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.

Result Flash on Apollo Tyres for 4QFY2011

Apollo Tyres - 4QFY2011 standalone results

Y/E March (Rs cr)	4QFY11	4QFY10	% chg (yoy)	Angel est.	% diff
Net Sales	1,762	1,313	34.2	1,490	18.2
Operating Profit	146	185	(20.7)	142	3.0
OPM (%)	8.3	14.1	(575)bp	9.5	(123)bp
Reported PAT	66	116	(43.0)	49	35.2

Source: Company, Angel Research

Review

v  For 4QFY2011, Apollo Tyres registered a robust and better-than-expected 34.2% yoy increase in net sales to Rs1,762cr driven by 14% increase in volumes and due to the improvement in product mix and price increases.

v  On the operating front, the company reported 21% yoy dip in EBITDA, where operating margins for the quarter fell marginally by a substantial 575bp yoy on higher natural rubber cost which increased by 60% in 4QFY2011. Moreover, decline in staff cost during the quarter arrested further contraction in margins to certain extent.

v  As a result, net profit for the quarter declined by 43% yoy. Further, higher interest cost and depreciation also negatively impacted bottom-line performance. However, lower tax outgo on account of MAT credits marginally benefitted the bottom-line performance.

Consolidated performance: The company reported a strong 27% yoy and 15.2% qoq increase in the consolidated top-line to Rs2,730cr aided by 12% yoy increase in volumes and ~16% yoy jump in realization. Revenues at South Africa and European operations grew by 31% and 10% yoy, respectively. OPM on a consolidated basis declined 215bp yoy mainly due to icrease in raw-material cost pressures However, on a sequential basis, the operating margins improved marginally by 24bp. The company benefitted at the operating level to the tune of Rs60cr during 4QFY2011 largely on the employee expenses front and also due to inventory revaluation. Adjusted net profit on a consolidated basis increased 9.6% yoy to Rs193cr.  

Outlook

In view of the apparent structural shift that the tyre industry is going through, we remain positive on the sector. The stock is available at attractive valuations of 9.5x and 7x FY2012E and FY2013E earnings. We retain our Buy rating on the stock, however, target price is under review. We shall release a detailed update note soon.

Quarterly performance (consolidated)

Y/E March (Rs cr)	4QFY11	4QFY10	% chg	FY2011	FY2010	% chg
Net Sales	2,730	2,143	27.4	8,868	8,121	9.2
Consumption of RM	1,592	1,202	32.4	4,821	4,152	16.1
(% of Sales)	58.3	56.1		54.4	51.1
Staff Costs	250	297	(15.8)	1,155	1,088	6.1
(% of Sales)	9.2	13.9		13.0	13.4
Purchases of TG	149	108	37.3	481	429	12.2
(% of Sales)	5.5	5.1		5.4	5.3
Other Expenses	417	237	76.0	1,432	1,277	12.2
(% of Sales)	15.3	11.1		16.2	15.7
Total Expenditure	2,408	1,845	30.5	7,890	6,946	13.6
Operating Profit	321	298	7.7	978	1,175	(16.8)
OPM	11.8	13.9		11.0	14.5
Interest	54	13	332.7	185	115	60.5
Depreciation	74	64	14.8	272	254	7.0
Other Income	17	13	27.7	26	21	23.2
PBT (excl. Extr. Items)	210	235	(10.4)	547	827	(33.8)
Exceptional Items	-	(87)	-	-	(87)	-
PBT (incl. Extr. Items)	210	322	(34.7)	547	914	(40.1)
(% of Sales)	7.7	15.0		6.2	11.3
Provision for Taxation	18	59	(70.3)	106	261	(59.2)
(% of PBT)	8.4	18.4		19.4	28.5
Share in loss/(profit) of associates	0	0		1	0
Minority interest	(0)	0		(0)	0
Reported PAT	193	263	(26.8)	440	653	(32.6)
PATM	7.1	12.3		5.0	8.0
Equity capital (cr)	50.4	50.4		50.4	50.4
EPS (Rs)	3.8	5.2	(26.8)	8.7	13.0	(32.6)

Source: Company, Angel Research

Key Financials (consolidated)
Y/E March (Rs cr)	FY2010	FY2011E	FY2012E	FY2013E
Net Sales	8,117	8,534	9,788	10,737
% chg	62.5	5.1	14.7	9.7
Net Profit	653.4	354.6	375.3	504.5
% chg	369.5	(45.7)	5.9	34.4
OPM (%)	14.6	10.5	9.5	10.5
EPS (Rs)	13.0	7.0	7.4	10.0
P/E (x)	5.4	10.0	9.5	7.0
P/BV (x)	1.8	1.5	1.3	1.1
RoE (%)	30.1	14.0	12.9	16.2
RoCE (%)	29.2	12.6	11.4	14.1
EV/Sales (x)	0.6	0.6	0.6	0.5
EV/EBITDA (x)	4.1	5.8	5.8	4.5

Source: Company, Angel Research