loader2
NRI
Apollo Tyres Ltd>
  • CMP : 541.2 Chg : -7.90 (-1.44%)
  • Target : 250.0 (25.0%)
  • Target Period : 12-18 Month

14 May 2022

Double digit return ratios seen, inexpensive valuations

About The Stock

Apollo Tyres (ATL) is a leading tyre manufacturer, with operations in India & Europe with an installed capacity of ~7.9 lakh MT p.a. In India, ATL has substantial presence in TBR (31% market share) & PCR space (21% market share)

  • Derives ~67% revenues from APMEA (largely India), ~32% from Europe
  • FY22 segment mix: Truck/bus ~43%, PV ~35%, OHT ~10%, others ~12%
Q4FY22

The company posted muted operational performance in Q4FY22

  • Total consolidated operating income was down 2.3% QoQ to ₹5,578 crores
  • EBITDA came at ₹626 crores with margins down 180 bps QoQ to 11.2%
  • Consolidated PAT at ₹113 crores was down 49.2% QoQ
What should Investors do?

ATL’s stock price has de-grown at ~3% CAGR from ~₹ 227 levels in May 2017, underperforming Nifty Auto Index in that time.  

We retain our BUY rating on ATL amidst management intent on sweating on assets, controlled capex spends and return ratios focus for the business 

Target Price Valuation

Rolling over our valuations, we now value ATL at a target price of ₹250 i.e., 5.25x FY24E EV/EBITDA (previous target price: ₹ 270).

Key Triggers for future price performance
  • India CV cyclical upswing, high radialisation levels, pent-up demand in PV & network expansion across globe to be major top line drivers. We expect consolidated sales to grow at a CAGR of 10.9% FY22-24E.
  • India/Europe sales are seen growing at a CAGR of 13%/7% over FY22-24E  
  • Strong operational performance in European market to result in 13.5% FY24E margins and double digit return ratios profile (10.6% RoCE in FY24E)
  • Healthy FCF generation to lead debt reduction in FY24E and boost PAT
New Stock Ideas

Apart from ATL, in our ancillary coverage we like JK Tyre.

  • Walking the talk on B/S deleveraging, sweating of assets & capital efficiency
  • BUY with target price of ₹170

Key Financial Summary

Key Financials FY19 FY20 FY21 FY22P 5 year CAGR (FY17-22P) FY23E FY24E 2 year CAGR (FY22-24E)
Net Sales 17,548.8 16,327.0 17,344.0 20,947.6 9.7 24,051.3 25,775.3 10.9
EBITDA 1,958.9 1,915.6 2,744.5 2,574.1 6.9 3,003.6 3,489.2 16.4
EBITDA Margins (%) 11.2 11.7 15.8 12.3 - 12.5 13.5 -
Net Profit 680.0 476.4 350.2 638.6 -10.3 932.9 1,318.7 43.7
EPS (₹) 11.9 8.3 5.5 10.1 - 14.7 20.8 -
P/E 16.8 24.0 36.3 19.9 - 13.6 9.6 -
RoNW (%) 8.3 4.8 6.4 5.5 - 7.5 9.9 -
RoCE (%) 7.3 4.5 7.6 6.3 - 8.1 10.6 -
- - - - - - - - -
Source: Company, ICICI Direct Research

Key takeaways of the recent quarter & Concall highlights

Q4FY22 Results:

  • Among geographies, APMEA i.e. largely India revenues grew 5% QoQ to ₹4,025 crores while Europe de-grew 15% QoQ at ₹1,685 crores.
  • Gross margin decline was limited to ~20 bps QoQ which was aggravated by higher other expenses which was up ~140 bps QoQ (negative o/p leverage).
  • EBITDA margins on standalone basis stood at 9.4% (up 30 bps QoQ) with expansion in gross margins a positive surprise up 40 bps QoQ, contrary to peers releasing results till date

