H O L D 13 Sep, 2010 Key Data (`) CMP 85 Target Price 89 Key Data Bloomberg Code APTY IN Reuters Code APLO.BO BSE Code 500877 NSE Code APOLLOTYRE Face Value (`) 1 Market Cap. (` Bn.) 42.8 52 Week High (`) 88.8 52 Week Low (`) 39 Avg. Daily Volume (6m) 6164962 Beta (Sensex) 1.1 Shareholding % Promoters 39.8 Mutual Funds/UTI/Banks 14.0 Foreign Institutional Investors 28.7 Bodies Corporate 4.3 Individuals 12.5 Other 0.7 Total 100 Apollo Tyres Ltd We initiate coverage on Apollo Tyres Ltd (ATL) with Hold recommendation and price target of ` 89 (based on P/E of 9x its FY12 EPS of ` 9.9 per share). ATL is one of the largest tyre manufacturers having market share of 21.7% in the domestic market. ATL is present across 3 continents viz Asia, Africa and Europe. ATL has planned capacity expansion on back of rising demand. Robust domestic sales and increased contribution by radial plant at Chennai, are expected to boost revenues and profitability going forward. The company has enhanced its global footprint with acquisition of Vredestein Banden BV in Europe. VBBV manufactures high speed, high performance car tyres. The acquisition would provide synergistic benefits as ATL will have acess to high technology and gain foothold in the advanced European market. VBBV, in turn would benefit from sourcing of tyres from domestic/south African operations. At CMP of ` 85, ATL trades at P/E of 8.6x its FY12E EPS of ` 9.9 per share, and FY12 EV/EBIDTA of 5.1x. Investment Positives Robust Domestic Sales Automotive sales have been robust in the domestic market. After, slowdown in FY09, sales have grown rapidly in FY10. Commercial vehicle sales have grown 37.2% in FY10. Passenger car sales have grown 26.8% in FY10. Sales are expected to remain robust due to strong underlying demand and favorable factors such as buoyant economic growth, higher disposable incomes, lower vehicle penetration levels etc. Continuing momentum in the automotive sales augurs well for the company going forward. ` (Mn) FY10E FY11E FY12E Net sales 81,207.4 89,978.9 102,991.7 Operating Profit 11,748.8 10,131.6 12,317.8 OPM (%) 14.5 11.3 12.0 PAT 5,659.8 3,947.8 4,990.7 PAT (%) 7.0 4.4 4.8 Earnings Per Share 11.2 7.8 9.9 Source: SIAM, ACMIIL Research Analyst Bharat Gianani research@acm.co.in Tel: (022) 2858 3404 Market Leadership to fuel growth ATL is the market leader in the domestic commercial vehicle segment. It has a market share of ~27% in the Truck and Bus segment and ~28 % in the LCV segment. It has the third largest market share in the passenger car segment. Commercial vehicle segment is an attractive segment because of high tonnage requirement and relatively shorter life span resulting into higher replacement demand. In fact the replacement demand forms ~73% of the total Truck and bus demand and ~47% of the LCV demand. Given the strong demand for commercial vehicles (due to strong economic growth) and leadership position of the company, sales are expected to remain robust for ATL going forward. Apollo Tyres Ltd ACMIIL
ATL has market share of 27% in Truck & Bus segment and 28% in the LCV segment Source: Crisinfac, ACMIIL Research Acquisition of VBBV to provide synergistic benefits Increasing radialisation in domestic commercial vehicle segment to boost revenues Replacement segment to register good growth Replacement segment is set to register strong growth going forward on the back of good automotive sales in the previous years. Sales of commercial vehicles grew at CAGR of 9.9% during 2005-2010. Similarly, passenger car sales grew at CAGR of 14.2% during 2005-2010. Considering average tyre life of 2 years for commercial vehicles and 3 years for passenger vehicles, such high growth in the past, is likely to boost replacement demand going forward. Acquisition of Vredestein Banden B V (VBBV) to enhance presence ATL acquired VBBV in May 2009 for ` 2,450 Million. VBBV manufactures high speed, high performance car tyres in Europe. Its brands Vredestein and Maloya are well recognized in the market. The acquisition has provided ATL with opportunity to enter the European market. Besides opening