Result Update on Apollo Tyres for 4QFY2011

For 4QFY2011, Apollo Tyres reported better-than-expected top line on a standalone as well as consolidated basis, driven by strong volume growth and higher prices. Standalone operating margin came below expectations due to a steep increase in natural rubber prices, while consolidated margin benefitted due to gain of `90cr on account of pension and inventory revaluations. We retain our revenue and earnings estimates for the company and maintain our Buy recommendation on the stock.

Standalone results beat estimates: Standalone top line registered strong 34.2% yoy (23% qoq) growth to `1,762cr, led by higher volumes (up 14% yoy) and prices. After three straight quarters of declining volumes, the company reported higher volumes in 4QFY2011, led by pick-up in demand in the replacement segment. Operating margin declined considerably by 575bp yoy and 209bp qoq to 8.3% mainly due to the 60% yoy and 16% qoq increase in natural rubber cost. Thus, net profit recorded a sharp 43% yoy decline to `66cr, though sequentially it grew by 22.8%. Noticeably, higher other income and lower tax rate on account of MAT credits positively helped the company’s bottom line.

Consolidated revenue up 27.4% yoy, net profit rises 10% yoy: Consolidated net revenue grew by 27.4% yoy (15.2% qoq) to `2,730cr due to a 12% yoy increase in volumes and a 15.6% jump in average realisation. In 4QFY2011, revenue of South African and European operations grew by 31% and 10% yoy, respectively. Operating margin declined by 215bp yoy to 11.8%, but improved by 24bp qoq. Operating performance benefitted due to gain of `90cr on account of pension and inventory revaluations. Net profit grew by 9.6% yoy (59.4% qoq) to `193cr.

Outlook and valuation: We remain positive on the tyre industry in view of the structural shift that the industry is going through. We expect the company to deliver a healthy revenue CAGR of 15.3% over FY2011–13E, as the production ramp up at the Chennai facility continues as scheduled. However, volatile raw-material prices are a concern, and we expect margins to remain under pressure. We estimate the company to post EPS of `10.3 in FY2013. We maintain our Buy view with a target price of `82, valuing it at 8.0x FY2013E earnings.