January 01, 1970 5:30 IST | India Infoline News Service
CMP Rs85, Target Rs102, Upside 20%
Indian Operations
Apollo Tyres net sales on standalone basis witnessed robust growth of 23.7% yoy to Rs22.8bn for Q2 FY13. On sequential basis, revenues for the quarter increased by 6.1%. Growth in volume contributed large part of revenue surge for the standalone operations. Operating profit margin expanded by 311bps on yoy basis to 9.9% in the quarter. Expansion in OPM was primarily driven by the decline in raw material cost as % of sales aided by ~11% yoy decline in the average cost of natural rubber for the company. Product mix for Q2 FY13 remained stable sequentially with replacement market accounting for 60% of the sales while the remaining share was contributed by the OEM segment (30%) and exports (10%).
European Operations
Better product mix for the European subsidiary more than offset the decline of 12% in tyre volumes resulting into 6.2% yoy revenue growth during the quarter. On constant currency basis revenue was flat on yoy basis. EBIT margin expanded 3.6pps in Q2 FY13 against Q2 FY12 aided by higher realizations account of better product mix.
South African Operations
Revenues for the South African operations during Q2 FY13 jumped 30% on yoy basis driven by improvement in the demand scenario during the quarter. However, the company has reported loss at EBIT level for the quarter. The company has taken various initiatives to improve performance for the subsidiary viz. a) introduction of Apollo and Vredestein brand in the SA market and b) implementation of reference price for the tyres. Management expects momentum in revenue growth to continue and with successful implementation of the initiatives it expects improvement in EBIT margins.
Outlook
We expect volume growth in the Indian operations to remain healthy aided by strong demand for tyres in CV segment for 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 in H2 FY13 from ~60% currently. Both these factors would aid in ~2pps expansion in the OPM for FY13. 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 South African operations to turn EBIT positive in FY14. The company plans to raise additional equity capital which will be used to: a) to bring down net leverage, b) invest in long term in manufacturing capacity in ASEAN, Australia and Europe c) for conversion of cross ply tyre capacity to industry, OTH tyres, etc. We maintain our BUY recommendation with target price of Rs102.
