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Spark Capital: Apollo Tyres 3QFY13 Results Review: Capex plans tempered. Margin expansion in focus; Upgrade to Add.




Spark Capital Advisors(India) Private Limited


07 Feb 2013





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Capex plans tempered. Margin expansion in focus; Upgrade to Add. Apollo Tyres reported flat consolidated revenues of Rs 32bn and posted a sequential EBITDA margin expansion of 100bps on the back of softening rubber prices. PAT grew 85% yoy and came in Rs 1.8bn. We turn positive on the stock despite near term challenges to demand given management plans to slow down on expansion plans and tailwinds from rubber prices. Strong revenue growth in the recent past was aided substantially by price increases and currency movements. Going forward, we expect revenues to be driven by volumes. We expect volumes in the domestic market to recover from 2HFY14 onwards. However, we factor in revenue growth of 6% in FY14 and FY15 to allow pass-through of price declines. In the Europe business, we believe the excess inventory in winter tyres will drain this year and expect normalized revenues from FY14. Accordingly, we expect a revenue growth of 12% in FY14 and 7% in FY15 in this business. Pricing discipline in the domestic market is a key variable, and we believe upsides to our estimates are possible if companies don’t pass through rubber price declines to the replacement market. We expect rubber price declines to be passed through by FY15 in Europe. Management indicated that the ASEAN capacity will start with the passenger car tyres by end of FY15 and that the truck-bus tyre capacity will be commissioned later. Given the substantially higher tonnage for truck-bus tyres, we believe that this implies a significant capex reduction from the earlier plan of setting up capacities for both car and truck tyres. In Europe, the company has opted for a brown-field expansion at a cost of EUR 50mn to increase capacity by 20%. Given the requirement for conversion of bias capacity to radials (~80% of the cost of new plant commissioning), we expect the company to increase debt by ~Rs10bn over the next two years (D/E remains at 0.8x). However, we do not factor in an equity raise, and in our view, these plans are achievable without raising fresh equity. Estimates and Valuation: We expect consol topline to grow by 7.2% CAGR for FY13-15E to Rs.149bn and expect EBITDA margin to expand by 40bps for the same period. We expect the gross margin expansion to be partially offset by an increase in advertisement spends and R&D. We estimate a PAT CAGR of 8.6% and FY15 PAT to come in at Rs 7.6bn. We roll forward to FY15 and value the stock at 6x FY15E EPS of Rs 15.1 and arrive at a TP of Rs 91. We upgrade the stock to Add (earlier Reduce). Conference Call Takeaways: (1) Consolidated net debt at Rs 27bn (2) No decision QIP and no plans to raise capital until annual results.(3) Europe utilizations at 80%; S.Africa utilizations at 70%.

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