Apollo Tyres (APOTYR) 170

Transcription

1 Result Update Rating matrix Rating : Buy Target : 200 Target Period : 12 months Potential Upside : 18% What s Changed? Target Changed from 228 to 200 EPS FY16E Changed from 21.2 to 20.6 EPS FY17E Changed from 22.8 to 20.5 Rating Unchanged Quarterly Performance ( Crore) Q2FY16 Q2FY15 YoY Q1FY16 QoQ Revenues 2, , , EBITDA EBITDA (%) bps bps Reported PAT Key Financials Crore FY14 FY15 FY16E FY17E Net Sales 13,311 12,726 12,400 13,564 EBITDA 1, , , ,079.0 Net Profit 1, , ,034.5 EPS ( ) Valuation summary FY14 FY15 FY16E FY17E P/E (x) Tgt P/E (x) EV/EBITDA (x) P/BV (x) RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) 8570 Crore Total Debt (FY15) ( Crore) 801 Crore Cash & Investments (FY15) ( Crore) 695 Crore EV ( Crore) 8676 Crore 52 week H/L ( ) 249 / 155 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 Research Analyst Nishit Zota nishit.zota@icicisecurities.com Vidrum Mehta vidrum.mehta@icicisecurities.com Challenging demand environment! November 3, 2015 Apollo Tyres (APOTYR) 170 Apollo Tyres (ATL) consolidated revenues declined 9.6% YoY to 2996 crore (our estimate: 3101 crore), mainly due to dismal European operations (subdued demand & unfavourable currency movement) and discontinuation of African operations. At the standalone level, 4% volume growth was offset by lower pricing EBITDA margins at 16.1% (up 123 bps YoY but down 155 bps QoQ) were below our estimate of 17.7%. This was mainly after ATL passed on the benefit of lower input cost to consumers An exception gain from sale of property ( 48 crore), helped profitability, with reported PAT up 8% YoY to 279 crore (our estimate 302 crore) Margins are likely to contract in the wake of stiff competition and a subdued demand scenario impacting its performance. Hence, we have revised downwards earning, margin estimates, going forward Domestic business play on radialisation ATL is well placed to benefit from the radialisation story in India. At present, the company enjoys a market share of ~25% in TBR & is likely to improve radial volumes, albeit capacity constraint would hinder immediate growth possibilities. In H1FY16, TBR volumes for the company recorded volume growth of 20% YoY, supporting overall growth. We believe a higher mix of radial tyres, going forward, would further support margins for the company. The domestic tyre industry continues to face growth challenges and has been adversely impacted by cheaper imported Chinese tyres. Chinese imports are up 90% YoY in Q2FY16 while Chinese tyres currently hold ~30% market share in the domestic TBR replacement segment. Amid a stiff competitive environment, we believe radial capacity expansion would cater to expected OEM demand. In addition, some price pass on will help the company maintain its market share, going forward. European operations to fare well, going forward At present, ATL s European operations face the dual challenge of a subdued demand environment impacting volume & pricing growth and the unfavourable currency movement impacting its performance. During Q2FY16, the company had a maintenance shutdown resulting in a lower utilisation level resulting into higher overhead cost. Also, a delayed winter with higher inventory level at the dealer end is resulting in lower offtake for the company. We believe Vredestein is a strong brand with specialisation in high performance summer & winter tyres. The company is well placed to benefit from the demand revival, going forward. It is operating at ~90% utilisation level. Therefore, ATL has planned a greenfield plant in Hungary worth ~ 500 million over the next four or five years. The negative impact of currency movement is likely to stop from Hence, this would support the performance. Decent business case as valuations remain fair! ATL s growth prospects appear muted in the near term mainly due to capacity constraints, slower OEM demand and stiff competition from Chinese players. However, the company is investing towards more diversified, rapid growth areas coupled with a larger scale of business for coming years. As the outlook on raw material prices is favourable, this lends additional support to earnings. We build in revenue growth of ~3% CAGR in FY1517E (South African business included in FY15) and earnings growth of ~4% in FY1517E. We continue to remain positive on the stock valuing at 10x FY17E EPS to arrive at a target price of 200 (earlier 228) and maintain BUY recommendation. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Consolidated ( crore) Q2FY16 Q2FY16E Q2FY15 YoY (%) Q1FY16 QoQ (%) Comments Total Operating Income 2, , , , Sales were impacted mainly due to; 1) winding down of South African operations and 2) dismal European operations (weaker demand & unfavourab currency fluctuations) Raw Material Expenses 1, , , , Lower raw material prices (NR + crude derivates) benefit on YoY basis Employee Expenses Other expenses EBITDA EBITDA Margin (%) bps bps Margin declined 155bps QoQ; as the company passed on the price benefit accrued from lower input cost Depreciation Interest Other income Exceptional items NA 0.0 NA It includes onetime gain of profit on sale of property of its wholly owned subsidiary, Apollo Tyres Africa Ltd Tax PAT Miss in topline & margins; impacted the profitability EPS ( ) Key Metrics Revenue ( crore) India 2,257 2,187 2, , Registered volume growth of 4%. However, thus was equally offset by lower pricing resulting into muted topline growth Europe Subdued demand (volume and price growth declined by 9% YoY & 2% YoY, respectively) further unfavourable currency movement impacted by ~9%) impacting the European revenue EBIT Margin (%) India bps bps Margins contracted QoQ; as the company passed on benefits of lower input cost to consumers Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 12,727 12, ,924 13, Subdued demand environment in both domestic as well as European business is likely to impact its performance. Hence, we have moderated our revenue estimate EBITDA 2,110 2, ,226 2, EBITDA Margin (%) bps bps Benefit of lower raw material prices (NR + crude derivative) is likely to continue. However, stiff competition would force the company to paas on this benefit resulting into lower realisation and margins PAT 1,070 1, ,147 1, Downward revision of topline & margins is likely to impact PAT EPS ( ) Assumptions Current Earlier Comments FY14 FY15 FY16E FY17E FY16E FY17E India Total Tonnage Sold (MT) 404, , , , , ,617 Chinese competition likely to impact the company performance Realisation per kg ( ) Company is likely to pass on some benefit resulting into lower realisation Natural Rubber price ( /kg) Sustained weakness in rubber prices witnessed over the past 1215 months is likely to continue Europe Total Tonnage Sold (MT) 67, , , , , ,977.0 Subdued demand environment is likely to continue Realisation per MT ('000 ) 7, , , , , ,261.0 Stiff competition resulting into lower pricing power coupled with inventory liquidation could impact realisations, going forward ICICI Securities Ltd Retail Equity Research Page 2

