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Apollo Tyres (APTY)
Automobiles
Sliding raw material costs to boost margins. As per our estimates, lower raw
material costs should positively impact EBITDA margins for Apollo Tyres from 3QFY12
onwards (partially) and full benefits should flow in 4QFY12E. In our view, EBITDA
margins (standalone) in 4QFY12E should move upwards of ~10%. Double-digit margins
in 4QFY12E would mean that the confidence of the Street on FY2013E EPS of Rs9.2
would be high. The stock is quoting at 7X FY2013E EPS of Rs9.2, which is at a discount
to the average one-year forward P/E multiple of 8.5X in the past 10 years.
Lower raw material costs to lead to rising trend in earnings in 4QFY12E
As of 2QFY12, APTY had not benefited because of lower natural rubber costs as higher synthetic
rubber and tire cord fabric prices more than neutralized the benefit. 3QFY12 would be the first
quarter in which all the raw materials would have sequentially lower prices (versus 2QFY12). Our
index of raw materials based on spot prices (quarterly average) is down ~10% from the average
levels of 2QFY12. As the company usually has one month of inventory at any time, benefits should
partially flow in 3QFY12 and full benefits on EBITDA margins should be visible in 4QFY12E.
Standalone margins could reach upwards of 10% in 4QFY12E from 6.8% in 2QFY12
APTY’s raw material cost per kg of tire was Rs165 in 2QFY12 (standalone). Even if the company
were to retain half of the savings in raw material cost per kg out of total of 10% (~Rs16 per kg), it
could mean an incremental EBITDA of Rs8 on a base of Rs14.5 per kg (our estimate) in 2QFY12.
Given that EBITDA margins in 2QFY12 were at 6.8%, Rs8 per kg of incremental EBITDA could lead
to EBITDA margins moving upwards of 10% in 4QFY12E when full benefits of lower raw material
prices are expected to flow through.
Double-digit margins in 4QFY12E should make the Street confident of FY2013E EPS of ~Rs9.2
The rising trend in earnings would not only lead to continued outperformance, it would also make
the Street confident of FY2013E EPS of ~Rs9.2. Our FY2013E EPS of Rs9.2 assumes EBITDA
(standalone) margin of 9% (+100 bps yoy) and volume and price growth of 10% and 3% yoy,
respectively. Double-digit EBITDA margins in 4QFY12E would mean that (assuming stable raw
material prices) even in case the volume growth momentum does not improve in FY2013E, the
company could still achieve our FY2013E EPS of Rs9.2. The stock is quoting at 7X FY2013E EPS of
Rs9.2, which is at a discount to the average one-year forward P/E multiple of 8.5X in the past 10
years.
Key risks include (1) fresh upward spike in raw material costs and (2) any negative development in
South African or European subsidiary.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Apollo Tyres (APTY)
Automobiles
Sliding raw material costs to boost margins. As per our estimates, lower raw
material costs should positively impact EBITDA margins for Apollo Tyres from 3QFY12
onwards (partially) and full benefits should flow in 4QFY12E. In our view, EBITDA
margins (standalone) in 4QFY12E should move upwards of ~10%. Double-digit margins
in 4QFY12E would mean that the confidence of the Street on FY2013E EPS of Rs9.2
would be high. The stock is quoting at 7X FY2013E EPS of Rs9.2, which is at a discount
to the average one-year forward P/E multiple of 8.5X in the past 10 years.
Lower raw material costs to lead to rising trend in earnings in 4QFY12E
As of 2QFY12, APTY had not benefited because of lower natural rubber costs as higher synthetic
rubber and tire cord fabric prices more than neutralized the benefit. 3QFY12 would be the first
quarter in which all the raw materials would have sequentially lower prices (versus 2QFY12). Our
index of raw materials based on spot prices (quarterly average) is down ~10% from the average
levels of 2QFY12. As the company usually has one month of inventory at any time, benefits should
partially flow in 3QFY12 and full benefits on EBITDA margins should be visible in 4QFY12E.
Standalone margins could reach upwards of 10% in 4QFY12E from 6.8% in 2QFY12
APTY’s raw material cost per kg of tire was Rs165 in 2QFY12 (standalone). Even if the company
were to retain half of the savings in raw material cost per kg out of total of 10% (~Rs16 per kg), it
could mean an incremental EBITDA of Rs8 on a base of Rs14.5 per kg (our estimate) in 2QFY12.
Given that EBITDA margins in 2QFY12 were at 6.8%, Rs8 per kg of incremental EBITDA could lead
to EBITDA margins moving upwards of 10% in 4QFY12E when full benefits of lower raw material
prices are expected to flow through.
Double-digit margins in 4QFY12E should make the Street confident of FY2013E EPS of ~Rs9.2
The rising trend in earnings would not only lead to continued outperformance, it would also make
the Street confident of FY2013E EPS of ~Rs9.2. Our FY2013E EPS of Rs9.2 assumes EBITDA
(standalone) margin of 9% (+100 bps yoy) and volume and price growth of 10% and 3% yoy,
respectively. Double-digit EBITDA margins in 4QFY12E would mean that (assuming stable raw
material prices) even in case the volume growth momentum does not improve in FY2013E, the
company could still achieve our FY2013E EPS of Rs9.2. The stock is quoting at 7X FY2013E EPS of
Rs9.2, which is at a discount to the average one-year forward P/E multiple of 8.5X in the past 10
years.
Key risks include (1) fresh upward spike in raw material costs and (2) any negative development in
South African or European subsidiary.
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