Apollo Tyres (APTY IN) Hungary Plant Visit: Finally benefiting from its greenfield expansion

INSTITUTIONAL EQUITY RESEARCH Apollo Tyres (APTY IN) Hungary Plant Visit: Finally benefiting from its greenfield expansion 20 June 2018 INDIA AUTOMOBILES Company Update Hungary plant visit: Key takeaways We visited Apollo' Hungary plant, followed by management interaction. We saw that the company is finally reaping the benefits of its long awaited greenfield expansion. Including the Hungary plant, Apollo s Vredestein capacity has essentially doubled to over 30,000 PV tyres per day. The Hungary plant currently manufactures c.5,000 tyres daily, aims to scale this to 12,000 by the end of FY19, and achieve full throughput of 16,000 tyres per day in FY20. Sees 15 20% cost savings from the Hungarian plant at peak utilisation. Expects cost of production to be lower than its Netherlands plant from 3QFY19. With the Hungary plant in the process of receiving approvals from multiple OEMs, car dealerships and OEMs are new growth avenues. Apollo s India business remains in a sweet spot, with TBR demand staying strong. It will add a 350MT/day greenfield plant in Andhra Pradesh (50% TBR, 50% PVs). Key highlights: Overall, we see the company finally benefiting from its long awaited greenfield expansion, while India is in growth mode. Increased price aggression in the EU by incumbents is a key risk to its strategy. We maintain buy with a TP of Rs. 340. New avenues of growth With additional capacity and increased cost competitiveness, APTY sees itself tapping newer avenues of growth such as: (1) targeting 20% revenue from OEMs business (currently nil) and is on the verge of receiving approvals from multiple OEMs, (2) tapping Central and Eastern Europe markets where it had not focused due to higher cost structure of the Netherlands plant, and (3) with OEMs approving its Hungary plant, it will be able to place products in dealership formats (which forms a meaningful chunk of replacement industry sales); earlier it was absent from car dealerships. Overall, the management sees its market share rising to 3.5% in FY20 from current market share of 2.5% Potential savings could be immense The Hungary plant not only benefits from lower employee costs (c.60% employee cost savings), but also from new technology, higher throughput, and more automation. In fact it is one of the most automated tyre plants that we have seen, with sparse human intervention right from material handling to curing to inventory management. The management expects 15 20% cost savings at optimum utilisation and expects the Hungary plant to break even from Q2FY19. India business is enjoying tailwinds With a leadership position in the TBR segment, Apollo is enjoying the benefits of low Chinese competition due to anti dumping duty and GST. The company foresees this strong momentum continuing and will add a 350MT/day greenfield plant in Andhra Pradesh (50% TBR, 50% PVs), which it expects would start producing from FY21. It pegs cumulative consolidated capex for FY19 and FY20 at Rs 50bn. Outlook and valuation We see Apollo reaping the benefits of the long wait for its Hungary greenfield expansion, and being a major beneficiary of a pick up in the domestic truck replacement demand and import duties on Chinese TBR tyres. We retain BUY with a target of Rs 340. Buy (Maintain) CMP RS 267/ TARGET RS 340 (27%) COMPANY DATA O/S SHARES (MN) : 572 MARKET CAP (RSBN) : 154 MARKET CAP (USDBN) : 2.2 52 WK HI/LO (RS) : 307 / 228 LIQUIDITY 3M (USDMN) : 11.1 PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % Mar 18 Dec 17 Sep 17 PROMOTERS : 40.3 39.4 44.2 FII / NRI : 26.1 28.2 26.1 FI / MF : 20.0 18.1 13.7 NON PRO : 5.6 5.6 6.6 PUBLIC & OTHERS : 8.0 8.7 9.5 PRICE VS. SENSEX 210 170 130 90 50 Apr 16 Apr 17 Apr 18 Apollo Tyres BSE Sensex KEY FINANCIALS Rs mn FY18E FY19E FY20E Net Sales 1,48,405 1,69,079 1,89,999 EBIDTA 16,512 22,878 26,394 Net Profit 7,239 10,812 13,003 EPS, Rs 12.7 18.9 22.7 PER, x 21.1 14.1 11.7 EV/EBIDTA, x 11.6 8.1 6.9 PBV, x 1.6 1.4 1.3 ROE, % 7.4 10.1 10.9 Debt/Equity (%) 45.5 41.4 37.3 Source: Phillip Capital India Research PhillipCapital India values your support in the Asiamoney Brokers Poll 2018. We appreciate your vote. Nitesh Sharma, CFA (+ 9122 6667 9965) nsharma@phillipcapital.in Dhawal Doshi (+ 9122 6667 9769) ddoshi@phillipcapital.in Page 1 PHILLIPCAPITAL INDIA RESEARCH

