Apollo Tyres Ltd - No Rolling Resistance; Initiating Coverage :: Edelweiss PDF link

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

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Apollo Tyres Acquisition overhang clears; Buy :: Anand Rathi

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.

Apollo Tyres - Cooper deal called off; Stock likely to play catch up :: Prabhudas Lilladher

As we had mentioned in our update dated 14th Nov’13 in case the deal with
Cooper Tires does not go through, it would be a big positive for the stock. Cooper
Tires called off the deal in the last week of Dec’13. Cooper was unable to file its
financials for the September quarter due to unavailability of financials of the
Chinese venture. We believe thatthe termination ofthe deal is a positive for Apollo
tyres as the deal would have put significant pressure on the consolidated balance
sheet(acquisition cost of $2.5bn mainly funded through debt).Now thatthe deal is
called off, we revert back to our earlierthesis of Apollo being better placed among
the tyre companies in terms of balance sheet and strong Free Cash Flow. Now, in
our view, it will play a catch up game with other tyre stockslike JK, MRF and CEAT
which have run‐ up by 50‐70%. With valuations attractive at 6.5x FY14E and 6.2x
FY15E EPS, we recommend BUY rating on the stock with a Target price of Rs138
(@8x FY15E P/E ‐  in line with its average P/E).
 Termination of the deal a big positive: We believe that the termination of the
deal is a positive for Apollo tyres as the deal would have put significant pressure
on the consolidated balance sheet. Moreover, there was a high risk of Cooper
not being able to service the huge debt asmargins were under pressure. With an
annual interest outgo of USD 180‐200m, it would have put pressure on servicing
the debt. Now that the deal is called off, we revert back to our earlier thesis that
Apollo is better placed among tyre companies in terms of balance sheet and
strong Free cash generation. We do not take into account any termination fee /
damages that may arise to either of the entities. We are of the view that Apollo
Tyres would not have to pay any termination fee as the earlier two rulings by
the Delaware court were in Apollo’s favor.

Angel Broking - Apollo Tyres - Event Update

 

Acquisition of Cooper Tire – Ambitious move

Apollo Tyres (APTY) and Cooper Tire and Rubber Company (CTB) have announced a definitive merger agreement, under which APTY will acquire CTB in an all cash transaction valuing the firm at US$2.5bn (including minority interest). APTY will acquire 100% equity of CTB for an equity valuation of US$2.2bn, ie at a 43% premium to CTB’s 30 day volume weighted average price. The acquisition would be funded entirely through debt. The deal value of US$2.5bn translates into an implied EV/EBITDA multiple of 4.4x (TTM basis), which is broadly in-line with the global average. Post the acquisition, the combined entity will be the 7^th largest tyre company in the world with combined revenues of US$6.6bn. The company expects to close the transaction in the next four months.     

  

Kindly click on the following link to view the Report.

 

Apollo Tyres - Event Update

Stock Strategy: Consider short strangle on Apollo Tyres :: Business Line

Apollo Tyres: Tread with care :: Business Line

Apollo Tyres - “Overambitious move”:LKP

The Development  

In a path-breaking development, Apollo has announced to buy US based Cooper Tyres in an all cash transaction of $2.5 bn. This cost seems to be too high according to us as Apollo will be paying at 42% premium to Cooper’s closing market price on Tuesday (translating it into 4.4x trailing 12 months EV/EBITDA)  and will carry this acquisition by raising 100% of this cost through debt. 80% of this debt will be serviced by the holding entity housing the target company and Apollo’s European business Vredestein. Post this acquisition, the Net Debt/EBITDA will expand to 3.8x and the consolidated net D/E will move up from 0.53x to 1.35x. The company is seeking regulatory approvals from the key markets of the US and Germany, which is likely to get completed within next 3-4 months.

Outlook

In our view, the acquisition looks over ambitious viewing the current demand scenario across the globe. Although the management has mentioned that this move will be EPS accretive right from the first year of operations, we have our reservations on it viewing the limitations on the topline growth and profitability at the EBITDA front considering the challenges both Apollo and Cooper are facing currently. In FY 12, Cooper has posted its peak margins, and given the competitive intensity in the US from Chinese and Japanese players, we remain concerned over the pricing stability over there. In India too, given the falling CV industry growth (~70 % of Apollo’s business), earning incremental cash flows to pay off the debt seems difficult. Also execution is a key to earn stable margins considering the volatile demand and raw material environment across the globe. Few years back, when the company had acquired Vredestein’s operations, it was acquired from a loss making company at reasonable valuations, which paid off well for Apollo. Though Cooper seems like a good strategic fit, Apollo is paying a huge price for it (the debt raised for buying it, itself being more than 3x times Apollo’s market cap), and hence gaining synergies and the timeline of achieving it is important. We also await more visibility on the complex funding structure and approval process in the next few months. Despite the 20% fall in the stock price today, we believe there will be an overhang on the stock due to the complexity of the deal and expectations of investors from the deal going forward. We need to wait and watch over the next few quarters, as in how the synergies of this deal shape up. We are reviewing our numbers and hence the stock is ‘Under Review’.The financial projections in this report does not include numbers of Cooper.

