Profitability likely to improve November 09, 2011 Surjit Arora surjitarora@plindia.com +91-22-66322235 Rating Accumulate Price Rs59 Target Price Rs66 Implied Upside 11.9% Sensex 17,362 (Prices as on November 09, 2011) Trading data Market Cap. (Rs bn) 29.8 Shares o/s (m) 504.0 3M Avg. Daily value (Rs m) 192.9 Major shareholders Promoters 44.33% Foreign 26.67% Domestic Inst. 11.68% Public & Other 17.32% Stock Performance (%) 1M 6M 12M Absolute 8.2 (16.3) (19.1) Relative 1.2 (10.0) (2.0) Price Performance (RIC: APLO.BO, BB: APTY IN) (Rs) 90 80 70 60 50 40 30 20 10 0 Nov-10 Jan-11 Mar-11 Source: Bloomberg May-11 Jul-11 Sep-11 Nov-11 Standalone profitability impacted by higher raw material cost: Apollo Tyres (APTY) reported a 56.9% YoY growth in its standalone top-line at Rs18.5bn. This was on account of ~37% volume improvement to ~89,000 tonnes and ~14.6% increase in average realization/ kg to Rs207/ kg. Recipe cost/kg in the current quarter increased by ~31% YoY to Rs159/kg. As a result, EBITDA for the quarter was flat YoY at Rs1.2bn. EBITDA margin declined by 350bps YoY to 6.8%. However, on account a 44% increase in interest cost on account of higher working capital requirement, PAT declined by 40.8% YoY to Rs221mn. Consolidated performance encouraging: APTY reported a growth of 47.3% YoY in net sales at Rs28.7bn, while PAT grew by 46.1% YoY to Rs778m (Rs772m in Q1FY12). Netherlands Vredestein Banden B.V (VBBV) reported a 42.3% YoY growth in its top-line at Rs7.5bn (QoQ growth of 20% on account of inventory build-up of winter tyres which would commence in the current quarter). PBIT margins improving by 80bps QoQ at 10.6%. Higher profits at Vredestein cushioned the weak standalone results, thereby, restricting the EBITDA margin decline to 50bps QoQ at 8.0% on a consolidated level. Conference call highlights: Consolidated net debt stood at Rs31bn, an increase of Rs6bn, mainly on account of higher working capital. Demand scenario is likely to be better in the replacement side of the market, going forward. According to the management, abolishment of anti-dumping duty on Chinese tyres has not been approved by the ministry and thereby, they don t see any negative impact. Outlook and Valuation: At the CMP of Rs59, the stock trades at 6.7x FY13E EPS and 4.9x FY13E EV/EBITDA, which seems attractive, given that the margins are likely to improve from hereon. On account of ~11.9% potential upside in the stock, we maintain our Accumulate rating on the stock. Key financials (Y/e March) 2010 2011 2012E 2013E Revenues (Rs m) 81,209 88,680 113,988 128,587 Growth (%) 62.9 9.2 28.5 12.8 EBITDA (Rs m) 11,750 8,883 9,961 12,377 PAT (Rs m) 5,662 3,509 3,291 4,411 EPS (Rs) 11.2 7.0 6.5 8.8 Growth (%) 307.1 (38.0) (6.2) 34.0 Net DPS (Rs) 0.7 0.7 1.0 1.0 Source: Company Data; PL Research Profitability & Valuation 2010 2011 2012E 2013E EBITDA margin (%) 14.5 10.0 8.7 9.6 RoE (%) 34.1 16.0 12.9 15.3 RoCE (%) 21.8 10.7 9.0 10.6 EV / sales (x) 0.5 0.6 0.5 0.5 EV / EBITDA (x) 3.7 6.0 6.0 4.9 PE (x) 5.3 