3 Key conference call takeaways For Q2FY16, domestic business remained muted, as it registered 4% volume growth, which was equally offset by lower pricing. On a YTD basis (AprilOctober 2015), on an average, the company has reduced prices of TBB and PV tyres by ~8% and 4%, respectively. Overall utilisation levels have further improved to ~75%, with radial capacity utilisation running >90% European operations in Q2FY16 declined 19.3% YoY, mainly impacted by a subdued demand environment (with volumes and price degrowth coming in at 9% and 2%, respectively) and was impacted by an unfavourable currency movement (~9%) during the quarter. In constant currency terms, revenue from Europe (Vredestein) declined ~12% YoY to ~ 120 mn. The European business was impacted by 1) maintenance shutdown, lower capacity utilisation level resulting into higher overheads cost and due to 2) regulatory change of labelling of tyres impacted part of the inventory in the system and 3) lower offtake of winter tyres by dealers due to delayed start of the season and the current high inventory According to the management, the domestic tyre industry continues to face growth challenges and has been adversely impacted by cheaper imported Chinese tyres in the domestic market. Chinese imports are up 90% YoY in Q2FY16 while Chinese tyres currently have ~30% market share in the domestic TBR replacement segment Chinese truck bus radial (TBR) tyres are at ~30% discount to Indian TBR tyres. This eventually leads to prices of Chinese TBR tyres being almost at par with Indian truck bus bias (TBB) tyres On a standalone basis; replacement, OEM, export mix is at 33%, 27%, 40%, respectively. Further, truck & bus accounts for ~66% of total standalone revenue (33% each bias & radial). On a consolidated basis, revenue mix in terms of replacement and OEM continues to be at 75:25, respectively The restructuring exercise of its South African business is complete. The company had an exceptional item of 47.7 crore during the quarter, mainly towards the gain from the sale of property of its wholly owned subsidiary Apollo Tyres Africa Ltd ATL is also looking at exploring the 2W segment and wishes to enter the space, going forward On a consolidated basis, its gross debt has reduced from 1100 crore in Q4FY15 to 800 crore in Q1FY16. The company is debt free at the net debt levels 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 onwards. Revenue and profit contribution from Europe has increased from ~24% in FY10 to ~30% in FY15. With further capacity expansion planned for ~ 500 million in Eastern Europe over the next four or five years, we expect a consistent increase in revenues and profitability for ATL after FY15. ATL has completed the restructuring of its South African operations and closed its operations. Henceforth, it would only be a trading subsidiary and would not be contributing meaningfully to its consolidated revenue. In Q2FY16, the company reported an exceptional item of 47.7 crore, mainly towards the gain from the sale of property of its whollyowned subsidiary Apollo Tyres Africa Ltd. Exhibit 1: Revenue breakup Geographywise 18,000 ( crore) 15,000 12,000 9,000 6,000 3,000 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, ,943 4,032 3,772 8,712 8,938 8,873 4,346 9,422 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E India Europe South Africa Exhibit 2: Profitability contribution Geographywise 2,000 ( crore) 1,600 1, ,069 1,331 1,276 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E India Europe ICICI Securities Ltd Retail Equity Research Page 4

