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Apollo Tyres 3QFY2013 performance highlights and results update

Contributed by Angel Broking

Subdued results due to weak demand: Apollo Tyres (APTY)‘ results for 3QFY2013 were subdued as the consolidated top-line performance across the three geographies remained weak mainly on account of sluggish demand amid weak economic environment. The consolidated top-line stood flat (down 4.7% yoy) at Rs.3,217cr, lower than our estimate of Rs.3,559cr on account of a 2.7% and 0.5% yoy decline in revenues in India and Europe respectively. Nonetheless, the consolidated EBITDA margin expanded ~100bp sequentially (~160bp yoy) to 11.9%, led by receding raw-material cost pressures. However, higher advertisement expenses towards brand building restricted further margin expansion. The EBITDA margins in India, Europe and South Africa expanded by 200bp, 160bp and 200bp to 10.1%, 4.8% and 20.1% respectively. Further, higher other income (on forex gains and insurance proceeds) and lower tax rate resulted in a 40.7% yoy (17.8% qoq) growth in the adjusted net profit to Rs.180cr.

Lower-than-expected standalone performance: APTY’s standalone results were impacted by a significant decline in the OEM demand for medium and heavy commercial vehicle (MHCV) tyres (volume down ~40% yoy) which led to a 2.7% yoy (10.8% qoq) decline in the top-line. The EBITDA margin too remained under pressure on a sequential basis as it expanded by a modest ~20bp (strong 200bp yoy) to 10.1%, despite the decline in raw-material expenses. However, led by higher other income, sequential decline in the bottom-line was restricted to 1.8%.

Outlook and valuation: We lower our volume estimates for FY2013/14 to account for the subdued demand scenario in the key geographies of India and Europe. Nonetheless, our earnings estimates for FY2013 are revised upwards as we factor in the higher other income during the quarter. We remain positive on the tyre industry in view of the structural shift that the industry is witnessing and also due to the softening of natural rubber prices. However, we remain watchful of the capital expenditure plans of the company in the absence of proper clarity on the quantum and usage of funds. Further, raising of funds through QIP and issue of warrants to promoters is also likely to remain an overhang on the stock as it will result in equity dilution of ~20%. Nevertheless, due to attractive valuations we maintain our Accumulate rating on the stock with a revised target price of Rs.97.