Volumes decline, but rubber prices keep the bottomline afloat
Apollo’s standalone net sales de-grew by 3% yoy and 11% qoq to Rs 20.4bn on the back of weak OEM volumes and flat realizations. Softness in the domestic CV industry which dropped approximately 40% in December led to disappointment at the topline. Apollo’s volumes declined by 10% yoy in the quarter while its prices fell by 1% due to slightly adverse product mix. The company has gained market share despite the industry wide fall. At the EBITDA levels, profits grew by 22% yoy to Rs2.05 bn and EBITDA margins firmed up to 10.1% from 8% yoy and 9.9% qoq as natural rubber prices moved down in the range of Rs160-170/kg. Other expenses increased as a % of sales to 13.6% from 10.8% qoq and 10.5% yoy as the company initiated an ad campaign on TV which led to higher ad spend. Other income moved up to Rs191 mn as it included a one-off insurance receipt of Rs80 mn. Depreciation remained flattish since last three quarters at Rs547.95 mn. Interest costs went down to Rs 668mn by 3.3% qoq and 3% up yoy, while tax rate was at 30.4%.
Outlook and valuation
Apollo reported Q3 numbers above our expectations mainly on the profitability front. Top line declined due to OEM squeeze at the TBR segment. The TBR industry saw a steep fall in December which led to a below than expected results at the top line. However, at the bottom-line, a fall in natural rubber prices, successful European margin performance, and downtrend in capex cycle, production cuts at domestic plants, reduction in net debt and turning of South African operation in positive territory at the operating levels more than offset the top line underperformance. Going forward, in the domestic operations, the company may continue production cuts and slow ramp up at Chennai plant if CV industry does not improve thus cutting unnecessary costs.
However, with interest rate cycle showing some signs of moving downwards and economic revival expected to follow, we believe TBR segment will see a reversal thus boosting Apollo’s performance. Furthermore, the tyre industry is seeing a revival in replacement cycle from Q3, which may help Apollo to offset any kind dramatic fall in the OEM TBR segment(62% revenues of Apollo comes from replacement segment). European business is expected to continue with a good margin performance while South Africa is expected to fight it out well with the industry issues there. We are slightly increasing our FY 13/14E estimates on falling net debt, operational out performance and reversal in capex cycle. We are upgrading the target price from Rs99 to Rs 104 (@6x times consol earnings). Maintain BUY.
LKP Research
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