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 (%) 3 8 8 ROE (%) 8 23 21 ROCE (%) 12 27 25 P/BV(x) 2.04 1.57 1.25 P/E(x) 25.55 6.82 6.03 EV/EBDITA(x) 2.66 3.79 3.78 Debt-Equity ratio 0.51 0.44 0.38 Key Data: Sector Automobile Face Value Rs.1.00 52 wk. High/Low Rs.59.00 /14.75 Volume (2 wk. Avg.) 1028000 BSE Code 500877 V.S.R. Sastry Vice President Equity Research Desk 91-22-25276077 vsrsastry@firstcallindiaequity.com 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. The company expects its Chennai facility to start commercial production of truck, bus and passenger car radial tyres beginning February-March this year. The company would start exporting tyres to Saudi Arabia and Australia in Q4FY10. 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 the next year. The company is planning to invest about Rs 10 billion for setting up an IT park and a hotel complex in Kerala. The company has successfully concluded the acquisition of 100% shareholding of Dutch company `Vredestein Banden BV` (VBBV) through its special purpose vehicle (SPV). Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com 1
Table of Content Content Page No. 1. Investment Highlights 03 2. Peer Group Comparison 06 3. Key Concerns 06 4. Financials 07 5. Charts & Graph 09 6. Outlook and Conclusion 11 7. Industry Overview 12 2
Investment Highlights Result Updates (Q3FY10) (Standalone): For the third quarter, the top line of the company increased 47%YoY and stood at Rs.13234.29mn against Rs.9032.57mn of the same period of the last year. The bottom line of the company for the quarter stood at Rs.1020.31mn from Rs.55.08mn of the corresponding period of the previous year i.e., an increase of 1752%YoY. EPS of the company for the quarter stood at Rs.2.02 for equity share of Rs.1.00 each. 3
Expenditure for the quarter stood at Rs.11183.22mn, which is around 31% higher than the corresponding period of the previous year. Raw material cost of the company for the quarter accounts for 60% of the sales of the company and stood at Rs.7992.02mn from Rs.7000.28mn of the corresponding period of the previous year i.e., an increase of 14%YoY. Employee cost increased 73%YoY to Rs.799.81mn from Rs.462.10mn. and accounts for 6% of the revenue of the company for the quarter. OPM and NPM for the quarter stood at 16% and 8% respectively from 6% and 1% respectively of the same period of the last year. 4
Apollo Tyres Chennai unit to go on stream as planned The company expects its Chennai facility to start commercial production of truck, bus and passenger car radial tyres beginning February-March this year. Plans are also afoot to enter the European markets with Apollo branded tyres in the first quarter of 2010-11. The commissioning of the Chennai facility is going ahead as per schedule. The plant is expected to start commercial production this quarter. Production is expected to peak to the full capacity of 8,000 car radials a day (2.4 lakh a month) and 1 lakh truck radials a month by December 2010 and April 2011 respectively. A part of the production from the Chennai facility will be marketed in Europe. Increase Production Capacity by over 50% in the Next Five Years 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 the next year. The company aim over next five years is to reach among the top 10 tyre companies in the world. The company's production capacity will go up by over 50% to around 1,600 tonnes a day after the Chennai plant reaches terminal capacity by first quarter of next year's. The company would start export of the Apollo brand of tyres to Europe from 2010. Apollo Tyres likely to invest about Rs 10bn for IT park in Kerala The company is planning to invest about Rs 10 billion for setting up an IT park and a hotel complex in Kerala. There were plans to set up a five star hotel and IT park at the 30 acres land at nearby Kalamassery where it has a tyre unit. The company had decided to shift the unit to the Rubber Park at nearby Irapuram. But due to strong objection from the trade unions, it had been held up. The company said the unions have more or less agreed for shifting the factory. Apollo Tyres is planning to double the capacity of the unit from 100 tons per day to 200 tons per day after it was shifted to the rubber park. Apollo Tyres completes acquisition of Dutch Company 5
