Apollo Tyres (APOTYR) 169

Transcription

1 Result Update Rating matrix Rating : Buy Target : 240 Target Period : 12 months Potential Upside : 42% What s Changed? Target Changed from 260 to 240 EPS FY15E Changed from 22.1 to 20.5 EPS FY16E Changed from 23.7 to 21.8 Rating Unchanged Quarterly Performance ( Crore) Q1FY15 Q1FY14 YoY Q4FY14 QoQ Revenues 3, , , EBITDA EBITDA (%) bps bps Reported PAT Key Financials Crore FY13 FY14 FY15E FY16E Net Sales 12,795 13,311 13,850 15,256 EBITDA 1, , , ,081.7 Net Profit , , ,101.4 EPS ( ) Valuation summary FY13 FY14 FY15E FY16E P/E (x) Target P/E (x) EV/EBITDA (x) P/BV (x) RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) 8719 Crore Total Debt (FY14) ( Crore) 1613 Crore Cash & Investments (FY14) ( Crore) 654 Crore EV ( Crore) 9478 Crore 52 week H/L ( ) 217 / 59 Equity capital ( crore) 50.4 Crore Face value ( ) 1 Price performance (%) 1M 3M 6M 12M Apollo Tyres Ltd JK Tyres CEAT Ltd MRF Ltd Balkrishna Industries Ltd Analyst Nishant Vass [email protected] Venil Shah [email protected] August 8, 2014 Apollo Tyres (APOTYR) 169 Capex in high margin businesses augurs well! Apollo Tyres (ATL) reported revenues of 3248 crore (YoY increase of ~2%) vs. our estimate of ~ 3445 crore, with Vredestein growing at ~18% YoY (led by currency benefit and volume growth) EBITDA margins at 13.2% came in lower than our estimate of 14.3% as the full impact of favourable raw material prices did not reflect in the quarter leading to only ~90 bps YoY improvement in margins Subsequently, ATL's reported PAT at 228 crore also came in lower than estimates ATL a unique combo of domestic & global tyre play! While the deal with Cooper failed to materialise, ATL s focus on geographically derisking the business augurs well for the future. With radialisation trend in the T&B segment likely to improve radial volumes, a revival in economic demand augurs well for domestic capacity utilisation levels, which stand at ~75%. With the European business doing well, capex planned for expanding capacity in Eastern Europe augurs well as existing capacity in Europe is operating at ~90% utilisation. We believe by benchmarking the R&D budget to industry leaders and focusing on corporate branding, the management is on the right track to become a serious competitor to global tyre players. Major capacity addition in high margin segments major positive Vredestein (more than a century old brand) is a highly profitable business for ATL specialising in high performance summer and winter tyres. VBV s operating margin profile (last 10 quarter average margins at ~18%) is far superior to that of the domestic business. The ~30% RoCE business is operating at ~90% capacity utilisation. With little scope to expand, the board s decision to set up a greenfield plant in Eastern Europe at an estimated spend of 500 million is on track to fatten ATL s bottomline even further. On the domestic front, a capex cycle revival is likely to aid tyre markers as bulk of revenues are from the truck & bus (T&B) segment. Hence, ATL has embarked on capacity expansion at its Chennai TBR plant as the rapid rise of radialisation in the T&B segment is likely to create capacity shortfall (existing utilisation for TBR capacity ~80%). Favourable raw material prices likely to keep margins firm! In the domestic business, with raw material prices (especially rubber which represents >60% of total raw material cost for ATL) remaining favourable, ATL s margin profile is likely to remain stable. We also expect the pricing discipline shown by the industry to continue, going forward, thus helping sustain profitability. Along with the strong standalone performance, the European subsidiary Vredestein (VBV) has contributed handsomely to the overall profitability for ATL (~36% contribution to consolidated EBIT) and recovery in Europe is likely to further the same. Strong business case for premium to historic multiples! Maintain BUY With a low D/E profile, decent return ratios and strong operating cash flow visibility in the near term, ATL is placed much better in this business cycle visàvis previous up cycles due to its largely diversified and global scale of business. This, we believe, lends additional room for valuation multiples to expand as the demand scenario improves and outlook on raw material prices remains stable. We reduce our growth and earnings estimate for FY15E, FY16E owing to a change in our expectations on the product mix/realisation front. However, we retain our valuation multiple, positioning ATL at a premium to peers and value ATL at 11x FY16E EPS to arrive at a target price of 240. We recommend BUY. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Consolidated ( crore) Q1FY15 Q1FY15E Q1FY14 YoY (%) Q4FY14 QoQ (%) Comments Total Operating Income 3,248 3,445 3, , Raw Material Expenses 1,833 1,999 1, , Employee Expenses Higherthanexpected employee costs as wage revisions coupled with increase in head count led to increase Other expenses EBITDA EBITDA Margin (%) bps bps Higher on a YoY basis as raw material prices continue to be favourable Depreciation Interest Other income Tax PAT EPS ( ) Key Metrics Revenue ( crore) India 2,328 2,350 2, , South Africa Europe , EBIT Margin (%) India bps bps Lowerthanexpected benefit of favourable raw material prices South Africa bps bps Europe bps bps Decline in margins owing to ~5% price cut taken in sync with market leaders Change in estimates FY15E FY16E ( Crore) Old New % Change Old New % Change Comments Revenue 14,266 13, ,825 15, Lower than initially expected pricing growth for the European business and adverse product/client mix for domestic business leading to lower realisation EBITDA 2,086 1, ,225 2, EBITDA Margin (%) bps bps Margins expectation reduced owing to lower than anticipated margin benefit due to higher mix of OEMs as demand scenario improves PAT 1,115 1, ,193 1, EPS ( ) Assumptions Current Earlier Comments FY13 FY14P FY15E FY16E FY15E FY16E India Total Tonnage Sold (MT) , ,689 Reduced volume growth estimates as economic recovery appears backended in H2FY15E, FY16E Realisation per kg ( ) Realisation estimates reduced owing to higher share of OEM demand Natural Rubber price ( /kg) Sustained weakness in rubber prices witnessed over the past 1215 months is likely to continue South Africa Total Tonnage Sold (MT) 51,271 44,168 26,076 26,319 26,394 28,199 Reduction in volumes due to completion of sales of the facility to Sumitomo Rubber Realisation per kg ( ) Reduced expectation of improvement in realisations as indicated by Q1 results EBIT per kg ( ) Europe Total Tonnage Sold (MT) 60,328 67,383 72,412 78,983 72,068 78,219 Realisation per MT ('000 ) 7,098 7,076 7,068 7,162 7,366 7,374 Lowerthanexpected jump in realisation as pricing cuts taken in the quarter reflect the lower than expected demand pickup EBIT per MT ( ) 1,025 1,013 1,077 1,035 1,217 1,201 Lower than expected jump in margins as pricing cuts taken in the quarter reflect the lower than expected demand pickup ICICI Securities Ltd Retail Equity Research Page 2

