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UBS Investment Research
Apollo Tyres
Share price weakness due to confusion
a round anti-dumping duty
�� Event: Q1FY12 results and negative news flow around anti-dumping duty
While Apollo Tyres reported somewhat weak Q1FY12 results as expected (India /
Europe / SA revenues were up 75%/38%/5% YoY; EBIT grew 39%/15%/-172%
YoY; consolidated PAT grew 4% YoY to Rs75m), negative news flow around the
anti-dumping duty has hurt investor sentiment on the stock. The DGFT has not yet
approved the removal of the anti-dumping duty. While the newsflow related to the
anti-dumping duty continues to hurt investor sentiment on the stock, we view the
stock price weakness as an attractive buying opportunity.
�� Impact: we lower our FY12 and FY13 EPS estimates by 3% each
We lower our FY12 and FY13 EPS estimates by 3% each to factor in lower
volume growth.
�� Action: reiterate Buy rating and Rs84 price target
We view the current share price weakness as an attractive buying opportunity. Our
price target is 35% above the current price. We believe removal of the antidumping
duty is unlikely, especially because 40% of domestic capacity is
recording EBITDA losses or barely breaking even.
�� Valuation: Buy rating and price target of Rs84
We derive our price target from our sum-of-the-parts valuation. We value the
company’s India / international business at 4.5x / 5.5x FY13E EV/EBITDA. The
stock is currently trading at 1x/0.86x FY12E/FY13E P/B despite an ROE in the
high teens.
Negative news flow around anti dumping duty—
attractive buying opportunity
The Custom Excise and Service Tax Appellate Tribunal (CESTAT) has passed
an order for removal of anti-dumping duty on Truck and Bus Radial (TBR) tyres.
However, the Directorate General of Foreign Trade (DGFT) has not signed this
order yet.
Our belief is that removal of the anti-dumping duty and a steep increase in
imports is not a sustainable long-term situation for various reasons:
�� Some of the small tyre vendors are making losses at the EBITDA level.
Removal of anti-dumping duty will cause their situation to deteriorate further.
We believe that the regulator will adopt a favourable stance towards the
domestic tyre industry.
�� During the last quarter, CEAT Tyres and Birla Tyres recorded EBITDA
losses. JK Tyres recorded an EBITDA profit of ~4%. The three tyre
manufactures contribute to ~40% of domestic tyre manufacturers’ capacity.
Domestic tyre manufacturers’ poor operating margins point to a cyclical
bottom in the domestic tyre industry’s profitability. Additionally, it will also
provide a reason to the DGFT to not approve removal of the anti-dumping
duty which can hurt domestic tyre industry further. Given the high share of
road transportation in domestic cargo movement (~70%) we consider the tyre
industry as critical to the smooth functioning of the economy and believe that
the government bodies will not allow a situation where 40% of the domestic
capacity will have to shut down.
�� In case anti-dumping duty is actually removed and the imports actually
increase meaningfully, the domestic tyre industry can then appeal for
imposition of a safeguard duty.
If the DGFT clears the removal of anti-dumping duty, it can impact Apollo
Tyre’s profitability for a quarter; we do not expect this situation to last.
What if DGFT clears the removal of anti-dumping duty?
We estimate the unbranded imports from China/Thailand are around 3% of truck
and bus tyre volumes in India and 20% of truck and bus radial (TBR) tyre
volumes (imports are primarily radial tyres, there are no imports of cross ply
tyres). Even with anti-dumping duty, imports are 10-15% cheaper than
domestic TBR tyres. So the extent of the impact from lifting of anti-dumping
duty will be limited. Our analysis indicates that the volumes will be impacted to
the tune of less than 2% of overall Apollo Tyres volumes. The impact on
profitability can be higher given potentially higher margins in radial tyres.
Apollo Tyres
Apollo Tyres is a leading tyre manufacturer in India. It has the highest market
share in truck tyres. It has established a presence in South Africa and Europe by
acquiring Dunlop's South African operations and Vredestein in the Netherlands.
