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C.M.P: Rs.70.80 1 Year Comparative Graph Stock Data Sector Apollo Tyres Ltd Apollo Tyres Ltd Auto Tyres Face Value (Rs.) 1.00 52 wk. High/Low (Rs.) 82.55/28.25 Volume (2 wk. Avg.

com Target Price: Rs.85.00 BSE SENSEX BUY June 3, 2010 SYNOPSIS Apollo Tyres is one of India's leading manufacturers of tyres with presence in the commercial vehicle OEM segment.

It also exports its products to South America, Pakistan, South East Asia, Middle East countries and Africa.

The company would increase production capacity in the country by over 50% as it looked to enter the top-10 global tyre maker's club in the next five years.

1 C.M.P: Rs Year Comparative Graph Stock Data Sector Apollo Tyres Ltd Apollo Tyres Ltd Auto Tyres Face Value (Rs.) wk. High/Low (Rs.) 82.55/28.25 Volume (2 wk. Avg.) BSE Code Market Cap (Rs.mn.) Share Holding Pattern V.S.R. Sastry Equity Research Desk vsrsastry@firstcallindiaequity.com Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com Target Price: Rs BSE SENSEX BUY June 3, 2010 SYNOPSIS Apollo Tyres is one of India's leading manufacturers of tyres with presence in the commercial vehicle OEM segment. It has market leadership in the truck tyre replacement segment. The company also supplies to car and tractor OEM majors. It also exports its products to South America, Pakistan, South East Asia, Middle East countries and Africa. Apollo is entering Europe with an initial range of passenger car tyres with speed ratings from T to Y -- 4x4, Summer and Winter tyres, primarily comprising the top 50 sizes by volume. The company would increase production capacity in the country by over 50% as it looked to enter the top-10 global tyre maker's club in the next five years. The company is also looking to almost double its exports in this year. The Board of Directors of the Company has recommended a Re per Share for FY10. The company s net sales and net profit are expected to grow at a CAGR of 18% and 76% over FY09 to FY12E. Financials (Rs. in mn.) FY09 FY10 FY11E FY12E Net Sales EBIDTA PAT EPS P/E F I R S T C A L L R E S E A R C H 1

2 Table of Content Content Page No. 1. Peer Group Comparison Investment Highlights Company profile Financials Charts & Graph Outlook and Conclusion Industry Overview 18 2

3 Peer Group Comparison Name of the company CMP(Rs.) Market Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%) Apollo Tyres ltd MRF Goodyear India Balkrishna industries *As on 03/06/2010 Investment Highlights Results Updates (Q4 FY10) (Standalone) For the fourth quarter, the top line of the company increased 18%YoY and stood at Rs mn against Rs mn of the same period of the last year. The bottom line of the company for the quarter stood at Rs mn from Rs mn of the corresponding period of the previous year i.e. an increase of 152%YoY. EPS of the company for the quarter stood at Rs.2.30 for equity share of Rs.1.00 each. 3

4 Expenditure for the quarter stood at Rs mn, which is around 13% higher than the corresponding period of the previous year. Raw material cost of the company for the quarter accounts for 67% of the sales of the company and stood at Rs mn from Rs mn of the corresponding period of the previous year i.e., an increase of 54%YoY. Other Expenditure stood at Rs mn from Rs mn. and accounts for 13% of the revenue of the company for the quarter i.e., a decrease of 7%YoY. OPM and NPM for the quarter stood at 15% and 9% respectively from 11% and 4% respectively of the same period of the last year. 4

5 FY10 Performance in line with expectation The Company s Top line has increased 24% to Rs mn from Rs mn of FY09. Bottom line for the year increased 284% to Rs mn. from Rs mn of FY09. These numbers are in line with our expectation. Earnings per share of the company for the year stood at Rs.8.23 per share. Expenditure of the company for the year stood at Rs mn, which is around 14% higher than FY09. Raw materials Cost for the year stood at Rs mn from Rs mn of FY09 i.e. an increase of 9%YoY. Other Expenditure increased 31%YoY to Rs mn. Interest increased 11%YoY to Rs mn, and depreciation increased 25%YoY to Rs mn. 5