8.5 9.0 6.7 P / BV (x) 1.5 1.2 1.1 1.0 Net dividend yield (%) 1.3 1.3 1.7 1.7 Source: Company Data; PL Research Q2FY12 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Q2FY12 Result Overview Consolidated (Rs m) Y/e March Q2FY12 Q2FY11 YoY gr. (%) Q1FY12 H1FY12 H1FY11 YoY gr. (%) Net Sales 28,712 19,489 47.3 28,224 56,936 37,696 51.0 Expenditure Raw Material 19,395 11,476 69.0 18,553 37,948 21,700 74.9 % of Net Sales 67.5 58.9 65.7 66.6 57.6 Salaries & Wages 3,299 3,013 9.5 3,517 6,816 5,924 15.1 % of Net Sales 11.5 15.5 12.5 12.0 15.7 Other Exp. 3,714 3,147 18.0 3,751 7,465 6,234 19.7 % of Net Sales 12.9 16.1 13.3 13.1 16.5 Total Expenditure 26,408 17,636 49.7 25,821 52,229 33,858 54.3 EBITDA 2,304 1,853 24.4 2,403 4,707 3,838 22.6 EBITDA Margin (%) 8.0 9.5 8.5 8.3 10.2 Depreciation 777 669 16.1 754 1,531 1,308 17.1 Net interest 654 442 47.8 620 1,274 781 63.2 Non Operative Income 118 4 NA 19 138 39 255.0 PBT 992 745 33.1 1,049 2,040 1,788 14.1 Tax Total 211 213 (0.9) 274 484 514 5.8 Tax Rate Total (%) 21.2 28.5 26.1 23.7 28.7 Rep. PAT 778 532 46.1 772 1,553 1,271 22.2 Sale Tonnage (MT) 120,000 91,000 31.9 126,000 246,000 184,000 33.7 Realisation in Rs per Kg 239.3 214.2 11.7 224.0 231.4 204.9 13.0 Recipe (RM) cost in Rs per Kg 161.6 126.1 28.2 147.2 154.3 117.9 30.8 Source: Company Data, PL Research November 09, 2011 2
Exhibit 2: Segmental Breakup Consolidated (Rs m) Y/e March Q2FY12 Q2FY11 YoY gr. (%) Q1FY12 H1FY12 H1FY11 YoY gr. (%) India 18,449 11,756 56.9 19,608 38,057 22,969 65.7 South Africa 3,023 2,632 14.8 2,800 5,823 5,296 9.9 Europe 7,492 5,247 42.8 6,035 13,527 9,622 40.6 Total 29,340 19,635 49.4 28,443 57,783 37,888 52.5 Less : Intersegment revenue 627 (146) NA 219 846 (191) NA Net Sales 28,713 19,489 47.3 28,224 56,937 37,696 51.0 India (including exceptional items) 816 915 (10.8) 1,157 1,973 1,749 12.8 South Africa 26 (73) NA (51) (25) (2) NA Europe 792 432 83.2 589 1,381 944 46.3 Total 1,634 1,274 28.3 1,695 3,329 2,691 23.7 Less : Interest Expenses (655) (464) 41.2 (620) (1,275) (802) NA Other unallocable corporate expenses 12 (65) NA (26) (14) (100) NA PBT (inc. exceptional and after MI) 992 745 33.1 1,049 2,040 1,789 14.1 Segment Margins India 4.4 7.8 5.9 5.2 7.6 South Africa 0.9 (2.8) (1.8) (0.4) (0.0) Europe 10.6 8.2 9.8 10.2 9.8 Total 5.6 6.5 6.0 5.8 7.1 Source: Company Data, PL Research November 09, 2011 3
Exhibit 3: Q2FY12 Result Overview Standalone (Rs m) Y/e March Q2FY12 Q2FY11 YoY gr. (%) Q1FY12 H1FY12 H1FY11 YoY gr. (%) Net Sales 18,449 11,756 56.9 19,608 38,057 22,969 65.7 Expenditure Raw Material 14,357 7,886 82.1 15,018 29,375 15,528 89.2 % of Net Sales 77.8 67.1 76.6 77.2 67.6 Salaries & Wages 867 769 12.8 916 1,783 1,543 15.6 % of Net Sales 4.7 6.5 4.7 4.7 6.7 Other Exp. 1,974 1,887 4.6 2,106 4,081 3,514 16.1 % of Net Sales 10.6 16.0 10.7 10.7 15.3 Total Expenditure 17,199 10,541 63.2 18,040 35,239 20,585 71.2 EBITDA 1,250 1,215 2.9 1,568 2,818 2,384 18.2 EBITDA Margin (%) 6.8 10.3 8.0 7.4 10.4 Depreciation 442 377 17.4 424 866 718 