5 Revenue growth strong on radial TB side as overall recovery muted! We have factored in a modest revenue growth at ~3% CAGR in FY15 17E, mainly led by volume growth. We believe the domestic market will improve but the radialisation trend in the truck bus segment would hurt companies with higher nylon capacity. Although in Indian operations, replacement forms ~65% of total revenues, we expect the share to remain steady as major OEM demand in the coming years in tonnage terms is expected to be in radial where ATL is already operating at >90% utilisation. Further competition from cheaper imported Chinese tyre in the M&HCV space is taking away some of the replacement demand from Indian branded tyre players, thus registering moderate growth for ATL. Exhibit 3: We build modest revenue growth at 3% CAGR in FY1517E ( crore) 18,000 15,000 12,000 9,000 6,000 3,000 8, ,153 12,795 13, ,785 12,463 13, FY11 FY12 FY13 FY14 FY15 FY16E FY17E Sales % growth (%) EBITDA margins to remain strong as RM price outlook soft! ATL s margins have expended from 9.6% to 15.1% from FY12 to FY15 on the back of a reduction in raw material prices. Prices of natural rubber (account for ~40% of raw material cost) declined from 250/kg in 2011 to ~ 114/kg in October We expect margins to remain >15%, going forward, as we expect raw material prices to remain benign at least in the medium term. However, some of these benefits would be passed on to consumers, going ahead, resulting in lower realisation. A higher mix in terms of radial tyres is likely to support margins, going forward. We, thus, estimate margins at 16.2%, 15.2% in FY16E, FY17E, respectively. Exhibit 4: EBITDA margins to remain strong over FY1517E ( crore) 2,500 2,000 1,500 1, ,166 1,457 1,876 1,931 2,022 2,079 FY11 FY12 FY13 FY14 FY15 FY16E FY17E (%) EBITDA EBITDA Margins (%) ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 5: Margin movement with RM trend (%) Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 (%) Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Raw materials/sales Contribution OPM (LHS) Exhibit 6: Declining trend of rubber prices!! ( /Kg) Jun11 Oct11 Feb12 Jun12 Oct12 Feb13 Jun13 Oct13 Feb14 Jun14 Oct14 Feb15 Jun15 Oct15 Strong capital structure in capital intensive, cyclical business! Despite the capital intensiveness and cyclicality of the business, ATL has managed to maintain decent balance sheet strength. With net D/E at comfortable ~0.2x levels, we believe this is the company s greatest strength in the good RoCE business. Despite the increase in borrowings due to huge capex planned of ~ 2,000 crore each for the next two years, the D/E ratio is likely to remain comfortable at these levels as CFO generation remains strong and would contribute to account for the bulk of the expenditure. ICICI Securities Ltd Retail Equity Research Page 6

