apollo tyres limited -...
TRANSCRIPT
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Apollo Tyres Limited
BUY Target Price: Rs.65.00
CMP: Rs.54.80 Market Cap. : Rs.27624.13mn.
Date: February 15, 2010
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
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:
V.S.R. Sastry
Vice President
Equity Research Desk
91-22-25276077
Dr. V.V.L.N. Sastry Ph.D.
Chief Research Officer
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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
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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.
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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.
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• 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
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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
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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
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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
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Charts
• Net sales & PAT
• P/E Ratio (x)
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• P/BV (X)
• EV/EBITDA(X)
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1 Year Comparative Graph
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.
Apollo Tyres ltd BSE SENSEX
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• 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.
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However, the contribution from OEM and replacement segments varies across sub-
segments 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.
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____________________________________________________________
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inadvertent error in the information contained in this report. This document is provide for
assistance only and is not intended to be and must not alone be taken as the basis for an
investment decision.
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