Apollo Tyres - Trade-off between volumes and margins to continue -LKP

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.

Apollo Tyres 3QFY13 Result Update_LKP

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

Angel Broking - Apollo Tyres - RU2QFY2013 - Result Updates

Apollo Tyres - RU2QFY2013

Apollo Tyres - "QIP issue and SA operations weigh on the stock, cut target, maintain BUY" :: LKP Research

Impressive set of numbers

Apollo’s standalone net sales grew by 23.7% yoy and 6.1% qoq to Rs 22.8bn, most of which came out of volume improvement and the rest from a minimal price hike and product mix improvement. The standalone results were above our expectations as replacement cycle is showing some signs of reversal. Management said that they have seen improvement in demand in this quarter when compared sequentially, on the replacement segment especially TBR side, however are still witnessing softness on the OEM demand. EBITDA grew by 80% yoy, but just 2% qoq to   Rs2.25 bn and EBITDA margins went down qoq to 9.9% from 10.3% as natural rubber prices slightly firmed up with other RM costs (74.6% of sales v/s 72.9% qoq). On yoy basis it improved significantly from 6.8%.  In spite of higher depreciation on account of the ramp up in Chennai plant, PAT pulled a strong growth of 240% yoy and remained flattish qoq to Rs752 mn. Interest costs went up to Rs 694mn, 33% yoy and 12.4% qoq, while tax rate remained flat at 31.2%.

Bharat Electronics, Motherson Sumi, Apollo Tyres: reports by Kotak Securities

Bharat Electronics: Execution, margins and cash utilization remain unclear;
retain REDUCE

Motherson Sumi Systems: Peguform turning around faster than expected

Apollo Tyres: Why are Apollo's reported debtor days lower than peers?

APOLLO TYRES (Buy, Target Rs.115) LKP Advisory

APOLLO TYRES (Buy, Target Rs.115)

·         Apollo Tyres is India’s second largest tyre producer with subsidiaries in Europe & South Africa. Improving South African operations and stable demand in Europe would in our view drive volumes for Apollo Tyres and easing rubber prices coupled with a pick-up in the domestic replacement market would help sustaining  EBIDTA margins of 10%

Angel Broking - Apollo Tyres - RU4QFY2012 - Result Updates - PDF link

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Apollo Tyres - RU4QFY2012

Apollo Tyres - “Margin improvement drives Q4 numbers” ::LKP

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Domestic outlook is positive

Going forward, the impact of falling rubber prices will be seen even more in FY 13. The plantation of significant amount of natural rubber plantation in India and China done in 2005-06 will started yielding from 2012 (it takes 6-7 years for a rubber plant to get matured and start producing). This may reduce the demand supply gap, thus resulting in a further price fall. However, crude based derivatives and falling Rupee may somewhat neutralise the benefits. Replacement demand which have already showed signs of improvement from Q4, is expected to pick up on both TBR as well as PCR sides in FY 13, which will assist margins. Slow pick up in radial tyres may remain a slight concern for the margins. The company has gained back its lost market share on the TBR side at 28% and will further gain as the Chennai plant is expected to get completely ramped up by December 2012 and will function at optimum capacity of 450 MTPD from current levels of 350 MTPD. Apollo has estimated its Indian operations to grow at 15% in FY 13. Also the company is through with its capex plans and has just maintenance capex of Rs2.7bn for FY 13. Due to this reason, we expect the Net D/E to come down significantly and reduce the interest expenses thus boosting bottomline. In line with these, we have increased our volume and margin estimates for the standalone business going forward.

South Africa to cut losses and Europe to be stable in FY13

On a consolidated basis, the performance was majorly lifted up by India and Europe as the latter reported margins close to 17.5%, though volumes were slightly softer on a qoq basis. Europe showed a growth in sales of only 8% yoy and 17% a decline qoq as March quarter is seasonally softer than December as summer sets in and the high demand winter tyre sales comes off. No significant capacity expansion in Europe is slightly stagnating Vredestein’s business, however, strong inflows of Apollo branded tyres (expected to grow at 100% in Europe on a small base of €10 mn in a couple of years) will ensure the momentum remains intact. Also entry into new geographies like Switzerland, Denmark and Austria in Q4 and plans of setting up a new manufacturing facility in Eastern Europe will take care of the long term plans of the company. Apollo expects stable business from Europe in FY 13, however, the high margin profile of this business will ensure Apollo reports stable consol profitability though volumes from Europe may not be too high. 