7 Exhibit 7: Comfortable debt position in high RoCE business! (x) (%) FY11 FY12 FY13 FY14 FY FY16E FY17E 5 Nebt Debt/Equity RoCE Strong CFO generation to lead to low debt levels despite capex plans!!! From ~ 295 crore in FY11, the CFO has increased to ~ 1800 crore in FY15, mainly due to lower input cost (natural rubber) and more of a price discipline maintained by domestic players in the past. With OEM demand soon likely to revive, we expect volumes to improve, going forward. This would further sustain CFOs even as ATL embarks on a capex in FY17E in Eastern Europe and on enhancing capacity in the domestic business. Exhibit 8: CFOs on up trend! 2,800 2,400 2,000 ( crore) 1,600 1, ,045 2, , ,282 1, , ,388 1, ,489 1,900 1,334 FY11 FY12 FY13 FY14 FY15 FY16E FY17E CFO Capex Debt ICICI Securities Ltd Retail Equity Research Page 7

8 Profitability to remain at elevated levels as demand returns! With the expected demand revival, we believe volumes will improve as OE demand is likely to increase, going forward. This would help the company to post healthy profits with stable margins. 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 payment and stable depreciation. We expect FY16E, FY17E to witness PAT margin of 8.1% & 7.6% levels. Exhibit 9: Profit margins to remain as operational improvement kicks in!!! 1, , ( crore) ,044 1,015 1,007 1, (%) FY11 FY12 FY13 FY14 FY15 FY16E FY17E 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, , , , , , , FY11 FY12 FY13 FY14 FY15 FY16E FY17E EBITDA Interest Depreciation ICICI Securities Ltd Retail Equity Research Page 8

9 Outlook and valuation ATL s growth prospects appear muted in the near term due to capacity constraints, slower OEM demand and competition from imported Chinese tyres. However, the company is investing towards more diversified, rapid growth areas coupled with larger scale of business for coming years. ATL s new European facility is slated to aid the current capacity crunch faced by Vredestein coupled with strong domestic demand improvement from FY17E onwards. With a low D/E profile, decent return ratios and strong operating cash flow visibility in the near term, the company is placed much better in this business cycle visàvis previous up cycles due to its largely diversified and global scale of business. With the outlook on raw material prices favourable would continue to favour company s profitability. We build in earnings growth of ~3% CAGR in FY1517E (South African business included in FY15). We continue to value the stock at 10x FY17E EPS. Therefore, we reduce our target price to 200 (earlier 228) with a BUY recommendation on the stock. Exhibit 11: Valuation Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY14 13, FY15 12, FY16E 12,400 (2.6) FY17E 13, ICICI Securities Ltd Retail Equity Research Page 9

10 Company snapshot Target Price : Dec10 Mar11 Jun11 Sep11 Dec11 Mar12 Jun12 Sep12 Dec12 Mar13 Jun13 Sep13 Dec13 Mar14 Jun14 Sep14 Dec14 Mar15 Jun15 Sep15 Dec15 ( ) Mar16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event 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 Jun14 Apollo to invest ~ 400 crore at its Kerala facility to expand its Offhighway tyre capacity Sep14 Company to invest greenfield facility at Hungary and is likely to invest Euro 475 million over next 4 to 5 years Sep14 Apollo Tyre Africa voluntarily decides to cease its business operations Oct14 RBI hikes FII limit for investment upto 45% of paid up capital in Apollo Tyre May15 Apollo plans to invest 1500 crore to expand its Truck bus radial (TBR) capacity at its Chennai plant from 6000 units/ day to 9000 units/day Aug15 Board approves ATL's plans to raise debt of 2,000 crore by way of rupee term loan, foregin currency term loan, NCDs from time to time Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Apollo Finance, Ltd. 30Sep Neeraj Consultants Pvt. Ltd. 30Sep Sunrays Properties & Investment Company Pvt. Ltd. 30Sep Constructive Finance Pvt. Ltd. 30Sep UTI Asset Management Co. Ltd. 30Sep Classic Auto Tubes, Ltd. 30Sep Franklin Templeton Asset Management (India) Pvt. Ltd. 30Sep Mehta (Ashwin Shantilal) 30Sep Templeton Asset Management Ltd. 30Sep Skagen AS 30Sep Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep14 Dec14 Mar15 Jun15 Sep15 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Dimensional Fund Advisors, L.P m 11.21m Caisse de Depot et Placement du Quebec 15.56m 4.39m William Blair & Company, L.L.C m 4.67m Carmignac Gestion 11.24m 4.23m RBC Investment Management (Asia) Ltd m 4.04m ICICI Prudential Asset Management Co. Ltd. 7.99m 2.60m Franklin Templeton Asset Management (India) Pvt. Ltd. 9.40m 3.42m Principal Global Investors (Equity) 7.03m 2.59m Sundaram Asset Management Company Limited 6.99m 2.58m Van Eck Associates Corporation 6.99m 2.41m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 10

