres (APLO.BO)
Neutral Equity Research
In line with expectations: Operational challenges ahead; still Neutral
What surprised us
Apollo Tyres reported net income of Rs0.7bn, up 4% yoy, lower than our
estimates by 6% and Bloomberg consensus by 10%. EBITDA margin was
down 326bps qoq, and 239bps yoy. On the conference call, management
highlighted key concerns for the overall market, with an update on
company operations: 1) Materials costs as a percent of sales increased by
2pp qoq and 10pp yoy. 2) A price hike of 14pp was implemented in the
replacement market to partially offset rising costs. 3) International
operations: A) Higher cost of production coupled with the government’s
decision to remove anti-dumping duty was a key headwind to the
performance of South African operations as imports from China increased.
B) Demand remained strong in European operations, also aided by
channel restocking in advance of the winter season. 4) Increasing
radialisation in the domestic market led to weak demand for and
production cuts in the cross-ply segment. 5) Interest cost was high on
increased expensing and capex for the Chennai plant and increase in
working capital.
What to do with the stock
We retain our Neutral rating and 12-month FY12E P/B-based TP of Rs69.
The stock is currently trading at a 7-year historical average of 1.3X FY12E
P/B vs. our global tire coverage group average of 1.4X. Key risks: 1)
Higher-/lower-than-expected material costs, particularly natural rubber; 2)
higher-/lower-than-expected replacement demand and pricing; and 3)
further weakening/strength in performance of European and South African
operations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EARNINGS REVIEW
Apollo Tyres (APLO.BO)
Neutral Equity Research
In line with expectations: Operational challenges ahead; still Neutral
What surprised us
Apollo Tyres reported net income of Rs0.7bn, up 4% yoy, lower than our
estimates by 6% and Bloomberg consensus by 10%. EBITDA margin was
down 326bps qoq, and 239bps yoy. On the conference call, management
highlighted key concerns for the overall market, with an update on
company operations: 1) Materials costs as a percent of sales increased by
2pp qoq and 10pp yoy. 2) A price hike of 14pp was implemented in the
replacement market to partially offset rising costs. 3) International
operations: A) Higher cost of production coupled with the government’s
decision to remove anti-dumping duty was a key headwind to the
performance of South African operations as imports from China increased.
B) Demand remained strong in European operations, also aided by
channel restocking in advance of the winter season. 4) Increasing
radialisation in the domestic market led to weak demand for and
production cuts in the cross-ply segment. 5) Interest cost was high on
increased expensing and capex for the Chennai plant and increase in
working capital.
What to do with the stock
We retain our Neutral rating and 12-month FY12E P/B-based TP of Rs69.
The stock is currently trading at a 7-year historical average of 1.3X FY12E
P/B vs. our global tire coverage group average of 1.4X. Key risks: 1)
Higher-/lower-than-expected material costs, particularly natural rubber; 2)
higher-/lower-than-expected replacement demand and pricing; and 3)
further weakening/strength in performance of European and South African
operations.
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