3 Key conference call takeaways Indian business For the domestic business, volumes came in higher by ~5%, leading to bulk of the revenue growth. Capacity utilisation for Indian operations also increased closer to 80%. The Chennai plant is operating at ~80% utilisation levels Favourable raw material prices led to ~80 bps improvement in gross margins. However, the full impact of lower raw material prices has not come in this quarter due to use of existing inventory. For the quarter, the landed cost of natural rubber was ~ 160/kg ( 175/kg in Q4FY14) while for synthetic rubber it was ~ 140/kg ( 150/kg in Q4FY14). Other raw materials like NTCF and steel cord also saw a decline in prices Share of the replacement market was at 77% during the quarter while contribution of the truck segment was at 65% and passenger cars contributed 16% For domestic operations, the company has lined up a capex of 1500 over the next two years for expanding the TBR capacity in Chennai. Also, for converting the bias tyre plant at Cochin to OHT/speciality, ~ 500 crore is expected to be spent over the next three years European business Vredestein operations saw strong revenue growth of ~20% YoY led by 1) volume growth of 7% and 2) steep depreciation of rupee (~13%). However, overall European operations saw revenues jumping ~31% YoY Growth would have been steeper had it not been for a fall in realisations, which was on the back of increasing competitive pressure. The volume growth for the company in the European market has been in line with the growth reported by the industry. The EBIT margin for the quarter was at 11.3%, lower QoQ by ~200 bps. With softening of rubber prices, most manufacturers are resorting to price cuts leading to pressure on realisations Vredestein s capacity utilisation is ~90%. There is limited scope to increase it by debottlenecking and expansion. In order to meet the capacity constraint, the company has increased exports from Indian operations and raised passenger car capacity from 6 million to 6.5 million Also, as reported in the previous quarter, the company has received board approval for setting up a greenfield plant in Eastern Europe at a spend of 500 million. The plant is slated to have a capacity of 3,000 truck tyres per day and 16,000 passenger car tyres per day. Construction of the plant will commence in 2015 while a scale up to full capacity will take four years. In the meanwhile, the first tyre will roll out of the plant in CY17. For FY15, the company expects to export 1 million tyres from India to European operations ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Strong global player good business diversification across geographies!! A quick glance at Apollo s consolidated performance shows an increase in contribution of the European subsidiary from FY10, especially on profitability front. With a further capacity expansion planned for ~ 500 million in Eastern Europe, we expect a consistent increase in revenues and profitability for Vredestein in the next three or four years. Exhibit 1: Revenue breakup Geographywise ( crore) 16,000 12,000 8,000 4,000 1,097 1,990 5,037 1,183 2,234 5,490 1,308 1,502 2,850 2,992 8,158 8,507 1,271 3,943 8, ,297 9, ,511 10,255 FY10 FY11 FY12 FY13 FY14 FY15E FY16E India Europe South Africa Exhibit 2: Profitability contribution Geographywise 2,000 ( crore) 1,600 1, ,092 FY10 FY11 FY12 FY13 FY14 FY15E FY16E India Europe ICICI Securities Ltd Retail Equity Research Page 4

