APTY’s adjusted Q3FY21 revenues, up 15% y-y, were in line with our estimate but 5% above consensus. EBITDA at Rs 8.7 bn (margin 17.3%) was ahead of our estimate (margin 13.6%) and consensus (14.5%). Revenue in India rose 20% y-y (with EBITDA margin of 18.6%) while EU was up 6% y-y (with EBITDA margin of 14.9%). Reported revenues had Rs 1.15 bn as one-time incentive for past quarters for Chennai plant and we have adjusted the same in Q3 results.
Commentary: Mgmt indicated strong demand momentum in Q3 [truck-bus radial (TBR) +30%, Truck-bus bias (TBB) 5%, car 24%], led by a pick-up in economic activity, import restrictions on car tyres and market share gains by APTY (~300bp in truck to 31% and ~400bp in car to 22% in 7MFY21) on rural push. Also, the company plans to launch premium ‘Vredestein’ brand car tyres by Mar-21.
Our view: APTY accounted for ~60% of the 9MFY21 revenues of Truck Bus segment and will be the key beneficiary of CV demand recovery, rising radialisation and import restrictions benefitting PV demand. Given our view of strong 85%/25% growth in MHCV OE and ~10% CAGR FY21-23F in TBR replacement demand, we revise our tonnage growth assumption to +4%/25%/13% over FY21-23F (1%/16%/13% earlier).
Commodity costs rose ~7% in Q3FY21 and are likely to impact APTY’s margin in Q4FY21F. APTY raised prices by ~3% in Dec-20, and plans to raise them further by 2-3% by end-Q4FY21F. Hence, while we raise India EBITDA margins to 16.7% (15% earlier) in FY21F, we maintain 14.3%/14.2% over FY22F/23F. In the EU, we maintain margins of 14% in FY22/23F (9.5% FY21F) on cost control and headcount reduction.
Overall, we raise consolidated FY21F-23F EBITDA by 13-15%, but EPS increases are higher at 59%/48%/44% due to financial leverage.
Valuation: TP raised 108% to Rs 307, based on 7x FY23F EV/EBITDA—APTY is currently trading at 6x FY23F EV-EBITDA. We expect capex intensity to peak out in FY22F (Rs 18 bn) and drive stronger FCF generation in FY23F (6% yield), which should support valuation multiples. Hence, we raise our target EV/EBITDA to 7x (5x earlier) on FY23F to arrive at a higher TP of Rs 307 (Rs 147 earlier). Upgrade to Buy.