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http://www.kotaksecurities.com/pdf/dmb/MorningInsight20032012.pdf
APOLLO TYRES (APTY)
PRICE: RS.80 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.92 FY13E P/E: 7.2X
Sharp increase in rubber prices coupled with slowing demand has kept
APTY's earnings under pressure in FY11 and 1HFY12. However rubber prices
have corrected from its highs and have remained relatively stable in the
recent months. Going ahead; expected pick-up in economic activity will lead
to steady improvement in tyre demand. After two consecutive years of
earnings de-growth, we expect APTY's net profit to grow by 50% in FY13.
We expect the company to turn FCF positive from FY13 and use the cash to
reduce its debt which in our view has peaked out for the near to medium
term. On the back of stable natural rubber prices, positive outlook on
APTY's earnings and improving balance sheet, we initiate coverage on the
stock with a ACCUMULATE rating and a price target of Rs.92. Despite various
positive triggers, we rate the stock as ACCUMULATE due to recent run-up in
the stock price.
Key Investment Rationale
q Capacity in place for the next round of growth. Over the past couple of
years, the company has been investing towards enhancing capacities in order to
cater to the next wave of demand. APTY's new greenfield plant in Chennai is
expected to get fully completed in FY13, even though production has already
started since 4QFY10. With full production levels at the Chennai plant, the
company's standalone capacity will increase from around 850MTPD in FY10 to
around ~1400MTPD in FY13. Even though the current demand scenario is
slightly slack, we expect the same to gather pace with expected improvement in
the domestic economy. We believe the capacity after the completion of Chennai
plant to be sufficient enough to take care of the domestic demand for the next
2-3 years.
q Operating margins to improve going ahead. EBITDA margin of tyre
manufacturers has been under pressure over the past few quarters led by steep
jump in input cost. APTY's margin declined from 14.5% in FY10 to 11% in
FY11. Margins continued to remain under pressure in FY12 with 2QFY12 margins
standing at 8%. We believe the company's margins have bottomed out and
expect recovery going forward. Correction in natural rubber prices, full impact of
price hikes, improved capacity utilization of the Chennai plant and expected
improved performance from the South African operations are positive triggers for
the margins, going forward. While there are adequate levers present to propel
the company's EBITDA margins in FY13, we have been a bit conservative in our
assumptions. We expect the company's EBITDA margin in FY12 and FY13 at
9.2% and 10.0% respectively.
q Current investment cycle over, debt to start coming down going
forward. Over the past couple of years (FY10 and FY11), APTY invested Rs46bn
towards capex that included capacity enhancement at various location and
investment in its greenfield capacity at Chennai. With the current round of
investment cycle expected to come to an end by FY12, we expect debt levels to
stabilize and come down gradually for APTY. Reduction in debt levels will reduce
the interest burden that is on a rise over the past few years. With majority of the
capex getting over in FY12, we expect the company's free cash flow to turn
positive in FY13. Further the company has not chalked out any major capex for
FY13 and we expect the company to use this cash to lower its debt levels.
q De-risked business model and strong brands are APTY's key strengths.
APTY operations are spread across three different geographies and have
presence in most of the product segments within the tyre industry. Such a spread
out revenue model provides cushion to the revenues and profits of the company
during difficult times. APTY has created strong brands in each of its operational
zones. For APTY, 'Apollo', 'Dunlop' and 'Vredestein' are the key brands in
Indian, South African and European markets respectively. Company's other
brands line Regal, Kaizen and Maloya support their more established
counterparts. APTY sells its product through a strong distribution network across
all the three geographies.
Valuation
q At the CMP of Rs.80, the stock trades at a PE of 10.7x and 7.2x its estimated
FY12 and FY13 earnings respectively. On EV/EBITDA, the stock trades at 5.8x
and 4.3x its FY12 and FY13 estimates respectively. After going through a difficult
phase in the past 2 years, we expect macro situation for the tyre industry to
improve. At the company level, both margin improvement and debt reduction
will be positive for APTY in FY13. We initiate coverage on the stock with a
ACCUMULATE rating and a price target of Rs.92. We value the stock at its
historical average one year forward PE multiple of 8.2x.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://www.kotaksecurities.com/pdf/dmb/MorningInsight20032012.pdf
APOLLO TYRES (APTY)
PRICE: RS.80 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.92 FY13E P/E: 7.2X
Sharp increase in rubber prices coupled with slowing demand has kept
APTY's earnings under pressure in FY11 and 1HFY12. However rubber prices
have corrected from its highs and have remained relatively stable in the
recent months. Going ahead; expected pick-up in economic activity will lead
to steady improvement in tyre demand. After two consecutive years of
earnings de-growth, we expect APTY's net profit to grow by 50% in FY13.