South Africa witnessed revenue decline of 4% yoy in this quarter, however on a yearly basis, they have grown by 10.4%. Issues like Chinese imports and weak demand were the key concerns for South African tyre business. However, Q4 has started showing improvement structurally over there as growth has returned back to the sector despite Chinese imports, RM costs are stable and pricing scenario has also improved. The company took 3% price hikes twice in Feb and April which got were absorbed by the consumers, thus giving an indication of improvement. Although the margins were negative and losses high in the quarter, we expect SA business to cut losses in FY 13 and breakeven only in FY 14.

Outlook and valuation

Apollo came out with a good set of numbers in the quarter, where domestic business led from the front. With expectations of rubber prices moving down, Chennai capacity coming completely on stream, radialization in the TBR segment slightly improving and replacement demand showing signs of improvement, we are increasing our domestic volume as well as margin estimates for FY 13. In Europe, geographical expansion of Apollo branded tyres and steady volumes will act as drivers, while South Africa, which has shown some signs of improvement is expected to cut losses. With the company through with its capex cycle, we expect it to get a boost to the bottomline. Hence, we have raised out target price to Rs101 (@8.5x times FY 13E consol EPS of Rs11.9) from Rs91, and are maintaining our BUY rating on the stock.

Sizzling Stocks - IRB Infrastructure Developers (Rs 128.7) :Business Line,

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Sizzling Stocks - IRB Infrastructure Developers (Rs 128.7)

 

IRB Infrastructure nose-dived 24 per cent with extraordinary volumes breaking through a key long-term support around Rs 170 last week .

However, the stock is hovering above its next long-term support at Rs 125. As the stock has fallen steeply and its daily indicators and oscillators are featuring in the oversold levels, we do not rule out a near-term corrective rally to Rs 140 and then to Rs 150.

The stock has breached the lower boundary of the daily Bollinger Bands indicating an oversold counter.

The stock's primary trend is down from its August 2010 peak of Rs 312. A strong weekly close below Rs 125 will strengthen its downtrend and drag the stock down to Rs 108 and to Rs 80 in the medium-term. Significant resistances above Rs 150 are pegged at Rs 170 and Rs 190.

Apollo Tyres (Rs 80.5)

Last week Apollo Tyres did a volte-face and plummeted 12.8 per cent. This reversal was triggered by negative divergence in the daily relative strength index and daily moving average convergence divergence indicators.

The stock has breached its 21- and 50-day moving averages and is hovering well below them.

We notice the formation of a bearish engulfing candlestick pattern in the weekly candlestick chart, implying a bearish reversal in trend.

Further, confirming the change in direction, the stock penetrated its intermediate-term up trend-line last Friday.

The stock can fall to Rs 75 in the short-term. Strong tumble below Rs 75 will drag the stock down to Rs 67 and then to Rs 63.5 in the medium-term. Key resistances are positioned at Rs 85, 89 and Rs 94.

Apollo Tyres: Structural tailwinds - Part 2 :: Kotak Securities PDF link

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http://www.kotaksecurities.com/pdf/indiadaily/indiadaily09042012.pdf

Apollo Tyres: Structural tailwinds - Part 2
` Benefits of rising non-truck revenues - reduced working capital; higher
profitability
` Non-truck tire (car tires specifically) business is the future of the industry;
truck tire is the past
` Companies need to improve product quality to gain from the trend; losers
will be marginalized

Apollo Tyres::Sharekhan Top Picks -April 2012

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Remarks: We view Apollo Tyres as the best tyre play amongst the Indian listed tyre companies. The company is also the
best diversification story whereby it is now the largest radial manufacturer in the country. It is also a global
tyre play after the acquisition of Vredestien in Europe and of Dunlop in South Africa and derives 23% of its sales
globally.
Europe continues to be the shining spot with the company recording double-digit margins at the EBIT level
helped by strong sales of Vredestien’s branded replacement tyres. Increased sales of Apollo branded tyres in
Europe would provide additional fillip to its profitability.
The company is likely to benefit from an uptick in the domestic commercial vehicle (CV) replacement segment
and increased sales of CV radial tyres. The rupee’s depreciation will see reduced threat from Chinese imports.
Stable material prices, recovery in South African operations and increased proportion of Apollo branded tyres
in the premium European market are likely to improve the margins. At the current market price the stock
trades at a PE multiple of 6.8x discounting its FY2013E earnings. We maintain our Buy with a price target of
Rs86.

Apollo Tyres: Takeaways from recent market data :: Kotak Securities PDF link

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Apollo Tyres: Takeaways from recent market data
` Imports are losing market share in truck/bus segment on depreciating
Rupee
` Exports continue to exhibit strong growth
` European passenger car tire market weakening
` Domestic tire production de-grows in January; likely to have picked up in
March