�� Statement of Risk
We believe the key risks are: 1) a sustained industrial slowdown; 2) continued
increase in raw material prices; 3) further production interruptions; and 4) any
ruling against Apollo Tyres (and other tyre companies) by the Competition
Tribunal in South Africa.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Apollo Tyres
Share price weakness due to confusion
a round anti-dumping duty
�� Event: Q1FY12 results and negative news flow around anti-dumping duty
While Apollo Tyres reported somewhat weak Q1FY12 results as expected (India /
Europe / SA revenues were up 75%/38%/5% YoY; EBIT grew 39%/15%/-172%
YoY; consolidated PAT grew 4% YoY to Rs75m), negative news flow around the
anti-dumping duty has hurt investor sentiment on the stock. The DGFT has not yet
approved the removal of the anti-dumping duty. While the newsflow related to the
anti-dumping duty continues to hurt investor sentiment on the stock, we view the
stock price weakness as an attractive buying opportunity.
�� Impact: we lower our FY12 and FY13 EPS estimates by 3% each
We lower our FY12 and FY13 EPS estimates by 3% each to factor in lower
volume growth.
�� Action: reiterate Buy rating and Rs84 price target
We view the current share price weakness as an attractive buying opportunity. Our
price target is 35% above the current price. We believe removal of the antidumping
duty is unlikely, especially because 40% of domestic capacity is
recording EBITDA losses or barely breaking even.
�� Valuation: Buy rating and price target of Rs84
We derive our price target from our sum-of-the-parts valuation. We value the
company’s India / international business at 4.5x / 5.5x FY13E EV/EBITDA. The
stock is currently trading at 1x/0.86x FY12E/FY13E P/B despite an ROE in the
high teens.
Negative news flow around anti dumping duty—
attractive buying opportunity
The Custom Excise and Service Tax Appellate Tribunal (CESTAT) has passed
an order for removal of anti-dumping duty on Truck and Bus Radial (TBR) tyres.
However, the Directorate General of Foreign Trade (DGFT) has not signed this
order yet.
Our belief is that removal of the anti-dumping duty and a steep increase in
imports is not a sustainable long-term situation for various reasons:
�� Some of the small tyre vendors are making losses at the EBITDA level.
Removal of anti-dumping duty will cause their situation to deteriorate further.
We believe that the regulator will adopt a favourable stance towards the
domestic tyre industry.
�� During the last quarter, CEAT Tyres and Birla Tyres recorded EBITDA
losses. JK Tyres recorded an EBITDA profit of ~4%. The three tyre
manufactures contribute to ~40% of domestic tyre manufacturers’ capacity.
Domestic tyre manufacturers’ poor operating margins point to a cyclical
bottom in the domestic tyre industry’s profitability. Additionally, it will also
provide a reason to the DGFT to not approve removal of the anti-dumping
duty which can hurt domestic tyre industry further. Given the high share of
road transportation in domestic cargo movement (~70%) we consider the tyre
industry as critical to the smooth functioning of the economy and believe that
the government bodies will not allow a situation where 40% of the domestic
capacity will have to shut down.
�� In case anti-dumping duty is actually removed and the imports actually
increase meaningfully, the domestic tyre industry can then appeal for
imposition of a safeguard duty.
If the DGFT clears the removal of anti-dumping duty, it can impact Apollo
Tyre’s profitability for a quarter; we do not expect this situation to last.
What if DGFT clears the removal of anti-dumping duty?
We estimate the unbranded imports from China/Thailand are around 3% of truck
and bus tyre volumes in India and 20% of truck and bus radial (TBR) tyre
volumes (imports are primarily radial tyres, there are no imports of cross ply
tyres). Even with anti-dumping duty, imports are 10-15% cheaper than
domestic TBR tyres. So the extent of the impact from lifting of anti-dumping
duty will be limited. Our analysis indicates that the volumes will be impacted to
the tune of less than 2% of overall Apollo Tyres volumes. The impact on
profitability can be higher given potentially higher margins in radial tyres.
Apollo Tyres
Apollo Tyres is a leading tyre manufacturer in India. It has the highest market
share in truck tyres. It has established a presence in South Africa and Europe by
acquiring Dunlop's South African operations and Vredestein in the Netherlands.
�� Statement of Risk
We believe the key risks are: 1) a sustained industrial slowdown; 2) continued
increase in raw material prices; 3) further production interruptions; and 4) any
ruling against Apollo Tyres (and other tyre companies) by the Competition
Tribunal in South Africa.
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