We expect the company to turn FCF positive from FY13 and use the cash to
reduce its debt which in our view has peaked out for the near to medium
term. On the back of stable natural rubber prices, positive outlook on
APTY's earnings and improving balance sheet, we initiate coverage on the
stock with a ACCUMULATE rating and a price target of Rs.92. Despite various
positive triggers, we rate the stock as ACCUMULATE due to recent run-up in
the stock price.
Key Investment Rationale
q Capacity in place for the next round of growth. Over the past couple of
years, the company has been investing towards enhancing capacities in order to
cater to the next wave of demand. APTY's new greenfield plant in Chennai is
expected to get fully completed in FY13, even though production has already
started since 4QFY10. With full production levels at the Chennai plant, the
company's standalone capacity will increase from around 850MTPD in FY10 to
around ~1400MTPD in FY13. Even though the current demand scenario is
slightly slack, we expect the same to gather pace with expected improvement in
the domestic economy. We believe the capacity after the completion of Chennai
plant to be sufficient enough to take care of the domestic demand for the next
2-3 years.
q Operating margins to improve going ahead. EBITDA margin of tyre
manufacturers has been under pressure over the past few quarters led by steep
jump in input cost. APTY's margin declined from 14.5% in FY10 to 11% in
FY11. Margins continued to remain under pressure in FY12 with 2QFY12 margins
standing at 8%. We believe the company's margins have bottomed out and
expect recovery going forward. Correction in natural rubber prices, full impact of
price hikes, improved capacity utilization of the Chennai plant and expected
improved performance from the South African operations are positive triggers for
the margins, going forward. While there are adequate levers present to propel
the company's EBITDA margins in FY13, we have been a bit conservative in our
assumptions. We expect the company's EBITDA margin in FY12 and FY13 at
9.2% and 10.0% respectively.
q Current investment cycle over, debt to start coming down going
forward. Over the past couple of years (FY10 and FY11), APTY invested Rs46bn
towards capex that included capacity enhancement at various location and
investment in its greenfield capacity at Chennai. With the current round of
investment cycle expected to come to an end by FY12, we expect debt levels to
stabilize and come down gradually for APTY. Reduction in debt levels will reduce
the interest burden that is on a rise over the past few years. With majority of the
capex getting over in FY12, we expect the company's free cash flow to turn
positive in FY13. Further the company has not chalked out any major capex for
FY13 and we expect the company to use this cash to lower its debt levels.
q De-risked business model and strong brands are APTY's key strengths.
APTY operations are spread across three different geographies and have
presence in most of the product segments within the tyre industry. Such a spread
out revenue model provides cushion to the revenues and profits of the company
during difficult times. APTY has created strong brands in each of its operational
zones. For APTY, 'Apollo', 'Dunlop' and 'Vredestein' are the key brands in
Indian, South African and European markets respectively. Company's other
brands line Regal, Kaizen and Maloya support their more established
counterparts. APTY sells its product through a strong distribution network across
all the three geographies.
Valuation
q At the CMP of Rs.80, the stock trades at a PE of 10.7x and 7.2x its estimated
FY12 and FY13 earnings respectively. On EV/EBITDA, the stock trades at 5.8x
and 4.3x its FY12 and FY13 estimates respectively. After going through a difficult
phase in the past 2 years, we expect macro situation for the tyre industry to
improve. At the company level, both margin improvement and debt reduction
will be positive for APTY in FY13. We initiate coverage on the stock with a
ACCUMULATE rating and a price target of Rs.92. We value the stock at its
historical average one year forward PE multiple of 8.2x.
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