6 ANNUAL CORPORATE HIGHLIGHTS A major factor contributing to the 63% jump in consolidated revenues is the integration of the Netherlands-based Apollo Vredestein, which was acquired in May 2009, along with stellar performance in the India market. On a consolidated level the break-up of revenues across the three geographies are: India 62%, Netherlands 24% and South Africa 14% On a consolidated level, in terms of revenues across customer segments the break up is as follows: Replacement 83% and Original Equipment Manufacturers 17% On a consolidated level, in terms of revenue from product segments the break up is as follows: passenger car 33%, truck-bus 47%, light truck 9%, farm & offthe-road 9%, with other segments contributing 2% In India, the sharpest growth has been in the passenger car segment of 36% over the previous year. This is expected to grow even faster in the current year with the Chennai plant going into full production While in South Africa, which is climbing out of a very difficult period, Apollo Tyres South Africa (Pty) Ltd grew 18% by volume in the domestic South African market, registering an overall growth of 13% Apollo Vredestein Banden BV in Netherlands benefitted from a good European winter with the entire range of specialty Winter tyres, boosting sales of winter tyres by 23% after a slow year In the past year, Apollo Tyres has been taking its customer initiatives like Safe Drive to newer markets in the Asian CIS countries and South East Asia In India, which is Apollo s largest OEM market, the following passenger vehicles have rolled out with Apollo Tyres -- the Ford Figo, Chevrolet Beat, Volkswagen Polo, Fiat Linea, Skoda Fabia, Mitsubishi Pajero, Hyundai i20 and others. In India, 7 more new HIV-AIDS Health Clinics were opened across the country to cater to the health of commercial vehicle drivers, of which 5 were in Tamil Nadu, taking the total to 15 Apollo also launched a focused environment initiative called Habit At Apollo to enable individual employees to take on greater responsibility in the larger cause of sustainability 6

7 Apollo Tyres enters Europe A year after it acquired Dutch tyre maker Vredestein, domestic tyre major Apollo Tyres launched its own range of products in Europe. The company, which aims to be among the world s top 10 tyre makers, is only the third Indian major automotive company after Tata Motors and Reva Electric to enter Europe. Apollo will sell Vredestein's products in the higher range. The recent weakness in the euro is adding to its competitiveness. A small portion of the Vredstein products will be made in Europe. The Apollo space has been constructed keeping in mind the various brands and special attributes that the company brings to European customers. Leading the range are the passenger vehicle tyres from Apollo that are being introduced into Europe. These are the Amazer 3G Maxx, Acelere, Aspire and Hawkz, along with the Acelere Winter and Hawkz Winter. Also housed are the Vredestein and Maloya brands. A key feature of the Vredestein range is the new generation Nextreme range of winter tyres that have just been introduced into the market. The company plans to exploiting India s low production costs, add value to it with Vredestein technology, and then ship it to Europe to enjoy a cost advantage over European tyre firms. Apollo s tyres would be manufactured in Baroda and shipped to the UK, Germany and Holland. After March 2011, it will cover the whole of Europe. Dividend The Board of Directors of the Company has recommended a Re per Share amounting to Rs Millions on Equity Shares of Re. 1/- each as dividend for the year. Go Slow by workers At Company's Manufacturing Plant at Perambra (Kerala) The workers at Company's Manufacturing Plant at Perambra (Kerala) have resorted to go slow resulting in considerable drop in the production. The workers have resorted to go slow as a pressure tactics for bargaining long term settlement. However, the other units of the Company, both in India and abroad, are operating in full capacity. The management is confident of resolving this matter amicably within a reasonable time. Apollo Tyres opens its 150th Sales Office The company inaugurated its landmark 150th Sales and Marketing Office in Tirunelveli, in the southern Indian state of Tamil Nadu. This is Apollo Tyres 10th Sales and Marketing office in Tamil Nadu. The 149th office was in Etawah, Uttar Pradesh and the 148th in Begusarai, Bihar, opened in February and January this year. 7

8 Company Profile The flagship of the Raunaq Singh group Apollo Tyres Limited was incorporated in The company`s main business is the manufacture and sale of automobiles tyres, tubes and flaps. Its product range includes truck and bus bias, light truck bias and radial, passenger car radial, farm bias and radial. It also exports its products to South America, Pakistan, South East Asia, Middle East countries and Africa. It has a network of around 4,500 dealerships in India, of which over 3,000 are exclusive outlets and nearly 230 multi-brand Dunlop accredited dealers in South Africa and Zimbabwe The company has plants in Perambra, Kerala, Vadodara, Gujarat and Pune. It is the second largest tyre manufacturer in India with a total installed capacity of 250,000 million TPA. The company`s joint venture with Michelin, France for producing dual branded truck & bus radial tyres in India is the market leader in the category. The company in technical collaboration with General Tire International Company USA, produces some of India`s most advanced tyres for trucks, tractors, light commercial vehicles and cars. Mahindra and Mahindra and TAFC are its major OEM clients. Manufacturing locations Quality certification AIS 044 (India), CQAV (Indian Defence Services), DOT (USA), ECE (EU), In-Metro (Brazil), SABS (South Africa), SASO (Saudi Arabia), TS India Kalamassery, Cochin, Kerala. In operation since 1962 Products manufactured Truck and bus cross-ply Light truck cross-ply Farm cross-ply Re-treading material Kundli, Haryana In operation since 2007 Products manufactured 8