5 Revenue growth to pick up as demand improves from H2FY15E! We have factored in a modest growth in revenues at 7.7% CAGR in FY14 16E, led mainly by volume growth. We believe there could be upside risks to these estimates, especially in the wake of a possibility of demand cycle revival for OEMs in both CV and PV segments. Although in Indian operations, replacement forms ~75% of total revenues, we expect the share to taper down from H2FY15E onwards. Exhibit 3: We build modest revenue growth at 7.7% CAGR in FY1416E ( crore) 18,000 15,000 12,000 9,000 6,000 3, ,121 8,868 12,153 12,795 13,413 13,898 15, FY10 FY11 FY12 FY13 FY14 FY15E FY16E Sales % growth (%) EBITDA margins to remain strong as RM price outlook soft! Looking at a pickup in margins from 9.6% to 14% from FY12 to FY14 on the back of a reduction in natural rubber prices, despite the low demand growth, we believe margins will remain at ~14% as demand is expected to pick up on the back of a revival in the economy. Although a higher share of OEMs in revenues would lead to a reduction in ASPs and, thereby, margins, higher utilisation levels would ensure margins stay at a healthy 14.0%, 13.6% in FY15E, FY16E, respectively. Exhibit 4: EBITDA margins to remain strong over FY1416E!! ( crore) 2,500 2,000 1,500 1, , ,166 1,457 1,876 1,945 2,082 FY10 FY11 FY12 FY13 FY14 FY15E FY16E (%) EBITDA EBITDA Margins (%) ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 5: Margin movement with RM trend (%) (%) Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 FY15E FY16E Raw materials/sales Contribution OPM (LHS) Strong capital structure in capital intensive, cyclical business! Despite the capital intensiveness and cyclicality of the business, Apollo has managed to maintain decent balance sheet strength. With net D/E at comfortable ~0.2 levels, we believe this is Apollo s greatest strength in the good RoCE business. Despite increase in borrowings due to huge capex planned for the next 45 years, the D/E ratio is likely to remain comfortable at these levels as CFO generation remain strong and would contribute to the bulk of expenditure. Exhibit 6: Comfortable debt position in high RoCE business! (x) (%) FY10 FY11 FY12 FY13 FY14 FY15E FY16E Nebt Debt/Equity RoCE Strong CFO generation to lead to low debt levels despite capex plans!!! From ~ 295 crore in FY11, CFO has increased to ~ 1500 crore in FY14E with a decline in rubber prices and pricing discipline maintained by the industry. With a demand revival on the cards, we expect volumes to improve as OE demand increases. This would help sustain CFOs even as Apollo Tyres embarks on capex in FY16E in Eastern Europe and on enhancing capacity in the domestic business. ICICI Securities Ltd Retail Equity Research Page 6

7 Exhibit 7: CFOs on up trend!!! 2,800 2,400 2,000 ( crore) 1,600 1, ,550 1, ,045 2, , ,282 1, ,320 1,689 1,437 1,420 1,789 FY10 FY11 FY12 FY13 FY14 FY15E FY16E CFO Capex Debt Exhibit 8: Declining trend of rubber prices!! ( /Kg) Sep10 Dec10 Mar11 Jun11 Sep11 Dec11 Mar12 Jun12 Sep12 Dec12 Mar13 Jun13 Sep13 Dec13 Mar14 Jun14 Profitability to remain at elevated levels as demand returns! With a demand revival on the cards, we expect volumes to improve as OE demand increases. This would help maintain steady profits even as margins decline. The major reason for the increase in profitability has been a reduction in raw material prices coupled with a reduction in debt and, thereby, interest outgo and stable depreciation (due to low capex). We expect FY15E, FY16E to witness PAT margin of 7.4%, 7.2%, respectively. ICICI Securities Ltd Retail Equity Research Page 7