Financials Income Statement Y/E Mar, Rs mn FY17 FY18p FY19e FY20e Net sales 1,30,630 1,46,741 1,67,332 1,88,163 Growth, % 12 12 14 12 Other income 1,171 1,664 1,748 1,835 Total income 1,31,800 1,48,405 1,69,079 1,89,999 Raw material expenses 68,900 83,955 91,078 1,02,276 Employee expenses 17,421 21,566 22,573 24,851 Other Operating expenses 27,015 26,371 32,551 36,478 EBITDA (Core) 18,465 16,512 22,878 26,394 Growth, % (6.2) (10.6) 38.6 15.4 Margin, % 14.1 11.3 13.7 14.0 Depreciation 4,618 5,926 6,815 7,395 EBIT 13,847 10,587 16,063 18,999 Growth, % (10.3) (23.5) 51.7 18.3 Margin, % 10.6 7.2 9.6 10.1 Interest paid 1,029 1,629 2,223 2,223 Other Non Operating Income 1,541 1,165 1,282 1,410 Non recurring Items 0 0 0 0 Pre tax profit 14,359 10,123 15,122 18,187 Tax provided 3,365 2,884 4,310 5,183 Net Profit 10,994 7,239 10,812 13,003 Growth, % 5.2 (34.2) 49.4 20.3 Net Profit (adjusted) 10,994 7,239 10,812 13,003 Unadj. shares (m) 572 572 572 572 Wtd avg shares (m) 572 572 572 572 Balance Sheet Y/E Mar, Rs mn FY17 FY18p FY19e FY20e Cash & bank 3,309 5,992 12,844 15,810 Debtors 11,275 14,350 14,464 16,254 Inventory 26,455 29,454 27,448 30,823 Loans & advances 4,601 17 17 17 Other current assets 510 5,786 5,786 5,786 Total current assets 46,150 55,599 60,560 68,689 Investments 4,936 13,425 13,425 13,425 Gross fixed assets 1,20,008 1,63,120 1,77,620 1,92,120 Less: Depreciation 54,866 60,792 67,607 75,001 Add: Capital WIP 29,151 22,682 22,682 22,682 Net fixed assets 94,292 1,25,011 1,32,696 1,39,801 Non current assets 6,997 6,541 6,541 6,541 Total assets 1,53,005 2,01,532 2,14,177 2,29,412 Current liabilities 28,816 37,715 40,692 44,067 Provisions 4,043 3,381 3,381 3,381 Total current liabilities 32,859 41,096 44,073 47,448 Non current liabilities 47,246 62,670 62,670 62,670 Total liabilities 80,105 1,03,766 1,06,743 1,10,118 Paid up capital 509 572 572 572 Reserves & surplus 72,391 97,195 1,06,863 1,18,722 Shareholders equity 72,900 97,767 1,07,435 1,19,294 Total equity & liabilities 1,53,005 2,01,532 2,14,178 2,29,412 Cash Flow FY17 FY18p FY19e FY20e Pre tax profit 14,359 10,123 15,122 18,187 Depreciation 4,618 5,926 6,815 7,395 Chg in working capital 5,609 1,079 4,869 1,790 Total tax paid 3,365 2,884 4,310 5,183 Other operating activities 1,029 1,629 2,223 2,223 Cash flow from operating activities 11,031 15,873 24,719 20,831 Capital expenditure 25,000 25,000 14,500 14,500 Other investing activities 0 0 0 0 Cash flow from investing activities 25,000 25,000 14,500 14,500 Dividend (incl. tax) 1,144 1,144 1,144 1,144 Other financing activities 1,029 1,629 2,223 2,223 Cash flow from financing activities 9,827 2,227 3,367 3,367 Net chg in cash 4,142 6,901 6,852 2,965 Valuation Ratios FY17 FY18p FY19e FY20e Per Share data EPS (INR) 19.2 12.7 18.9 22.7 Growth, % (6.4) (34.2) 49.4 20.3 Book NAV/share (INR) 127.4 170.9 187.8 208.5 FDEPS (INR) 19.2 12.7 18.9 22.7 CEPS (INR) 27.3 23.0 30.8 35.7 CFPS (INR) 41.2 31.6 37.1 30.1 DPS (INR) 2.0 2.0 2.0 2.0 Return ratios Return on assets (%) 8.8 4.7 5.9 6.5 Return on equity (%) 15.1 7.4 10.1 10.9 Return on capital employed (%) 10.9 5.7 7.2 8.0 Turnover ratios Asset turnover (x) 1.7 1.4 1.4 1.5 Sales/Total assets (x) 1.0 0.8 0.8 0.8 Sales/Net FA (x) 1.8 1.3 1.3 1.4 Receivable days 31.5 35.7 31.6 31.5 Inventory days 73.9 73.3 59.9 59.8 Payable days 55.8 67.7 68.5 68.8 Working capital days 39.2 29.6 15.3 17.1 Liquidity ratios Current ratio (x) 1.6 1.5 1.5 1.6 Quick ratio (x) 0.7 0.7 0.8 0.9 Total debt/equity (%) 45.2 45.5 41.4 37.3 Net debt/equity (%) 40.7 39.3 29.4 24.0 Valuation PER (x) 13.9 21.1 14.1 11.7 PEG (x) y o y growth (2.2) (0.6) 0.3 0.6 Price/Book (x) 2.1 1.6 1.4 1.3 Yield (%) 1.0 1.0 1.0 1.0 EV/Net sales (x) 1.4 1.3 1.1 1.0 EV/EBITDA (x) 9.9 11.6 8.1 6.9 EV/EBIT (x) 13.2 18.1 11.5 9.5 Source: Company, PhillipCapital India Research Estimates Page 2 PHILLIPCAPITAL INDIA RESEARCH

Stock Price, Price Target and Rating History 330 280 B (TP 310) B (TP 345) B (TP 290) B (TP 325) B (TP 340) 230 180 B (TP 225) N (TP 159) N (TP 159) B (TP 239) N (TP 169) B (TP 239) 130 80 30 J 15 J 15 S 15 O 15 D 15 J 16 M 16 M 16 J 16 A 16 S 16 N 16 D 16 F 17 M 17 M 17 J 17 A 17 O 17 N 17 J 18 F 18 A 18 M 18 Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL 15% > to < +15% Target price is less than +15% but more than 15% SELL <= 15% Target price is less than or equal to 15%. Page 3 PHILLIPCAPITAL INDIA RESEARCH

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