up of new market, the product profile has also received boost. Earlier, ATL s product profile was mainly concentrated on commercial vehlcle tyres. But with the acquisition, car tyres would contribute more, thus leading to more balanced product profile. VBBV has capacity to manufacture 5.5 million tyres annually and is expanding it to 6 million tyres. The acquisition will provide synergistic benefits as ATL will have access to superior technology and understanding of the European market. ATL also has plans to source tyres from its South African subsidiary for sale in the European market. Increasing Radialisation in Commercial vehicle to enhance revenues In the domestic market, there is an increasing trend of radialisation in the commercial vehicle segment. Currently, the rate of radialisation in the commercial vehicle segment is around 15%. This is far below the global standards. ATL has set up a facility in Chennai for manufacture of Truck and Bus radial tyres. The plant has already commenced production in May 2010 and would boost the company s revenues going forward. The Chennai plant is expected to contribute ~25% of the revenues in FY12. Increasing radialisation would provide tremendous growth opportunity for ATL and enhance revenues going forward. Apollo Tyres Ltd ACMIIL 2
Source: Crisinfac, ACMIIL Research Cheaper imports especially from China pose serious threat Investment Concerns Cheaper imports Cheaper imports from China (especially in the truck and bus segment) have been surging. This constitutes considerable threat to the company. Also recently Government allowed Truck and bus manufacturers such as Tata Motors and Ashok Leyland to import radial tyres (which were earlier restricted) from China and Thailand, resulting in surge in imports. Source: Crisinfac, ACMIIL Research Commercial vehicle imports constitute majority of the imports in the tyre sector. In FY10, Truck and bus segment imports constituted 61.3% of the overall imports. This poses serious threat to the domestic tyre industry. Rising Input costs Input costs (especially natural rubber) have been on rise recently. While the company passes on majority increase in the material prices, sudden surge in the material prices can have impact on the company profitability. In the OEM segment particularly because of the strong bargaining power of customers, the pass through of material prices becomes difficult. Apollo Tyres Ltd ACMIIL 3
Spike in rubber prices affecting margins Source: Rubber Board, ACMIIL Research ATL has 9 manufacturing facilities spread across 3 continents Prices for natural rubber have been increasing recently. From ` 98 per/kg in July 2009, prices have increased to ` 180 per/kg in August 2010. Currency Risks ATL derives significant revenues from overseas subsidiaries (about 38%) which exposes it to currency risks. Any adverse movement in currency is likely to have significant impact on company s revenue and profitability. Company Background Apollo Tyres Ltd (ATL) was established in 1976 and is one of the leading tyre manufacturers in the country. ATL has manufacturing locations spread across 3 continents in Asia, Europe and Africa. ATL s product profile spans the entire range including passenger cars, utility vehicles, light trucks, truck and bus, agriculture and off-the road tyres, retreading material and alloy wheels. Its key brands include Apollo, Dunlop, Kaizen, Maloya, Regal and Vredestein. In 2006, ATL ventured outside India and acquired Dunlop Tyres International Pty Ltd in South Africa (since renamed as Apollo Tyres South Africa Pty Ltd) and Zimbabwe. With two manufacturing plants each in South Africa and Zimbabwe, ATL holds brand rights for the Dunlop brand across 30 African countries. In 2009, ATL acquired Vredestein Banden B V (VBBV) in the Netherlands thereby marking its presence in Europe. ATL has 9 manufacturing facilities spread across 3 continents. In the domestic market it has manufacturing facility at Limda (Gujarat), Kalamassery (Kerala), Perambra (Cochin), and recently in Chennai. In Africa it has manufacturing facility at Durban and Ladysmith in South Africa and Bulawayo and Harare in Zimbabwe. With the acquisition of VBBV, ATL has marked it presence in Europe. ATL has manufacturing facility in Enschede, Netherlands. Apollo Tyres Ltd ACMIIL 4