8 Exhibit 9: Profit margins to remain as operational improvement kicks in!! 1, , ( crore) ,044 1,035 1,101 6 (%) FY10 FY11 FY12 FY13 FY14 FY15E FY16E PAT PAT Margin (%) 2 Source: Company press release, ICICIdirect.com Research Exhibit 10: EBITDA growth vs. interest/depreciation trend 2,500 2,000 ( crore) 1,500 1, , ,166 1,457 1,876 1,945 2, FY10 FY11 FY12 FY13 FY14 FY15E FY16E EBITDA Interest Depreciation ICICI Securities Ltd Retail Equity Research Page 8

9 Key risks & concerns: Unexpected sharp increases in raw material prices Natural rubber, which forms ~60% of total raw material costs, has been moving down over the past two years. Any unanticipated shortfall in rubber production or increase in stockpiling to support prices is likely to lead to higher RM expenses, which would hurt margins Sharp declines in revenues in Europe, India to hurt volumes The European and Indian automotive market has been weak to say the least in the last couple of years. Though VBV has done well in Europe over the past 1012 quarters, any major decline in Europe s recovery will render the new capex planned in Eastern Europe unnecessary. With current capacity utilisation levels in Indian operations at ~75%, lack of improvement in demand is likely to lead to margins heading southwards as conversion and labour costs increase. Pricing discipline broken by tyre makers Though we have highlighted that the industry has maintained strong pricing discipline over the past two years in a falling demand scenario and declining raw material prices, any change in industry dynamics on the pricing front is likely to lead to a decline in ASPs and other promotional expenses, adversely impact margins. However, it appears unlikely given the strong discipline showed despite the rundown with the competition commission on this issue. ICICI Securities Ltd Retail Equity Research Page 9

10 Outlook and valuation With a low D/E profile, decent return ratios and strong operating cash flow visibility in the near term, ATL is placed much better in this business cycle visàvis previous up cycles owing to its largely diversified and global scale of business. This, we believe, lends additional room for valuation multiples to expand as the demand scenario improves and the outlook on raw material prices remains stable. We reduce our growth and earnings estimate for FY15E, FY16E owing to a change in our expectations on the product mix/realisations front. However, we retain our valuation multiple, positioning ATL at a premium to peers and value ATL at 11x FY16E EPS to arrive at a target price of 240. We have a BUY recommendation on the stock. Exhibit 11: Two year forward rolling PE ( ) Apr07 Oct07 Apr08 Oct08 Apr09 Oct09 Apr10 Oct10 Apr11 Oct11 Apr12 Oct12 Apr13 Oct13 Apr14 Price 9.5x 7.2x 5.4x 4.0x 3.1x 2.2x Exhibit 12: Valuation Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY13 12, (32.6) FY14 13, FY15E 13, FY16E 15, ICICI Securities Ltd Retail Equity Research Page 10

