Apollo Tyres (Q1 FY13)

Indian Operations

Apollo Tyres net sales on standalone basis grew by 9.8% yoy to Rs21.5bn for Q1 FY13. On sequential basis, revenues for the quarter declined by 4.8%. Volume growth during the quarter was measly 4% yoy on account of general economic slowdown and lackluster demand from the OEM segment.  Operating profit margin expanded by 229bps on yoy basis and 69bps on qoq basis to 10.3% in the quarter. Expansion in OPM (both yoy and sequentially) was primarily driven by the decline in raw material cost as % of sales with 15% fall in the average cost of natural rubber for the company on yoy basis. There was a sharp rise in the inventory levels due to low off take by OEMs. Management expects this to get normalized from September onwards. During Q1 FY13 replacement market accounted for 60% of the sales while the remaining share was contributed by the OEM segment (30%) and exports (10%).

Despite flat volume growth on yoy basis for the European operations, revenues ascended by 7.6% helped by higher realization. Sequentially revenues de-grew 4% with Q1 been seasonally weak quarter. EBIT margin expanded 4pps in Q1 FY13 against Q1 FY12 aided by improvement in product mix translating into better realizations. Management has guided for flattish revenue growth and stable margin for FY13. 

Revenues for the South African operations during Q1 FY13 jumped 40% on yoy basis and 16% sequentially primarily driven by improvement in the demand scenario and price hike implemented during the quarter. The company has managed to report positive EBIT for the quarter in for South African operations against losses in the past 4 quarters. Management expects momentum in revenue growth to continue for FY13 with improvement in EBIT margins. 

We expect volume growth in the Indian operations to remain healthy aided by strong demand for tyres in CV segment for both OEM and replacement market coupled with increasing level of radialization in truck segment.  Further, increase in capacity for the Chennai plant would add to the revenue growth.  Raw material cost is expected to remain stable for FY13. Additionally, share of high margin replacement market is expected to increase from ~70% currently. Both these factors would aid in ~2pps expansion in the OPM.  For overseas operation, we believe strong revenue growth in the South African operations will be offset by flattish growth for Europe. On the margin front, we foresee EBIT margin to remain stable for European operations and expect strong improvement in the margin for the South African operations. We maintain our BUY recommendation with the revised target price of Rs96.