Diversified positioning key positive! • Apollo Tyres:: ICICI Securities, PDF link

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Diversified positioning key positive!
• Apollo Tyres (ATL) reported revenues of ~| 3315 crore (3.4% YoY
decline) vs. our estimate of ~| 3490 crore with lower than expected
domestic sales leading to the miss
• Consolidated EBITDA margins at 14.9% came higher than our
estimate of 14.4% as the European business posted robust margins
(~17%) on the back of favourable raw material prices
• Thus, ATL's reported PAT at | 258 crore (~17% YoY growth) came
largely in line with estimates
ATL a unique combo of domestic & global tyre play!
While the deal with Cooper failed to materialise, ATL’s focus on
geographically de-risking the business augurs well for the future. With
radialisation trend in the T&B segment likely to improve radial volumes, a
revival in economic demand augurs well for domestic capacity utilisation
levels, which stand at ~75%. With the European business doing well,
capex planned for expanding capacity in Eastern Europe augurs well as
existing capacity in Europe is operating at ~90% utilisation. We believe
by benchmarking the R&D budget to industry leaders and focusing on
corporate branding, the management is on the right track to become a
serious competitor to global tyre players.
Major capacity addition in high margin segments major positive
Vredestein (more than a century old brand) is a highly profitable business
for ATL specialising in high performance summer and winter tyres. VBV’s
operating margin profile (last 10 quarter average margins at ~18%) is far
superior to that of the domestic business. The ~30% RoCE business is
operating at ~90% capacity utilisation. With little scope to expand, the
board’s decision to set up a greenfield plant in Eastern Europe at an
estimated spend of €500 million is on track to fatten ATL’s bottomline
even further. On the domestic front, a capex cycle revival is likely to aid
tyre markers as bulk of revenues are from the truck & bus (T&B) segment.
Hence, ATL has embarked on capacity expansion at its Chennai TBR plant
as the rapid rise of radialisation in the T&B segment is likely to create
capacity shortfall (existing utilisation for TBR capacity ~80%).
Favourable raw material prices likely to keep margins firm!
In the domestic business, with raw material prices (especially rubber
which represents >60% of total raw material cost for ATL) remaining
favourable, ATL’s margin profile is likely to remain stable. We also expect
the pricing discipline shown by the industry to continue, going forward,
thus helping sustain profitability. Along with the strong standalone
performance, the European subsidiary Vredestein (VBV) has contributed
handsomely to the overall profitability for ATL (~36% contribution to
consolidated EBIT) and recovery in Europe is likely to further the same.
Strong business case for premium to historic multiples! Maintain BUY
Apollo’s new European facility is slated to aid the current capacity crunch
faced by Vredestein coupled with strong domestic demand improvement.
ATL’s growth prospects appear strong. With a low D/E profile, decent
return ratios and strong operating cash flow visibility in the near term,
ATL is placed much better in this business cycle vis-à-vis previous up
cycles due to its largely diversified and global scale of business. With
outlook on raw material prices favourable, this lends additional room for
valuation multiples to expand. We build in earnings growth of ~13%
CAGR FY14-17E. We value ATL at 11x FY16E EPS to arrive at a target
price of | 275 and recommend BUY.

LINK
http://content.icicidirect.com/mailimages/IDirect_ApolloTyres_Q2FY15.pdf