The company has successfully concluded the acquisition of 100% shareholding of Dutch company `Vredestein Banden BV` (VBBV) through its special purpose vehicle (SPV). The acquisition has been funded by internal accruals and external loan finance. The acquisition will provide Apollo entry into Europe with manufacturing facility and market and distribution network of VBBV as well as access to high end technology. VBBV is a premium Tier-I, tyre manufacturer with a portfolio of high end, high speed rated passenger car tyres, having its manufacturing plant near Amsterdam with an annual production capacity of 5.5 million tyres. Peer Group Comparison Name of the company CMP(Rs.) (As on February 15,2010) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend (%) Apollo Tyres ltd 54.80 27624.13 6.84 8.01 2.04 45.00 MRF 5843.65 24783.80 968.47 6.03 1.80 200.00 Goodyear India 269.05 6206.00 26.90 10.00 3.95 60.00 Balkrishna industries 587.55 11358.40 86.41 6.80 2.43 60.00 Key Concerns Imports from neighboring countries at competitive prices Raw material price volatility Adverse Govt. policies 6
Financials Results Update 12 months ended Profit and Loss A/C (Standalone): Value(Rs in million) FY08A FY09A FY10E FY11E Description 12m 12m 12m 12m Net Sales 36939.27 40715.51 51533.24 57717.23 Other Income 92.23 101.37 24.51 26.96 Total Income 37031.50 40816.88 51557.75 57744.19 Expenditure -32298.52-37456.73-43395.10-48602.51 Operating Profit 4732.98 3360.15 8162.65 9141.68 Interest -520.41-668.43-762.77-839.05 Gross Profit 4212.57 2691.72 7399.88 8302.63 Depreciation -878.10-980.07-1241.24-1365.36 Profit before Tax 3334.47 1711.65 6158.64 6937.27 Tax -1141.44-630.47-2106.87-2358.67 Net Profit 2193.03 1081.18 4051.78 4578.60 Equity Capital 488.51 504.09 504.09 504.09 Reserves 11768.42 13021.82 17073.60 21652.19 Face Value 1.00 1.00 1.00 1.00 Total No. of Shares 488.51 504.09 504.09 504.09 EPS 4.49 2.14 8.04 9.08 7
Quarterly ended Profit and Loss A/C (Standalone): Value(Rs. in million) 30-Jun-09 30-Sep-09 31-Dec-09 31-Mar-10E Description 3m 3m 3m 3m Net Sales 11802.63 12203.29 13234.29 14293.03 Other Income 5.94 12.56 2.86 3.15 Total Income 11808.57 12215.85 13237.15 14296.18 Expenditure -9860.11-10202.69-11183.22-12149.08 Operating Profit 1948.46 2013.16 2053.93 2147.10 Interest -202.54-125.55-211.01-223.67 Gross Profit 1745.92 1887.61 1842.92 1923.43 Depreciation -311.52-328.82-293.12-307.78 Profit before Tax 1434.40 1558.79 1549.80 1615.65 Tax -487.69-537.70-529.49-551.99 Net Profit 946.71 1021.09 1020.31 1063.67 Equity Capital 504.09 504.09 504.09 504.09 Face Value 1.00 1.00 1.00 1.00 Total No. of Shares 504.09 504.09 504.09 504.09 EPS 1.88 2.03 2.02 2.11 8
Charts Net sales & PAT P/E Ratio (x) 9
P/BV (X) EV/EBITDA(X) 10
1 Year Comparative Graph Apollo Tyres ltd BSE SENSEX Outlook and Conclusion At the market price of Rs.54.80, the stock is trading at 6.82 x and 6.03 x for FY10E and FY11E respectively. On the basis of EV/EBDITA, the stock trades at 3.79 x for FY10E and 3.78 x for FY11E. Price to book value of the company is expected to be at 1.57 x for FY10E and 1.25 x for FY11E respectively. EPS of the company is expected to be at Rs.8.04 and Rs.9.08 for the earnings of FY10E and FY11E respectively. The company s top line and bottom line are expected to grow at a CAGR of 16% and 28% over FY08 to FY11E. The company is expecting to continue growth in its income during the current quarter too, although its margins are under pressure on a rise in raw material prices. In the last six months, rubber prices have shot up by 15 per cent and the company has raised prices by only 5 per cent... It is putting pressure. 11
The company expects its Chennai facility to start commercial production of truck, bus and passenger car radial tyres beginning February-March this year. 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 the next year. The company had a good network of internal resources to finance the company s operations, expansion plans as well as capital investments. The company is planning to invest about Rs 10 billion for setting up an IT park and a hotel complex in Kerala. The company has successfully concluded the acquisition of 100% shareholding of Dutch company `Vredestein Banden BV` (VBBV) through its special purpose vehicle (SPV). The company plans to enter the healthcare sector with a 500-bed hospital in Gurgaon with an investment of Rs 2,500 million. We recommend BUY with a target price of Rs.65.00 for long term. 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 accounts for as high as 57% of industry volumes. 12
However, the contribution from OEM and replacement segments varies across subsegments 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. 13
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