2 9January 2014
Apollo Tyres
Acquisition overhang clears; Buy
Key takeaways
3Q another good quarter for India operations. Apollo Tyres’ domestic
operation is expected to continue to grow decently, backed by higher
EBITDA margin and sanguine commodity costs. We expect 10% yoy revenue
growth, to `22.4bn, with a 12.9% EBITDA margin (up 280bps yoy, 90bps
qoq). Replacement demand growth is likely to be good. Our EBITDA growth
expectation is 40.5% yoy. We expect 58.8% yoy profit growth, to `1.2bn.
Consolidated profit growth at a slower pace. The slowdown in the
European market would bear heavily on the consolidated results. Being the
peak period for winter tyre demand, this would help sales growth. Yoy,
currency depreciation would also benefit. But in 2Q, the company had taken
price reduction due to competitive pressures. As a result, we expect
consolidated revenues to grow 12% yoy to `36bn, with a 12.8% EBITDA
margin (up 90bps yoy, 50bps qoq). We expect EBITDA to grow 20.8% yoy.
We expect 15.5% yoy profit growth to `2.1bn.
Cooper acquisition overhang over. The proposed Cooper acquisition was a
near-term overhang. With recent events now clearing the potential financial
burden that a leveraged buyout posed, the outlook is much brighter. The only
threat remains from the possibility of penal break-up fees being imposed by
the courts. In our view, given the nature of the break-up, this seems unlikely.
Our take. With the Cooper overhang over, we upgrade the stock to Buy on
continued strong financial performance of the company. While future
expansion plans may include overseas capex or another acquisition, so long as
the scale is not as big as Cooper, it would not pose a severe threat. At CMP,
the stock trades at 6.6x FY15e EPS. Our target price is at 8x earnings.
Risks. Increase in rubber prices, above-expected impact of the European
slowdown, unfavourable forex movements.
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Apollo Tyres
Acquisition overhang clears; Buy
Key takeaways
3Q another good quarter for India operations. Apollo Tyres’ domestic
operation is expected to continue to grow decently, backed by higher
EBITDA margin and sanguine commodity costs. We expect 10% yoy revenue
growth, to `22.4bn, with a 12.9% EBITDA margin (up 280bps yoy, 90bps
qoq). Replacement demand growth is likely to be good. Our EBITDA growth
expectation is 40.5% yoy. We expect 58.8% yoy profit growth, to `1.2bn.
Consolidated profit growth at a slower pace. The slowdown in the
European market would bear heavily on the consolidated results. Being the
peak period for winter tyre demand, this would help sales growth. Yoy,
currency depreciation would also benefit. But in 2Q, the company had taken
price reduction due to competitive pressures. As a result, we expect
consolidated revenues to grow 12% yoy to `36bn, with a 12.8% EBITDA
margin (up 90bps yoy, 50bps qoq). We expect EBITDA to grow 20.8% yoy.
We expect 15.5% yoy profit growth to `2.1bn.
Cooper acquisition overhang over. The proposed Cooper acquisition was a
near-term overhang. With recent events now clearing the potential financial
burden that a leveraged buyout posed, the outlook is much brighter. The only
threat remains from the possibility of penal break-up fees being imposed by
the courts. In our view, given the nature of the break-up, this seems unlikely.
Our take. With the Cooper overhang over, we upgrade the stock to Buy on
continued strong financial performance of the company. While future
expansion plans may include overseas capex or another acquisition, so long as
the scale is not as big as Cooper, it would not pose a severe threat. At CMP,
the stock trades at 6.6x FY15e EPS. Our target price is at 8x earnings.
Risks. Increase in rubber prices, above-expected impact of the European
slowdown, unfavourable forex movements.
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