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

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Apollo Tyres Ltd. (APTY) is the second largest tyre manufacturer in India. The company's standalone business is in a sweet spot as the domestic CV segment (64% of standalone business) is on the cusp of a recovery while key raw material prices (rubber and crude) have softened substantially (Q2FY15 India gross margins up by 380 bps QoQ). Natural rubber prices are expected to remain muted, as supply will continue to outpace demand over the next two years. This will drive an EPS CAGR of 23% over FY14-17E for APTY. The company is more than doubling its capacity in Europe to tap new geographies (Russia & Eastern Europe) and segments (CV & OEM), where it has already demonstrated capabilities by doubling its market share (1.7% to 3%). The domestic market dynamics and the company's long-term strategy for overseas markets give us visibility that APTY will remain resilient in a largely cyclical industry. Europe realizations and EBITDA per tyre are 3x (approximately) Vs Indian operations, which will lead to improved growth once enhanced capacity kicks in from FY17E.

APTY will be biggest beneficiary of domestic CV cycle recovery and radialization

APTY is expected to be the biggest beneficiary of CV cycle recovery, as it commands a 27% market share in the CV segment. Spurred by the revival in domestic economic activity, fleet utilization levels have started improving, which is expected to translate into pent-up demand for CVs in the near future. That, in turn will aid APTY in growing its Indian operations' revenue by 15%/20%/8% in FY15E/FY16E/FY17E, respectively. Further, the company is expanding aggressively to capture incremental demand. With improvement in radial mix in the overall revenue pie, the company is expected to report better margins going forward.

Expansion/dual brand strategy to drive growth in European market

To achieve a global footprint, APTY acquired Vredestein in Europe. Post acquisition, the company doubled market share to 3% and its revenue grew at 19% CAGR due to geographic expansion and entry into new segments. APTY has adopted a dual brand strategy in Europe, positioning Vredestein as a premium tyre brand while launching Apollo-branded tyres to cater to the mid-market segment. Further, the company is expanding its European presence by setting up capacity in Hungary to tap new geographies like Eastern Europe and Russia. Apollo-Vresdestein's successful dual brand strategy and consistently better-than-industry growth rate give us confidence about APTY's planned foray in Eastern Europe and Russia over the long term.

Significant capex for growth; Debt/EBITDA to remain at 0.6x

APTY is undertaking significant capex of INR 5700 cr over the next four years; out of which INR 5200 cr is growth capex - mainly focused on expansion in Europe and radialization in India. APTY will be able to fund majority of its capex through internal accruals while the company's net debt and operating cash flow would remain manageable.

Financials

Financials (INR Crs)	FY13	FY14	FY15E	FY16E	FY17E
Net revenues	12,795	13,310	13,622	15,540	17,143
EBITDA	1,466	1,786	1,751	2,045	2,322
Adjusted profit	613	1,054	994	1,163	1,261
Diluted EPS (Rs.)	12.2	20.9	19.7	23.1	25.0
Diluted P/E (x)	19.2	11.1	11.8	10.1	9.3
EV/EBITDA (x)	8.6	7.1	7.2	6.2	5.4
ROAE (%)	20	26	20	19	17
ROACE (%)	19	24	21	22	22

LINK

https://www.edelweiss.in/research/Apollo-Tyres-Ltd--No-Rolling-Resistance;-Initiating-Coverage/10005277.html