CMP Rs172, Target Rs210, Upside 22.1%

• Consolidated revenues at Rs32.5bn higher by 1.8% yoy; lower than our estimates
• Standalone operations see 6.6% yoy growth in revenues to Rs23.1bn driven by 5% growth in volumes
• European operations continue to see strong growth in volumes but sees pressure in realizations owing to strong competition
• South African operations sees 12.1% qoq growth in revenues but EBIT margins plummet 465bps qoq to 1.1%
• Consolidated OPM was at 13.2% a jump of 86bps on the back of sharp improvement in Indian operations and lower contribution from South African operations, Standalone OPM was higher by 75bps yoy to 12.5%
• Maintain BUY with a revised target price of Rs210 as we expect 1) recovery in domestic CV volumes from H2 FY15 and 2) rubber prices to remain soft  

Result table (Standalone)

(Rs m)	Q1 FY15	Q1 FY14	% yoy	Q4 FY14	% qoq
Net sales	23,065	21,647	6.6	22,124	4.3
Material costs	(15,413)	(14,925)	3.3	(14,916)	3.3
Personnel costs	(1,475)	(1,146)	28.7	(1,321)	11.6
Other overheads	(3,297)	(3,035)	8.6	(3,240)	1.8
Operating profit	2,881	2,540	13.4	2,647	8.8
OPM (%)	12.5	11.7	75 bps	12.0	52 bps
Depreciation	(606)	(594)	2.0	(628)	(3.5)
Interest	(513)	(633)	(19.0)	(564)	(9.0)
Other income	217	80	171.3	133	63.1
Extra ordinary items	-	-		(112)
PBT	1,978	1,393	42.0	1,476	34.0
Tax	(588)	(458)	28.5	(180)	226.7
Effective tax rate (%)	29.7	32.8		12.2
Reported PAT	1,391	936	48.6	1,296	7.3
Adj. PAT margin (%)	6.0	4.3	171 bps	5.9	17 bps
Ann. EPS (Rs)	11.0	7.4	48.6	10.3	7.3

Source: Company, India Infoline Research

Indian Operations
Apollo Tyres net sales for Q1 FY15 on standalone basis rose by 6.6% yoy. While volumes were higher by 5%, realizations rose marginally. Capacity utilization for the Indian operations increased closer to 80%. The Chennai plant of the company operated at 80%+ during the year. Operating margins for standalone operations improved by 75bps yoy and 52bps qoq. Gross margins improved by 213bps yoy on the back of decline of natural rubber prices. Impact of operating deleverage was seen with staff costs and overheads rising by 110bps and 27bps yoy respectively. Share of replacement market was at 77% during the quarter while contribution of truck segment was at 65% and passenger cars was at 16%. For domestic operations the company has lined up a capex of Rs15bn over the next two years for expanding truck radial capacity in Chennai.

Also the company is converting its part capacity of bias tyres plant at Kochi to off highway tyres which will be done at a cost of Rs5bn spent over 4 years. Routine maintenance capex for Indian operations is likely to be at Rs1bn.

European Operations
European operations saw a strong revenue growth of 30.8% yoy led by 1) volume growth of 7% and 2) steep depreciation of rupee. Growth had been steeper had it not been for fall in realizations which was on the back of increasing competitive pressure. The volume growth for the company in the European market has been in line with the growth reported by the industry. EBIT margin for the quarter was at 11.3% compared to 12.2% last year. With softening of rubber prices, most manufacturers are resorting to price cuts leading to additional pressure on realizations. Capacity utilization at Europe is near 90% for Apollo and has limited scope to increase it from here. To meet the capacity constraint the company has increased exports from the Indian operations and raised passenger car capacity from 6mn to 6.5mn. Furthermore, the company has received board approval for setting up of a greenfield plant in Eastern Europe with a spend of €500mn. The plant is slated to have a capacity of 3,000 truck tyres per day and 16,000 passenger car tyres per day. Construction of the plant will commence in 2015 and scale up to full capacity will take four years. In the meanwhile first tyre will roll out of the plant in CY17. For the year FY15 the company expects to export 1mn tyres from India to European operations.