Company Analysis The Company derives 62% of the revenues from the domestic market, 24% from the European market (owing to acquisition of VBBV) and the South African market accounts for the rest. ATL derives majority of the revenues from the Commercial vehicle segment, followed by the Passenger car segment. The acquisition of VBBV has resulted in more balanced revenue mix (as now the car segment also contributes significant revenues to the company). ATL derives 85% of the demand from the replacement segment and 15% from the OEM s. Domestic Operations Domestic operations of ATL recorded turnover of ` 50.3 billion in FY10 representing CAGR growth of 15.2% from FY07-FY10.Truck & Bus sales contribute major chunk of the revenue (68%). ATL is the leader in the commercial vehicle segment with market share of 27% in Truck & bus segment and 28% in the light truck segment. Further, ATL derives 71% of revenues from replacement segment, 21% from OEM segment and 8% from exports. Apollo Tyres Ltd ACMIIL 5
South African Operations South African operations recorded sales of Rand Million 1813,in FY10, registering CAGR growth of 5.2% over FY07-FY10.Commercial vehicle segment again contributes maximum to the company s revenues followed by the passenger car segment. Further, 81% of the revenues are derived from the replacement segment and 18% of the revenues are derived from exports. European Operations The passenger car segment is the major contributor for the European operations. This has provided an balance to the overall product profile of the company. Additionally, ATL derives 92% of the sales from the replacement segment and 8% from the OEM segment. Apollo Tyres Ltd ACMIIL
Plant wise Production Capacity Plant wise Production MT/Per day Baroda 450 Cochin 290 Kalamassarey 100 Haryana 10 South Africa 175 Europe 150 Peer Comparison MRF, ATL, JKTyre and Ceat are four major tyre companies in the industry accounting for ~70% of the market (measured in tonnage terms). MRF is the leader in the industry closely followed by ATL. ATL has one of the best operating margins and return ratios in the industry Particulars Apollo Tyres MRF JK Tyre Ceat Net Sales (` mn) 81,207.4 63,292.0 45,705.8 28,504.3 EBIDTA Margin 14.7 15.6 11.3 10.9 Net Profit Margin 8.0 6.9 4.8 5.7 Debt-Equity 0.9 0.5 1.4 1.1 Interest Coverage 8.2 13.8 3.7 5.3 ROCE (%) 24.0 22.9* 20.0 22.6 RONW (%) 28.8 18.2* 25.9 25.8 Source: Capitaline, ACMIIL Research. *MRF return ratios are based on September 2009 numbers. MRF has the best operating margins in the industry having an operating margin of 15.6%. ATL also has better operating margins and return ratios than peers. It has an EBIDTA margin of 14.7%. Similarly, ATL has ROCE of 24% and RONW of 28.8% in FY10. Capacity Expansion ATL has planned capacity ramp up at its Chennai plant which manufactures Truck & Bus radial (TBR) and Passenger car radial (PCR) tyres. It is planning to raise TBR capacity from currently 500 tyres per day to 6,000 tyres per day by FY12. Similarly, it is planning to raise PCR capacity from 2,500 tyres per day to 16,000 tyres per day by FY12. For FY11, ATL has guided for capex of ` 1,300 Crore for domestic operations, of which ` 1,000 Crore would be for the Chennai plant. Further, ATL is also expanding capacity at its European subsidiary VBBV. It is planning to expand capacity from current 5.5 million units per annum to 6 million units per annum by end of FY11. ATL has guided for capex of ` 350 million for VBBV in FY11. Apollo Tyres Ltd ACMIIL
