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Apollo Tyres 3QFY2012 performance highlights and results update

Contributed by Angel Broking

Strong consolidated performance: For 3QFY2012, Apollo Tyres (APTY) reported strong net sales growth of 36.3% yoy (12.4% qoq), led by an 18.2% yoy (8.3% qoq) increase in volumes and 15.3% yoy (3.8% qoq) growth in net average realization. Top-line growth was led by strong performance in India, Europe and South Africa, which posted revenue growth of 46.2%, 26.3% and 27.9% yoy, respectively. EBITDA margin expanded by 202bp sequentially to 10%, benefitting from lower raw-material costs and higher profitability in Europe in a seasonally strong quarter. As a result, adjusted net profit grew by 63.8% qoq to Rs.127cr. During the quarter, APTY made a provision of Rs.29cr in relation to a penalty following the settlement agreement with South Africa Competition Commission for its operations in South Africa.

Better-than-expected standalone performance, driven by volume growth: APTY’s standalone net sales grew strongly by 46.2% yoy (13.5% qoq) to Rs.2,093cr, led by volume growth of 24% yoy (10.2% qoq) and net average realization growth of 17.9% yoy (2.9% qoq). EBITDA margin for the quarter improved by 123bp qoq to 8%, driven by the decline in raw-material expenses; but the benefits were limited due to higher proportion of OEM sales during the quarter. However, net profit grew substantially by 92.9% qoq to Rs.43cr, largely led by improvement in operating margin.

Outlook and valuation: We revise upwards our volume estimates for FY2012/13E for standalone entity, driven by better-than-expected volume growth in 3QFY2012 and likely pick-up in demand going ahead. We have also raised our margin expectations to factor in moderation in natural rubber prices. We expect the company to deliver a strong revenue CAGR of 23.7% over FY2011–13E, led by production ramp-up at Chennai facility and robust growth in European subsidiary. We expect the company’s operating margin to improve in FY2013E on account of the gradual softening of raw-material prices. At Rs.76, APTY is trading at attractive levels of 6.9x FY2013E earnings. We maintain our Buy rating on the stock with a target price of Rs.88, valuing it at 8.0x FY2013E earnings.