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Apollo Tyres (APTY)
Automobiles
Inroads across the world. Apollo is a leading company in the Indian tire industry with
a consistent market share of 21% in the past six years. The company is preparing to
reap domestic growth with capacity expansion even as it ensures a global role for itself
with two acquisitions—Apollo is well-placed to grow its export business by leveraging
its low-cost production base. We initiate coverage on the stock with a BUY rating and a
target price of Rs85 (at 8.5X FY2013E EPS). At our target price, the stock will quote at
0.9X FY2013E book value and 5.2X FY2013E EBITDA.
Leading company in the domestic market
Apollo is one of the two large Indian tire companies that have been able to maintain their market
shares (at ~21% each) in the past six years in contrast to other companies in the domestic market
whose shares have fallen. It has managed to increase market share in the passenger radial
segment from 5% in FY2002 to 19% in FY2011 as it invested in capacity addition in anticipation
of growth in the market. With the new plant in Chennai getting fully commissioned by the end of
FY2012E, it is poised to leverage the growth in domestic tire volumes.
Potential overcapacity situation could be managed – exports could provide an outlet
Capacity of the industry in truck and bus radials (TBRs) will be 4X in the next three years while the
capacity in passenger car radials (PCRs) will increase from 26.2 mn tires to 40 mn tires by FY2014E.
We are assuming that all the announced capacity additions come online as per schedule (low
probability). Potential overcapacity situation in the coming two years could be managed by
increasing export volumes; an opportunity not explored by Indian manufacturers due to lack of
excess capacities in the past. Apollo is ideally placed to leverage the opportunity given its global
presence.
Momentum in earnings to renew after a subdued FY2012E
We expect the company to grow its EBITDA at a CAGR of ~14% in FY2011-13E assuming a
subdued growth in volumes in FY2012E. In case the company is able to scale up exports, it could
lead to higher-than-estimated growth. There could be upside to our earning estimates in case of a
meaningful correction in rubber prices.
Key risks
(1) Sharp increase in rubber prices, (2) pricing pressure on account of large capacity additions in
the domestic market or due to large increase in import volumes, and (3) large cash outflow on
account of the company’s reported foray into the rubber plantation business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Apollo Tyres (APTY)
Automobiles
Inroads across the world. Apollo is a leading company in the Indian tire industry with
a consistent market share of 21% in the past six years. The company is preparing to
reap domestic growth with capacity expansion even as it ensures a global role for itself
with two acquisitions—Apollo is well-placed to grow its export business by leveraging
its low-cost production base. We initiate coverage on the stock with a BUY rating and a
target price of Rs85 (at 8.5X FY2013E EPS). At our target price, the stock will quote at
0.9X FY2013E book value and 5.2X FY2013E EBITDA.
Leading company in the domestic market
Apollo is one of the two large Indian tire companies that have been able to maintain their market
shares (at ~21% each) in the past six years in contrast to other companies in the domestic market
whose shares have fallen. It has managed to increase market share in the passenger radial
segment from 5% in FY2002 to 19% in FY2011 as it invested in capacity addition in anticipation
of growth in the market. With the new plant in Chennai getting fully commissioned by the end of
FY2012E, it is poised to leverage the growth in domestic tire volumes.
Potential overcapacity situation could be managed – exports could provide an outlet
Capacity of the industry in truck and bus radials (TBRs) will be 4X in the next three years while the
capacity in passenger car radials (PCRs) will increase from 26.2 mn tires to 40 mn tires by FY2014E.
We are assuming that all the announced capacity additions come online as per schedule (low
probability). Potential overcapacity situation in the coming two years could be managed by
increasing export volumes; an opportunity not explored by Indian manufacturers due to lack of
excess capacities in the past. Apollo is ideally placed to leverage the opportunity given its global
presence.
Momentum in earnings to renew after a subdued FY2012E
We expect the company to grow its EBITDA at a CAGR of ~14% in FY2011-13E assuming a
subdued growth in volumes in FY2012E. In case the company is able to scale up exports, it could
lead to higher-than-estimated growth. There could be upside to our earning estimates in case of a
meaningful correction in rubber prices.
Key risks
(1) Sharp increase in rubber prices, (2) pricing pressure on account of large capacity additions in
the domestic market or due to large increase in import volumes, and (3) large cash outflow on
account of the company’s reported foray into the rubber plantation business.
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