20.6 Net interest 522 362 44.2 528 1,050 621 69.2 Non Operative Income 9 58 (84.6) 13 22 64 (66.2) PBT 294 534 (44.9) 629 923 1,109 (16.8) Tax Total 73 160 (54.4) 184 257 329 (21.9) Tax Rate Total (%) 24.8 30.0 29.3 27.9 29.7 Rep. PAT 221 374 (40.8) 444 666 780 (14.6) Sale Tonnage (MT) 89,000 65,000 36.9 96,000 184,000 130,500 41.0 Realisation in Rs per Kg 207.3 180.9 14.6 204.2 206.8 176.0 17.5 Recipe (RM) cost in Rs per Kg 159.7 121.3 31.6 156.4 159.6 119.0 34.2 Source: Company Data, PL Research November 09, 2011 4
Key Highlights of the Conference Call Standalone business: Standalone topline grew by 56.9% YoY on account of 37% YoY increase in volumes (Q2FY11 had lower tonnage due to strike at one of their plants) and 18% YoY increase in price. Standalone margins are likely to improve on account of softening of rubber prices. However, with 50% of the rubber requirement being imported, a further depreciation in rupee would nullify the impact of softening rubber prices. Demand scenario is likely to be better in the replacement side of the market, going forward. European operations: European operations grew by 43% YoY to Rs7.5bn on account of inventory buildup of winter tyres, the sales of which will take place during the current quarter. Volumes in Europe were up by 21% YoY, whereas average realization was up by 10% YoY. The remaining 10% increase in the topline has been on account of translation gain. The outlook here remains encouraging, with the softening rubber prices likely to lead to a better margin. South African operations: South African operations grew by 14.8% YoY, mainly on account of 12% volume growth during the quarter. APTY expects to breakeven in South African operations in FY12E. Consolidated Debt: The consolidated debt has increased substantially to Rs33bn at the end of September 2011 quarter as against Rs26bn at the end of March 2011, mainly on account of higher inventory and debtors. However, with winter tyre sales commencing in Europe in the current quarter i.e. Q3FY12E, the working capital is likely to come down. November 09, 2011 5
Income Statement (Rs m) Net Revenue 81,209 88,680 113,988 128,587 Raw Material Expenses 45,808 53,322 72,515 80,457 Gross Profit 35,401 35,358 41,473 48,130 Employee Cost 10,885 12,153 14,309 16,239 Other Expenses 12,766 14,322 17,203 19,514 EBITDA 11,750 8,883 9,961 12,377 Depr. & Amortization 2,542 2,719 3,017 3,439 Net Interest 1,154 1,852 2,520 3,020 Other Income 214 260 60 65 Profit before Tax 8,268 4,572 4,484 5,984 Total Tax 2,607 1,063 1,193 1,573 Profit after Tax 5,662 3,509 3,291 4,411 Ex-Od items / Min. Int. 1,747 Adj. PAT 5,662 3,509 3,291 4,411 Avg. Shares O/S (m) 504.0 504.0 504.0 504.0 EPS (Rs.) 11.2 7.0 6.5 8.8 Cash Flow Abstract (Rs m) C/F from Operations 14,183 130 4,538 5,162 C/F from Investing (14,781) (9,314) (4,541) (3,561) C/F from Financing 470 10,789 (3,707) (1,185) Inc. / Dec. in Cash (128) 1,606 (3,710) 416 Opening Cash 3,620 3,493 5,099 1,388 Closing Cash 3,493 5,099 1,388 1,804 FCFF (25,693) (11,728) (6,536) 