9 Retreaded tyres Lamba, Baroda, Gujarat In operation since 1991 Products manufactured Passenger car radial Truck and bus radial & cross-ply Light truck radial & cross-ply Farm radial & cross-ply Perambra, Cochin, Kerala In operation since 1977 Products manufactured Truck and bus cross-ply Light truck cross-ply Farm radial & cross-ply South Africa Durban, Kwazulu Natal In operation since 1935 Products manufactured Truck and bus radial & cross-ply Light truck radial & cross-ply Farm Off-the-road Ladysmith, Kwazulu Natal In operation since 1973 Products manufactured Passenger car radial Light truck radial 9

10 Zimbabwe Bulawayo, Matableleland In operation since 1957 Products manufactured Passenger car radial & cross-ply Truck cross-ply Light truck radial & cross-ply Farm Off-The-Road Retreading material Harare, Harare In operation since 1926 Products manufactured Retreaded tyres Subsidiaries Some of the major subsidiaries Apollo Tyres AG (Switzerland) Tyres Kft (Hungary) Apollo Tyres GmbH (Germany) Apollo (Mauritius) Holdings Pvt. Ltd Apollo Tyres Pte Ltd. (Singapore) Apollo Automotive Tyres Ltd Apollo Radial Tyres Ltd 10

11 Company products Passenger car Radial Aspire Acelere sportz Acelere Amazer Amazer XL Sports utility vehicle Van Hawkz H/T Hawkz R/T Hawkz A/T Hawkz H/L Hawkz R/Ts Quantum plus Quantum Passenger vehicle winter Acelere ice Hawkz ice Heavy commercial vehicle Radial Transport-RS Transport-RD Transport-MD Cross ply Amar gold Amar Amar DLX Amar AT-RIB Cargo plus Cargo miler Load star super gold Load star super Load star super XP 11

12 Herculs XT-7 Gold XT-7 XT-7 Haulug XT-100K XT-9 Gold XT-9, Champion gold Champion-FS LUG Miller Cargo TUF Light commercial vehicle Anchor LR-84 Amazer XLLT Cargo SL Amar DLX Cargo RIB Amar DLX Amar gold Champion XT-Plus Dura mile Racer Mile star Load star Agriculture Farm king Kaishak preimium Power haul Krishak premium Krishak super Y-Lon Dhruv Specialty Mine Log Y-Lon 12

13 Financials Results 12 Months Ended Profit & Loss Account (Standalone) Value(Rs.in.mn) FY09 FY10 FY11E FY12E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross profit Depreciation Profit Before Tax Tax Net Profit Equity capital Reserves Face Value Total No. of Shares EPS

14 Quarterly Ended Profit & Loss Account (Standalone) Value(Rs.in.mn) 30-Sep Dec Mar Jun-10E Description 3m 3m 3m 3m Net sales Other income Total Income Expenditure Operating profit Interest Gross profit Depreciation Profit Before Tax Tax Net Profit Equity capital Face Value Total No. of Shares EPS

15 Key Ratio Particulars FY09 A FY10 A FY11 E FY12 E EBIDTA % 8% 16% 16% 16% PAT % 3% 8% 8% 9% P/E ratio (x) ROE - % 8% 24% 22% 21% ROCE - % 12% 27% 26% 25% EV/EBIDITA (x) Debt Equity Ratio Price/Book Value A-Actual E-Expected Charts: Net sales & PAT 15

16 P/E Ratio (x) P/BV (X) 16

17 EV/EBITDA(X) Outlook and Conclusion At the market price of Rs.70.80, the stock is trading at 7.27 x and 6.10 x for FY11E and FY12E respectively. On the basis of EV/EBDITA, the stock trades at 4.39 x for FY11E and 4.22 x for FY12E. Price to book value of the company is expected to be at 1.61 x for FY11E and 1.28 x for FY12E respectively. EPS of the company is expected to be at Rs.9.74 and Rs for the earnings of FY11E and FY12E respectively. The Board of Directors of the Company has recommended a Re per Share amounting to Rs Millions on Equity Shares of Re. 1/- each as dividend for the year. Apollo Tyres launched its own range of products in Europe. The company, which aims to be among the world s top 10 tyre makers, is only the third Indian major automotive company after Tata Motors and Reva Electric to enter Europe. The construction of first phase of the new green field radial tyre plant at Oragadam near Chennai as per project schedule. The passenger car segment of the plant has commenced operations from 11 th march 2010 and the truck/bus radial segment has commenced operations from 11 th may The construction of second phase of the project has also started from January 2010 and is going on as per schedule. 17

The company plans to exploiting India s low production costs, add value to it with Vredestein technology, and then ship it to Europe to enjoy a cost advantage over European tyre firms.