Industry Analysis The Domestic tyre industry size is estimated at ` 260 billion. The top four players (MRF, Apollo Tyres, Ceat and JK Tyres) account for major chunk of the market (together they hold market share of ~70%.). These players are present in all segments except two wheelers. Ceat and MRF are the only suppliers to the two-wheeler segment. Commercial vehicle segment accounts for the major chunk of the industry (around 75% of the turnover is attributable to the CV segment). Also within the commercial vehicle segment, the replacement demand forms a major chunk due to relatively shorter replacement cycle for tyres. This makes the CV segment lucrative for the players. Source: Crisinfac, ACMIIL Research % wise break up represents tonnage demand The tyre industry is raw material intensive with materials accounting for ~65-70% of the total cost. Natural rubber accounts for ~50% of the material cost, NTC Fabric accounts for ~18% and carbon black accounts for about 12%. The movement of raw material prices plays a key factor in industry s profitability. Sudden spike in the prices of raw materials (as witnessed currently) has impact on the profitability as the players cannot fully pass thru increase in the material prices. This is particularly true for the OEM segment as they enjoy better pricing power. Radialisation is currently picking up in the industry. On average radial tyres have 20% higher realization than traditional tyres. While the passenger car segment has radialisation level of 97%, Commercial vehicle segment has radialisation level of ~15%. This presents tremendous scope for players. Major players have planned capex for entering the Commercial vehicle radial tyre market. Currently JK Tyre and Birla tyre are the major suppliers for CV Radial tyres. ATL has announced capex for entering this segment. Radialisation levels are expected to reach ~25-30% by 2013. Player Wise Truck and Bus radial Capacity addition plans Million Units 2009 2010 2011 2012 Apollo 0.1 0.4 0.7 1.9 JK 0.4 0.8 1.2 1.6 MRF na 0.6 1.2 1.8 Ceat 0.2 0.2 0.5 0.7 Birla - 0.8 1.3 1.3 Source: Crisinfac, ACMIIL Research Apollo Tyres Ltd ACMIIL 8
Bargaining power of Tyre companies. Tyre companies consume 62% of the overall natural rubber consumption in the country. Furthermore, ~25% of natural rubber requirement is imported by the tyre companies. Out of the overall tyre sector consumption, ~90% of the consumption is accounted for by 4 major players viz MRF, Apollo Tyres, JK Tyres and Ceat. As such the tyre sector can have significant impact on the demand. In view of this the bargaining power of tyre companies appears to be strong. Also Apollo tyres imports natural rubber only when the prices in the domestic market are high as compared to the international market. However it is important to note that as the players start importing natural rubber the prices start correcting in the domestic market as see from the chart below. Also domestic players are allowed duty free imports of rubber against the exports of tyres. Therefore in this case if there is a differential in the natural rubber prices, this acts as an advantage to the domestic players. Another point is that the natural rubber content is less in radial tyres compared to cross ply tyres. The proportion of synthetic rubber is high in radial tyres, which are not available in the domestic market. Therefore going forward with increased radialization the consumption of natural rubber would decline. The domestic and International prices move in tandem Valuation and Recommendation The growth in the domestic market is encouraging. Given ATL s dominant position in the domestic market and leadership position in the commercial vehicle segment, it is likely to provide boost to revenues going forward. Also, increased revenues from the radial plant at Chennai would boost realizations. Further, recovery in the South African market and steady sales in the European market are expected to provide steady revenues to the company. We assign a multiple of 9x to ATL FY12E EPS of `9.9 to arrive at value of ` 89 per share for the stock. We thus initiate coverage with Hold rating for the stock. Apollo Tyres Ltd ACMIIL