400 FCFE (17,529) (498) (3,267) 1,000 Key Financial Metrics Growth Revenue (%) 62.9 9.2 28.5 12.8 EBITDA (%) 182.4 (24.4) 12.1 24.3 PAT (%) 307.1 (38.0) (6.2) 34.0 EPS (%) 307.1 (38.0) (6.2) 34.0 Profitability EBITDA Margin (%) 14.5 10.0 8.7 9.6 PAT Margin (%) 7.0 4.0 2.9 3.4 RoCE (%) 21.8 10.7 9.0 10.6 RoE (%) 34.1 16.0 12.9 15.3 Balance Sheet Net Debt : Equity 0.7 1.0 1.1 1.0 Net Wrkng Cap. (days) 10 42 56 53 Valuation PER (x) 5.3 8.5 9.0 6.7 P / B (x) 1.5 1.2 1.1 1.0 EV / EBITDA (x) 3.7 6.0 6.0 4.9 EV / Sales (x) 0.5 0.6 0.5 0.5 Earnings Quality Eff. Tax Rate 31.5 23.2 26.6 26.3 Other Inc / PBT 2.6 5.7 1.3 1.1 Eff. Depr. Rate (%) 4.6 4.0 4.0 4.2 FCFE / PAT (309.6) (14.2) (99.3) 22.7 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 19,680 24,134 26,840 30,667 Total Debt 17,071 28,302 31,570 32,170 Other Liabilities 2,514 3,162 3,362 3,362 Total Liabilities 39,266 55,598 61,773 66,199 Net Fixed Assets 29,786 38,971 43,454 47,015 Goodwill 1,175 1,249 1,289 1,289 Investments 59 112 130 130 Net Current Assets 8,201 15,266 16,900 17,765 Cash & Equivalents 3,490 5,099 1,389 1,805 Other Current Assets 20,170 30,986 37,990 41,625 Current Liabilities 15,459 20,818 22,479 25,664 Other Assets 44 Total Assets 39,264 55,598 61,773 66,199 Quarterly Financials (Rs m) Y/e March Q3FY11 Q4FY11 Q1FY12 Q2FY12 Net Revenue 23,687 27,297 28,224 28,712 EBITDA 2,732 2,313 2,403 2,304 % of revenue 11.5 8.5 8.5 8.0 Depr. & Amortization 673 739 754 777 Net Interest 529 543 620 654 Other Income 51 171 19 118 Profit before Tax 1,581 1,203 1,049 992 Total Tax 373 177 274 211 Profit after Tax 1,208 1,926 775 781 Adj. PAT 1,208 1,026 775 781 Key Operating Metrics Tonnage (MT) 332,000 303,200 375,700 427,650 Realization / kg 146 178 198 196 Recipe cost / kg 104 160 184 179 Standalone - Rev. (Rs m) 50,369 54,907 74,899 83,495 Standalone - EBITDA (Rs m) 7,841 5,339 5,803 7,379 Standalone - PAT (Rs m) 4,153 1,983 1,442 2,113 Dunlop-Rev. (Rs m) 10,940 11,831 12,524 14,603 VBVV Rev. (Rs m) 19,901 22,425 26,565 30,489 Source: Company Data, PL Research. November 09, 2011 6
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage % of Total Coverage 70% 60% 50% 40% 30% 20% 10% 0% 58.5% 21.8% 17.7% 2.0% Buy Accumulate Reduce Sell PL s Recommendation Nomenclature BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute decline in 1-month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document. For Clients / Recipients in United States of America: All materials are furnished courtesy of Direct Access Partners LLC ("DAP") and produced by Prabhudas Lilladher Pvt. Ltd. ("PLI"). This material is for informational purposes only and provided to Qualified and Accredited Investors. You are under no obligation to DAP or PLI for the information provided herein unless agreed to by all of the parties. Additionally, you are prohibited from using the information for any reason or purpose outside its intended use. Any questions should be directed to Gerard Visci at DAP at 212.850.8888. November 09, 2011 7