11 Company snapshot Target Price: Jan09 Apr09 Jul09 ( ) Oct09 Jan10 Apr10 Jul10 Oct10 Jan11 Apr11 Jul11 Oct11 Jan12 Apr12 Jul12 Oct12 Jan13 Apr13 Jul13 Oct13 Jan14 Apr14 Jul14 Oct14 Jan15 Apr15 Jul15 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event May08 Total 1000 crore capex announced by Apollo Tyres Mar09 Announces buyback of shares May09 Acquires Dutch tyre maker Vredestein Apr10 Rubber prices sharply move upwards on production shortage Oct10 Rubber prices start moving up on production concerns in Thailand on excessive rains Aug11 Rubber prices begin to stabilise as production picks up Jun13 Apollo announces Cooper Tire deal acquisition Oct13 Cooper deal under pressure on China labour strike Oct13 Cooper Tire files suit against Apollo Dec13 Cooper Tire terminates deal with Apollo; court dismisses Cooper appeal Feb14 Cooper Tire files suit against Apollo Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Jun13 Sep13 Dec13 Mar14 Jun14 1 Neeraj Consultants Pvt. Ltd. 31Mar Promoter Apollo Finance, Ltd. 31Mar FII Sunrays Properties & Investment Company Pvt. Ltd. 31Mar DII Constructive Finance Pvt. Ltd. 31Mar Others Skagen AS 31Mar UBS Global Asset Management (UK) Ltd. 1Jan Mehta (Harshad Shantilal) 31Mar Apollo International, Ltd. 31Mar CLSA Capital Partners 26Aug Motlay Finance Pvt. Ltd. 31Mar Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Investec Asset Management Ltd m 5.35m CLSA Capital Partners 11.24m 10.32m Macquarie Investment Management Ltd m 5.26m Carmignac Gestion 9.89m 4.23m HDFC Standard Life Insurance Company Limited 9.12m 4.44m Fidelity Management & Research Company 7.72m 2.90m Caisse de Depot et Placement du Quebec 7.70m 4.39m The Boston Company Asset Management, LLC 2.95m 2.80m Norges Bank Investment Management (NBIM) 7.62m 4.16m AllianceBernstein Hong Kong Ltd. 2.66m 2.67m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 11

12 Financial summary Profit and loss statement Crore (Yearend March) FY13 FY14 FY15E FY16E Total operating Income 12, , , ,304.0 Growth (%) Raw Material Expenses 7, , , ,007.6 Employee Expenses 1, , , ,751.6 Other Expenses 1, , , ,463.1 Total Operating Expenditure 11, , , ,222.3 EBITDA 1, , , ,081.7 Growth (%) Depreciation Interest Other Income PBT , , ,542.6 Exceptional items Total Tax PAT , , ,101.4 Growth (%) EPS ( ) Cash flow statement Crore (Yearend March) FY13 FY14 FY15E FY16E Profit after Tax , , ,101.4 Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities , ,436.7 (Inc)/dec in Investments (Inc)/dec in Fixed Assets , ,420.0 Others CF from investing activities , ,420.0 Issue/(Buy back) of Equity Inc/(dec) in loan funds , Dividend paid & dividend tax Others CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Yearend March) FY13 FY14 FY15E FY16E Liabilities Equity Capital Reserve and Surplus 3, , , ,535.9 Total Shareholders funds 3, , , ,586.3 Total Debt 2, , , ,313.4 Deferred Tax Liability Total Liabilities 6, , , ,593.4 Assets Gross Block 8, , , ,469.3 Less: Acc Depreciation 4, , , ,636.4 Net Block 4, , , ,892.2 Capital WIP ,446.5 Total Fixed Assets 4, , , ,338.7 Investments Goodwill on consolidation Inventory 2, , , ,406.7 Debtors 1, , , ,274.8 Loans and Advances Other current assets Cash Total Current Assets 3, , , ,126.6 Creditors 1, , , ,295.7 Provisions Total Current Liabilities 1, , , ,831.8 Net Current Assets 2, , , ,294.7 Application of Funds 6, , , , Key ratios (Yearend March) FY13 FY14 FY15E FY16E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Net sales PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 12

13 ICICIdirect.com coverage universe (Auto & Auto Ancillary) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E Amara Raja (AMARAJ) Buy 8, Apollo Tyre (APOTYR) Buy 8, Ashok Leyland (ASHLEY) Hold 9, NM Bajaj Auto (BAAUTO) 2,139 2,400 Buy 61, Balkrishna Ind. (BALIND) Hold 7, Bosch (MICO) 13,714 11,000 Hold 43, Eicher Motors (EICMOT)` 8,511 8,000 Hold 22, Escorts (ESCORT)* Sell 1, Exide Industries (EXIIND) Hold 13, Hero Mototcorp (HERHON) 2,611 2,600 Hold 52, JK Tyre & Ind (JKIND) Hold 1, M&M (MAHMAH) 1,249 1,162 Hold 73, Mahindra CIE (MAHAUT)* Buy 5, Maruti Suzuki (MARUTI) 2,649 2,450 Hold 80, Motherson (MOTSUM) Hold 32, Tata Motors (TELCO) Buy 135, Wabco India (WABTVS) 3,343 3,700 Buy 6, * All financial numbers incorporate merger assumption completed ICICI Securities Ltd Retail Equity Research Page 13

14 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/10%; Sell: 10% or more; Pankaj Pandey Head Research [email protected] ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai [email protected] ANALYST CERTIFICATION We /I, Nishant Vass MBA (FINANCE) Venil Shah MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc. 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