Financials Profit and Loss Statement (` Mn) Particulars FY08 FY09 FY10 FY11E FY12E Net Sales 46,912.4 49,840.7 81,207.4 89,978.9 102,991.7 Add : Other Income 211.9 230.1 213.7 269.9 309.0 Total Income 47,124.2 50,070.7 81,421.2 90,248.8 103,300.6 less: Expenditure 40,988.4 45,679.2 69,458.6 79,847.2 90,673.9 Operating Profit 5,924.0 4,161.5 11,748.8 10,131.6 12,317.8 less: Depreciation 1,298.6 1,285.1 2,542.3 3,070.7 3,604.8 PBIT 4,837.2 3,106.4 9,420.2 7,330.9 9,021.9 less:interest 784.5 972.5 1,153.8 1,525.4 1,650.2 PBT 4,052.7 2,133.9 8,266.4 5,805.5 7,371.7 less:tax 1,355.9 742.3 2,606.6 1,857.8 2,381.1 Net Profit 2,696.9 1,391.5 5,659.8 3,947.8 4,990.7 Sales Growth (%) 81.8 6.2 62.9 10.8 14.5 Operating Profit Growth (%) 116.8-29.8 182.3-13.8 21.6 Net Profit Growth (%) 100.6-48.4 306.7-30.2 26.4 Operating Margin (%) 12.6 8.3 14.5 11.3 12.0 NP Margin (%) 5.7 2.8 7.0 4.4 4.8 Balance Sheet (` Mn) Particulars FY08 FY09 FY10 FY11E FY12E Share Capital 488.5 504.1 504.1 504.1 504.1 Reserves & Surplus 11290.7 12992.3 19174.2 22681.2 27231.0 Total Shareholders Fund 11,779.2 13,496.4 19,678.3 23,185.3 27,735.1 Total Loans 6,461.2 8,907.3 17,071.6 22,273.8 22,496.5 Deferred Tax Liability 1,755.7 1,941.5 2,514.3 2,514.3 2,514.3 Total Sources of Fund 20,041.7 24,345.2 39,264.2 47,973.4 52,746.0 Application of Fund Gross Block 19,555.4 22,840.5 55,628.0 68,756.1 75,975.5 less:depreciation 7,504.1 8,821.8 31,202.7 34,273.4 37,878.2 Net Block 12,051.4 14,018.7 24,425.2 34,482.7 38,097.3 Investments 51.9 47.5 58.5 87.8 131.7 Total Curent Assets 14,806.7 14,229.6 23,704.0 22,836.3 25,554.0 Total Current Liabilities 8,035.3 7,001.4 15,459.1 16,933.9 18,853.8 Net Current Assets 6,771.4 7,228.2 8,244.9 5,902.4 6,700.3 Total Application Of Fund 20,041.7 24,345.1 39,264.2 47,973.4 52,746.0 Apollo Tyres Ltd ACMIIL 10
Cash Flow statement (` Mn) Particulars FY08 FY09 FY10 FY11E FY12E Profit Before Tax 4,052.7 2,133.9 9,140.1 5,805.5 7,371.7 Depreciation 1,299.4 1,285.1 2,542.3 3,070.7 3,604.8 Interest Paid 784.5 1,097.8 1,157.1 1,525.4 1,650.2 Net Operating Profit Before working capital change 6,209.3 4,462.5 12,896.1 10,401.6 12,626.8 Net Cash Flow from Operating activities 4,365.4 4,249.8 13,124.7 8,482.4 9,574.4 Net Cash used in Investment Activities -1,377.3-5,220.8-12,141.5-14,122.3-7,579.6 Net Cash from Financing activities -2,070.6 671.3-801.3 3,236.1-1,868.3 Net Increase/decrease in cash & cash equivalent 917.5-299.7 181.8-2,403.9 126.5 Cash at Beginning 1,935.1 2,847.1 3,620.9 3,489.8 1,085.9 Cash at End of Period 2,847.1 3,620.9 3,489.8 1,085.9 1,212.5 Valuation Ratios FY08 FY09 FY10 FY11E FY12E Profitability Ratios Operating Margins (%) 12.6 8.3 14.5 11.3 12.0 PAT After Minority Interest (%) 5.7 2.8 7.0 4.4 4.8 ROCE (%) 24.1 12.8 24.0 15.3 17.1 RONW (%) 22.9 10.3 28.8 17.0 18.0 Capital Structure Ratios Debt-Equity 0.5 0.7 0.9 1.0 0.8 Turnover Ratios Fixed Assets 2.4 2.2 1.5 1.3 1.4 Inventory 6.6 7.9 8.2 8.4 8.6 Debtors 15.0 22.2 10.3 10.8 11.1 Creditors 6.7 8.4 5.8 6.1 6.3 Solvency Ratios Current Ratio 1.8 2.0 1.5 1.3 1.4 Interest Coverage Ratio 6.2 3.2 8.2 4.8 5.5 Valuation Ratios EPS 5.5 2.8 11.2 7.8 9.9 BV/Share 24.1 26.8 39.0 46.0 55.0 P/E (X) 10.9 8.6 EV/EBIDTA(X) 6.2 5.1 Apollo Tyres Ltd ACMIIL 11
Notes: Institutional Sales: Ravindra Nath, Tel: +91 22 2858 3400 Kirti Bagri, Tel: +91 22 2858 3731 Himanshu Varia, Tel: +91 22 2858 3732 Email: instsales@acm.co.in Institutional Dealing: Email: instdealing@acm.co.in Disclaimer: This report is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon such. ACMIIL or any of its affiliates or employees 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 the report. ACMIIL and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency we have incorporated a Disclosure of Interest Statement in this document. This should however not be treated as endorsement of the views expressed in the report Disclosure of Interest Apollo Tyres Ltd 1. Analyst ownership of the stock NO 2. Broking Relationship with the company covered NO 3. Investment Banking relationship with the company covered NO 4. Discretionary Portfolio Management Services NO This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for circulation. This document is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may from time to time have positions in and buy and sell securities referred to herein. Apollo Tyres Ltd ACMIIL 12