Volumes decline yet again in Q4, falling NR prices save the day
Apollo’s standalone net sales de-grew by 10% yoy and remained flat qoq to Rs 20.4bn on the back of weak OEM volumes and flat realizations. The entire 10% drop in sales has come on the back of volume decline mainly at the OEM side, both trucks as well as cars segments. Replacement demand showed some signs of improvement but could not make a meaningful impact on the topline. The company had also taken a price cut of c.1% in March on the back of falling NR prices. At the EBITDA levels, profits grew by 13.4% yoy to Rs2.46 bn and EBITDA margins firmed up to 12.1% from 9.6% yoy and 10.1% qoq as natural rubber prices moved down in the range of Rs150-160/kg. Other expenses increased as a % of sales to 14.4% from 13.6% qoq and 11.5% yoy as the company has initiated an ad campaign on TV last quarter which led to higher ad spend. Other income moved up to Rs247 mn as it included a one-off insurance claim writeback and recovery from certain employees for misappropriation of accounts. Depreciation expenses have remained flattish once again at Rs 556mn. Interest costs went down to Rs 628mn, 16% down yoy and 5.9% down qoq, while tax rate was at 42% which includes one off MAT credit. On margin accretion, PAT increased by 22.1% yoy and 34.1% qoq to Rs 882 mn.
Consolidated net sales de-grew by 6% both yoy as well as qoq to Rs 30.3 bn as overall volume growth remained weak and realizations remained flattish in all the three geographies. However, at the EBIT levels India performed well, while Europe showed a seasonal drop in margins at 11.73% from 17.2% qoq. South Africa reported a loss of Rs73 mn. Consol EBITDA margins came in at 11.7% slightly down from 11.9% qoq while up from 11.1% yoy as other expenses went up as a new R&D division was started at Netherlands to cater to their Vredestein business. Consolidated PAT adjusted for an exceptional item of Rs 168mn came in at Rs1.24bn, 28% qoq and 21% yoy drop on weak Europe and SA operations.
Outlook and valuation
Apollo’s Q4 results were a bit subdued because of the volume decline in India, weak margins in Europe in a seasonally weak quarter and continuation of underperformance from South Africa. Going forward, we believe Indian operations will continue to benefit from the tailwinds of natural rubber prices softening. Also downward movement of crude is expected to soften the prices of other crude based derivatives like synthetic rubber. Getting behind the capex cycle and reduction of debt will help to reduce interest costs and support the bottomline. The company is also free from the overhang of fund raising as these plans are postponed as of now. Overall demand improvement still seems to be far-fetched as we expect it to come only in H2 of FY 14 onwards. We believe that European operations will put up a strong margin show with Vredestein’s speciality in the high margin winter tyres business and proliferation of the Apollo brand in newer countries like Austria, Denmark and Switzerland. Scrapping of the plans for new plant in Eastern Europe comes on the back of availability of enough capacities (utilization rate of 85% in Europe) on weak demand. This will provide the company with ample scope for improving profitability through operating leverage when demand comes back. On account of unpredictable and volatile nature of SA operations, we believe this operation will not breakeven before FY 15 and will continue to be a drag on the consol business till then. In view of the weak overall demand, and uncertainty in the SA operations, we have cut our FY 14E earnings estimates by 12% to Rs15.2 and have introduced FY 15E estimates while rolling over our target price to the same. We now value the stock @ 6x times FY 15E earnings of Rs 18.7 and arrive at a target price of Rs 112, which is an upside of 19% from CMP of Rs94. Maintain BUY mainly on the domestic and European margin performance and rolling over of estimates to a new year.
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