South African Operations
Yoy comparison for South African operations is redundant as during Q3 FY14 a major plant was sold to SRI. Sequentially, South African operations saw a revenue growth of 12.1%. However, in terms of EBIT margins performance was disappointing with 465bps fall to 1.1%.

Cost analysis (Standalone)

As a % of net sales	Q1 FY15	Q1 FY14	bps yoy	Q4 FY14	bps qoq
Material costs	66.8	68.9	(213)	67.4	(60)
Personnel Costs	6.4	5.3	110	6.0	42
Other overheads	14.3	14.0	27	14.6	(35)
Total costs	87.5	88.3	(75)	88.0	(52)

Source: Company, India Infoline Research

Result table (Consolidated)

(Rs m)	Q1 FY15	Q1 FY14	% yoy	Q4 FY14	% qoq
Net sales	32,476	31,899	1.8	32,293	0.6
Material costs	(18,329)	(18,783)	(2.4)	(18,363)	(0.2)
Personnel costs	(4,320)	(3,932)	9.9	(3,858)	12.0
Other overheads	(5,539)	(5,248)	5.5	(5,460)	1.5
Operating profit	4,287	3,936	8.9	4,612	(7.0)
OPM (%)	13.2	12.3	86 bps	14.3	(108) bps
Depreciation	(1,004)	(986)	1.9	(1,021)	(1.7)
Interest	(530)	(724)	(26.8)	(616)	(14.1)
Other income	290	110	163.2	186	55.7
Extra ordinary items	-	-		110
PBT	3,044	2,337	30.2	3,270	(6.9)
Tax	(764)	(676)	13.0	(454)	68.2
Effective tax rate (%)	25.1	28.9		13.9
Reported PAT	2,279	1,661	37.2	2,816	(19.1)
Adj. PAT margin (%)	7.0	5.2	181 bps	8.7	(170) bps
Ann. EPS (Rs)	18.1	13.2	37.2	22.3	(19.1)

Source: Company, India Infoline Research

Cost analysis (Consolidated)

As a % of net sales	Q1 FY15	Q1 FY14	bps yoy	Q4 FY14	bps qoq
Material costs	56.4	58.9	(244)	56.9	(42)
Personnel Costs	13.3	12.3	98	11.9	135
Other overheads	17.1	16.5	60	16.9	15
Total costs	86.8	87.7	(86)	85.7	108

Source: Company, India Infoline Research

Segmental performance (Consolidated)

(Rs m)	Q1 FY15	Q1 FY14	% yoy	Q4 FY14	% qoq
Revenues
India	23,282	21,727	7.2	22,257	4.6
SA	1,598	3,911	(59.1)	1,425	12.1
Europe	9,503	7,263	30.8	10,670	(10.9)
Others	361	186	94.7	414	(12.8)
Less: Inter segment	(1,978)	(1,077)		(2,288)
Net Sales	32,765	32,009	2.4	32,479	0.9
EBIT
India	2,491	2,026	23.0	2,152	15.7
SA	18	185	(90.5)	82	(78.6)
Europe	1,069	888	20.3	1,421	(24.8)
Others	25	(18)	(237.7)	21	17.2
Total	3,603	3,082	16.9	3,676	(2.0)
EBIT Margin
India	10.7	9.3	137 bps	9.7	103 bps
SA	1.1	4.7	-364 bps	5.8	-465 bps
Europe	11.3	12.2	-98 bps	13.3	-206 bps
Blended	11.0	9.6	137 bps	11.3	-32 bps

Outlook
The demand for the truck tyres, which account for 65% of the revenues for the company in the domestic business, is expected to recover from H2 FY15 in line with our expectations for CV sales. Margins for the company are expected to expand with stable raw material prices coupled with increase in share of high margin replacement market. For overseas operation, we see decent revenue growth in the South African operations and recovery in growth for Europe. On the margin front, we foresee EBIT margin to remain stable for European operations and expect South African operations to remain EBIT positive in FY15. We maintain our BUY rating with a revised price target of Rs210.