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Fine print
Apollo Tyres’ FY11 annual report highlights a challenging year with sales
growth of a modest 9% YoY, 340bps of Ebitda margin erosion and a preexceptional
PAT decline of 22% YoY. The lacklustre performance was
underpinned by margin pressures in India and South Africa and drove an
80% decline in operating cash flow. Balance sheet concerns are emerging
with gearing now over 1x and significant repayments due in FY12. Whilst
capacity growth will be substantial in FY12, this is overshadowed by
demand worries and material costs. We retain U-PF on Apollo Tyres.
Cash generation deteriorated in FY11
Apollo’s poor P&L performance in FY11 was accompanied by a 107% YoY
increase in working capital (ex cash and provisions) to Rs9.9bn. This dragged
down CFO by 80% YoY to Rs2.4bn. Continuing investments into the Chennai
facility as well as incremental capacity additions elsewhere underpinned capex
of Rs11.2bn (+7% YoY). This caused FCF to come in at negative Rs8.5bn,
(against negative FCF of Rs289m in FY10).
Balance sheet worries emerging
Apollo’s consolidated debt/equity now stands at 103% - its highest level since
FY06, with absolute debt of Rs24.8bn (+45% YoY). The proportion of
unsecured debt has increased to 36% (15% in FY10). Interest/Ebit has
increased from 13% in FY10 to 26% in FY11. Apollo has Rs12.1bn of debt due
for repayment in FY12 (+54% YoY). This is 49% of Apollo’s total debt and
may present refinancing challenges. Given that Apollo’s capacity expansion
will continue in FY12, leverage ratios are likely to deteriorate further.
Outlook – focus on growth overshadowed by concerns
Looking ahead, Apollo’s capacity expansion plans continue. Its Chennai facility
will have capacity of 465MT/day by the end of FY12 (total India production
957MT/day in FY11). The company is also undertaking incremental capacity
expansion in Europe and South Africa. However, the annual report highlights
challenges from high material costs, demand uncertainty in India and
competition from imports in South Africa (50% market share now).
Maintain earnings and U-PF recommendation
We have left our forecasts on Apollo unchanged. Whilst softening rubber
prices pose an upside risk, this is offset by downside risk to our 21% FY12
volume growth estimate for India. The high leverage adds the risk of a sharp
increase in interest costs. Overall, we see the balance of risks to be on the
downside. Retain U-PF with a price target of Rs70, 13% downside.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Fine print
Apollo Tyres’ FY11 annual report highlights a challenging year with sales
growth of a modest 9% YoY, 340bps of Ebitda margin erosion and a preexceptional
PAT decline of 22% YoY. The lacklustre performance was
underpinned by margin pressures in India and South Africa and drove an
80% decline in operating cash flow. Balance sheet concerns are emerging
with gearing now over 1x and significant repayments due in FY12. Whilst
capacity growth will be substantial in FY12, this is overshadowed by
demand worries and material costs. We retain U-PF on Apollo Tyres.
Cash generation deteriorated in FY11
Apollo’s poor P&L performance in FY11 was accompanied by a 107% YoY
increase in working capital (ex cash and provisions) to Rs9.9bn. This dragged
down CFO by 80% YoY to Rs2.4bn. Continuing investments into the Chennai
facility as well as incremental capacity additions elsewhere underpinned capex
of Rs11.2bn (+7% YoY). This caused FCF to come in at negative Rs8.5bn,
(against negative FCF of Rs289m in FY10).
Balance sheet worries emerging
Apollo’s consolidated debt/equity now stands at 103% - its highest level since
FY06, with absolute debt of Rs24.8bn (+45% YoY). The proportion of
unsecured debt has increased to 36% (15% in FY10). Interest/Ebit has
increased from 13% in FY10 to 26% in FY11. Apollo has Rs12.1bn of debt due
for repayment in FY12 (+54% YoY). This is 49% of Apollo’s total debt and
may present refinancing challenges. Given that Apollo’s capacity expansion
will continue in FY12, leverage ratios are likely to deteriorate further.
Outlook – focus on growth overshadowed by concerns
Looking ahead, Apollo’s capacity expansion plans continue. Its Chennai facility
will have capacity of 465MT/day by the end of FY12 (total India production
957MT/day in FY11). The company is also undertaking incremental capacity
expansion in Europe and South Africa. However, the annual report highlights
challenges from high material costs, demand uncertainty in India and
competition from imports in South Africa (50% market share now).
Maintain earnings and U-PF recommendation
We have left our forecasts on Apollo unchanged. Whilst softening rubber
prices pose an upside risk, this is offset by downside risk to our 21% FY12
volume growth estimate for India. The high leverage adds the risk of a sharp
increase in interest costs. Overall, we see the balance of risks to be on the
downside. Retain U-PF with a price target of Rs70, 13% downside.
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