Apollo Tyres (Q2 FY14)

India Infoline News Service | Mumbai |

Apollo Tyres net sales for Q2 FY14 on standalone basis fell by 7.7% yoy. While volumes were lower by 7%, realizations were also lower as discounts increased and proportion of truck & bus segment reduced in terms of volumes.

CMP Rs75, Target Rs70, Downside 6.7%

Indian Operations

Apollo Tyres net sales for Q2 FY14 on standalone basis fell by 7.7% yoy. While volumes were lower by 7%, realizations were also lower as discounts increased and proportion of truck & bus segment reduced in terms of volumes. Capacity utilization levels for the Indian operations remained stable at ~70%. Decline of natural rubber prices led to OPM expansion of 284bps as RM costs declined by 284bps yoy. Impact of operating deleverage was seen with staff costs and overheads rising by 73bps and 335bps yoy respectively. Share of replacement market has seen a substantial jump from the previous quarter given the continued decline OEM sales on the back of macro headwinds. Replacement market accounted for 77% share in product mix for the quarter. In terms of product mix, Truck tyres accounted for 60% of revenues.


European Operations

European operations saw a strong revenue growth of 33% led by 1) volume growth of 15% 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 higher than reported by the industry. EBIDTA margin for the quarter was at 15% compared to 17% 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 scope to increase it by 5-6 percentage points. The current capacity for passenger cars is 16,500 tyres per day and is expected to go up to 17,500 tyres per day by the year end. Exports from India to the European market have increased by 50% but still account for very small portion of the European Division revenues.


South African Operations

Revenues for the South African operations during Q2 FY14  fell by 4.1% yoy. On the EBIDTA front, the company report positive margin of 5.7% and the division continued to breakeven at the net profit level. From December onwards the operations will have only the Durban plant.


Outlook

The demand for the truck tyres, which account for 65% of the revenues for the company in the domestic business, is expected stay sluggish with subdued volumes in CV sales. However, we expect margins for the company to expand with stable raw material prices coupled with increase in share of high margin replacement market. For overseas operation, we believe strong revenue growth in the South African operations and modest 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.


We believe, proposed acquisition of Cooper Tires & Rubber Ltd would pose risk of strain on the balance sheet for the consolidated entity. In case of an extended slowdown in US and Europe, debt servicing will be an issue. We maintain our rating of Market Performer for the stock with the revised target price of Rs70.


Results table (standalone)
(Rs m)
Q2 FY14
Q2 FY13
% yoy
Q1 FY14
% qoq
Net sales
21,068
22,829
(7.7)
21,647
(2.7)
Material costs
(14,254)
(17,025)
(16.3)
(14,925)
(4.5)
Personnel costs
(1,145)
(1,073)
6.7
(1,146)
(0.1)
Other overheads
(2,989)
(2,474)
20.8
(3,035)
(1.5)
Operating profit
2,680
2,256
18.8
2,540
5.5
OPM (%)
12.7
9.9
284 bps
11.7
99 bps
Depreciation
(609)
(548)
11.2
(594)
2.6
Interest
(615)
(695)
(11.5)
(633)
(2.9)
Other income
158
85
86.7
80
97.8
PBT
1,614
1,098
47.0
1,393
15.9
Tax
(523)
(346)
51.0
(458)
14.3
Effective tax rate (%)
32.4
31.5
32.8
PAT
1,091
752
45.1
936
16.6
PAT margin (%)
5.2
3.3
189 bps
4.3
86 bps
Ann. EPS (Rs)
8.7
6.0
BSE 256.85 7.30 (2.93%)
NSE 257.50 7.90 (3.17%)

***Note: This is a NSE Chart

 

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