Apollo Tyres stock rating: Credit Suisse pegs it at ‘Underperform’ even as India results strong

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February 12, 2018 3:42 AM

Estimates down 1-2%, with forecasts cut for Europe even as India numbers get upgrade; TP up to Rs 225 from Rs 215 with rollover to Dec-19.

Apollo Tyres, Apollo, Apollo stock rating, Apollo Tyres stock rating, Apollo Tyres stock, stock rating, Credit Suisse, marketApollo’s foray into OEM supplies also has had a margin impact over the past few quarters, said management.

Apollo Q3 results were a mixed bag with a weak Europe dragging otherwise strong India numbers. Standalone Ebitda/PAT was 13/19% ahead of estimates but consol. PAT was only 2% ahead.

India tonnage growth continues to pick-up in line with strong CV growth and was 16% this quarter: Truck segment grew 20% plus, driven by very strong 50% growth in TBR tyres. While requisite price hikes have been lacking, management highlighted having seen some early signs of pricing with a demand revival.

For the European business, volumes remain sluggish with margins continuing to disappoint due to: (i) start-up costs at the Hungary plant, (ii) lack of pricing (unusual for this market), (iii) high development costs to enter the OEM segment. Management expects margins to improve from here as start-up costs slide down.

Our estimates go down 1-2% as we cut forecasts for Europe, even as India numbers get an upgrade: While growth is accelerating, we remain cautious as pricing seems less forthcoming and the recent crude inflation poses further risk on input costs. Target price moves to Rs 225 (from Rs 215) on roll forward to Dec-19.

Overall consol numbers in line: At the PAT level, consol. numbers were in line while there was a 19% beat for the India business. Europe, however, was below estimates and dragged overall numbers down.

Another strong quarter for the domestic India business: This was the second consecutive strong quarter for the India business with 20%+ sales growth (3% above est.) and 16% tonnage growth (20-quarter high). Truck segment volumes grew 21% with TBR growing 50% y-o-y. LCV grew 10% while domestic passenger car volumes also grew mid-single digits. There was a q-o-q drop in the input basket leading to a higher-than-expected performance on gross margins. This led to a 13% beat to our Ebitda estimates.

Need price hikes now to maintain margins: On the call, however, management has clearly called out for slight firming up in their input basket going ahead. While pricing action has remained elusive, management remains hopeful and is seeing some early signs of pricing coming through. We believe that despite the strong topline recovery, the ability of this industry to take pricing remains a key factor to watch out for.

European operations remain weak due to multiple issues: European sales grew 5% y-o-y, with manufacturing operations (The Netherlands + Hungary) growing 2% and Reifencom (trading business) growing 12%. Volumes were flat, and growth was almost entirely due to better product mix, and favourable currency helping INR growth look higher at 11% y-o-y. The sore point, however, was the margin performance. For the manufacturing operations, margins were down 400 bp y-o-y though they improved sequentially. Management attributed this to the Hungary plant start-up costs and believes those would slide down from Q4. Another concern remains the lack of pricing in Europe for quite some time now. Apollo’s foray into OEM supplies also has had a margin impact over the past few quarters, said management.

Update on Chinese tyres: Chinese imports have continued to trend down and have now reached levels of 50,000 tyres per month versus a pre-demonetisation level of 150,000 per month. At current levels, Chinese tyres are 7% of the market and management expects this to sustain.

Other takeaways from the con call: The construction of the new passenger car tyre capacity at Andhra Pradesh has commenced. The company aims to reach 5.5 million tyres per year at the end of phase one with a capex of Rs 20 bn. Gross debt as of Dec-17 was Rs 43.6 bn; net debt Rs 23.4 bn lower due to the recent Rs 15 bn QIP issue. Hungary plant is currently running at 5,000 tyres per day but is expected to end FY18 at 7,000 tyres per day.


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