11 Financial summary Profit and loss statement Crore (Yearend March) FY14 FY15 FY16E FY17E Total operating Income 13, , , ,653.1 Growth (%) Raw Material Expenses 7, , , ,970.0 Employee Expenses 1, , , ,886.0 Other Expenses 2, , , ,718.1 Total Operating Expenditure 11, , , ,574.1 EBITDA 1, , , ,079.0 Growth (%) Depreciation Interest Other Income PBT 1, , , ,457.2 Exceptional items Total Tax PAT 1, , ,034.5 Growth (%) EPS ( ) Cash flow statement Crore (Yearend March) FY14 FY15 FY16E FY17E Profit after Tax 1, , ,034.5 Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities 1, , , ,489.4 (Inc)/dec in Investments (Inc)/dec in Fixed Assets , ,900.0 Others CF from investing activities , ,000.0 Issue/(Buy back) of Equity Inc/(dec) in loan funds 1, Dividend paid & dividend tax Others CF from financing activities , Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Yearend March) FY14 FY15 FY16E FY17E Liabilities Equity Capital Reserve and Surplus 4, , , ,625.1 Total Shareholders funds 4, , , ,676.0 Total Debt 1, , ,800.6 Deferred Tax Liability Total Liabilities 6, , , ,130.7 Assets Gross Block 9, , , ,308.8 Less: Acc Depreciation 4, , , ,407.6 Net Block 4, , , ,134.4 Capital WIP Total Fixed Assets 4, , , ,402.6 Investments Goodwill on consolidation Inventory 2, , , ,122.6 Debtors 1, ,022.0 Loans and Advances Other current assets Cash Total Current Assets 4, , , ,593.9 Creditors 1, Provisions Total Current Liabilities 1, , , ,546.6 Net Current Assets 2, , , ,047.3 Application of Funds 6, , , , Key ratios (Yearend March) FY14 FY15 FY16E FY17E 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 11

12 ICICIdirect.com coverage universe (Auto & Auto Ancillary) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E Amara Raja (AMARAJ) Buy Apollo Tyre (APOTYR) Buy Ashok Leyland (ASHLEY) Hold Bajaj Auto (BAAUTO) Buy Balkrishna Ind. (BALIND) Hold Bharat Forge (BHAFOR) Buy Bosch (MICO) Hold Eicher Motors (EICMOT) Hold Escorts (ESCORT) Hold Exide Industries (EXIIND) Buy Hero Mototcorp (HERHON) Hold JK Tyre & Ind (JKIND) Buy M&M (MAHMAH) Buy Mahindra CIE (MAHAUT) Buy NA Maruti Suzuki (MARUTI) Buy Motherson (MOTSUM) Hold Tata Motors (TELCO) Buy Wabco India (WABTVS) Hold ICICI Securities Ltd Retail Equity Research Page 12

13 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 pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 13

14 ANALYST CERTIFICATION We /I, Nishit Zota, MBA & Vidrum Mehta, 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 views about 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. Terms & conditions and other disclosures: ICICI Securities Limited is a Sebi registered Research Analyst having registration no. INH ICICI Securities Limited (ICICI Securities) is a fullservice, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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