18 The company plans to exploiting India s low production costs, add value to it with Vredestein technology, and then ship it to Europe to enjoy a cost advantage over European tyre firms. Apollo s tyres would be manufactured in Baroda and shipped to the UK, Germany and Holland. After March 2011, it will cover the whole of Europe. We recommend BUY this stock with a target price of Rs for medium to long term investment. Industry Overview Demand for tyres is derived from demand for automobiles. Therefore it is a derived demand product and its fortunes are very closely linked to those of the auto segment. Within the tyre industry the trucks and buses (T&B) segment accounts for more than 70% of sales. Though scooters and motorcycle tyre demand also plays a vital role, in value terms, CVs gain significance. Tyre varieties can be divided into two categories cross ply and radial. The domestic industry is dominated by cross-ply tyres, due to the poor conditions of roads in the country and overloading of CVs. This is also the reason why penetration of radial tyres in the CV segment is negligible and finds presence only in the passenger car segment. On the other hand, radial tyres dominate western markets. Radial tyres can be differentiated on the type of belt used fiberglass, steel and nylon. Worldwide, steel belted radials are more popular due to their performance advantage. There are three major consumer segments for tyres namely replacement segment, Original Equipment Manufacturers (OEMs) and exports. Though fortunes of the sector are closely tied with the automobile industry, replacement demand continues to remain the key growth driver. Replacement demand 18

accounts for as high as 57% of industry volumes. However, the contribution from OEM and replacement segments varies across sub-segments in the auto sector.

19 accounts for as high as 57% of industry volumes. However, the contribution from OEM and replacement segments varies across sub-segments in the auto sector. For instance, for the passenger car segment, demand is balanced from replacement and OEM categories i.e. 50:50. Another key transition that is taking place in the industry is the entry of multinationals like Good Year, Bridgestone and Michelin in the domestic market. MNC tyre makers have cornered a higher market share in India in the last three years due to their international relationships apart from superior technology. Since Honda, Hyundai and Toyota have an international sourcing agreement with Bridgestone; it is also the preferred supplier in India. Goodyear is believed to be the preferred supplier for Ford India. An extensive distribution network and strong brand recall are factors critical to tyre sales. Brand building is given a lot of importance by manufacturers, who allot 2-3% of sales to advertising. With the introduction of radial tyres, even technology has assumed significance. All foreign cars introduced in the country are on radial tyres. Raw materials constitute 60%-70% of production cost of tyres. Natural rubber and Nylon cord fabrics are the most critical raw materials as it accounts for 50% of total raw material cost. Since most of the raw materials are crude derivatives, a rise in prices has a negative impact on margins. The export market holds tremendous potential for domestic manufacturers. Tyre exports have grown at an annual compounded rate of 27% over the past 10 years. Indian tyres are exported to 56 countries, which are primarily developing countries. 19

20 Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 20

21 Firstcall India Equity Research: B. Harikrishna Banking B. Prathap IT A. Rajesh Babu FMCG C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods E. Swethalatha Oil & Gas D. Ashakirankumar Automobile Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s, Takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions (domestic and cross-border), divestitures, spin-offs, valuation of business, corporate Restructuring-Capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and Other international stock exchanges. For Further Details Contact: 3rd Floor, Sankalp, The Bureau, Dr.R.C.Marg, Chembur, Mumbai Tel.: / / Telefax: info@firstcallindiaequity.com 21

Apollo Tyres Limited BUY. V.S.R. Sastry Vice President Equity Research Desk

Apollo Tyres Limited BUY. V.S.R. Sastry Vice President Equity Research Desk Apollo Tyres Limited BUY CMP: Rs.54.80 Date: February 15, 2010 Target Price: Rs.65.00 Market Cap. : Rs.27624.13mn. Key Ratios: Particulars FY09 (12 m) FY10E (12 m) FY11E (12 m) OPM (%) 8 16 16 NPM (%)