Q4FY22 Earnings Conference Call highlights

  • Capacity utilisation for FY22 stood as: India 80%, Europe 83%; for Q4FY22 capacity utilization stood as: India 84% Europe: ~85%; Company remains optimistic about demand outlook going forward, but for Q4FY22 demand from India remained subdued (flat volumes on YoY basis).
  • Net debt to EBITDA stood at 1.8x as of FY22. Gross debt at Indian operation stood at ₹4,500 crores with net debt at ₹3,600 crores.
  • ATL witnessed highest ever EBITDA margins of 17.5% in European operations for FY22 with PAT at €103 million (Revenues at € 589 million).
  •  With respect to demand European PV segment grew high single digit YoY, further ~8-10 mil of PCR tyre market was served by Russian companies which post war would stop and ATL hope to carter this demand. ATL forecasts double digit growth in FY23.
  •  ATL has opened new distribution channels in Paris, Spain, UK with Netherlands demand still strong. Going forward focus would be on improving product mix to improve margins.
  • ATL is well positioned to carter to growing demand and debottlenecking existing capacity with no big capex is committed for FY23, ~₹900 crores is planned for FY23 primarily for completing AP plant of which ~₹250-300 crores is maintenance capex. European maintenance capex is ~ €40 mil of which ~€25-30 mil is maintenance capex.
  • Volume growth in India for Q4FY22 was flat QoQ, topline movement was largely due to price hike, volumes for FY22 were up ~15%. When it comes to Europe volume growth was ~14% QoQ for Q4FY22 with ~12% growth in volumes for full year basis.
  • ATL has taken ~3% price hike in Q1FY23 to offset rise in material which are expected to rise by further 3-4% in Q1FY23. Further raw material is expected to be at elevated level till Q2FY23. Post 3% hike still company is 2 hike behind to reach back to normal operating margin level. Raw material basket was up ~4% QoQ in Q4FY22.
  • Q4FY22 costs/kg – Natural rubber 183, synthetic rubber 180, carbon black 105.
  • Exports were primarily led by north American & middle east markets & ATL expects healthy growth in export markets.

  • Gross debt at consolidated basis stood at ~₹6,100 crores with net debt at ~₹4,600 crores

  • Company is focusing on developing special tyres for EV space and is currently under R&D stage.

  • Rise in depreciation & interest costs was on account of capex in AP plant and new leases taken.

  • PCR segment witnessed headwinds of semiconductor shortage, further demand from farm segment remained muted, however CV demand remained strong. Replacement demand remained flat QoQ.

  • Company lost some market share in the replacement market due to price hike taken by ATL ahead of competition

  • Peak revenue generation capability with 100% capacity utilization is pegged at ~₹25,000-26,000 crores on consolidated basis

Terms & conditions and other disclosures

ANALYST CERTIFICATION

I/We, Shashank Kanodia, CFA, MBA (Capital Markets), and Raghvendra Goyal, CA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

Terms & conditions and other disclosures:

ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products.

ICICI Securities is Sebi registered stock broker, merchant banker, investment adviser, portfolio manager and Research Analyst. ICICI Securities is registered with Insurance Regulatory Development Authority of India Limited (IRDAI) as a composite corporate agent and with PFRDA as a Point of Presence. ICICI Securities Limited Research Analyst SEBI Registration Number – INH000000990. ICICI Securities Limited SEBI Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com.

 

ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities and its analysts, persons reporting to analysts and their relatives are generally prohibited from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

 

Recommendation in reports based on technical and derivative analysis centre on studying charts of a stock's price movement, outstanding positions, trading volume etc as opposed to focusing on a company's fundamentals and, as such, may not match with the recommendation in fundamental reports. Investors may visit icicidirect.com to view the Fundamental and Technical Research Reports.

 

Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.

 

ICICI Securities Limited has two independent equity research groups: Institutional Research and Retail Research. This report has been prepared by the Retail Research. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, and target price of the Institutional Research.

 

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances.

 

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

 

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months.

 

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.

 

ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months.

 

 

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report.

 

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

 

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report.

 

Since associates of ICICI Securities and ICICI Securities as a entity are engaged in various financial service businesses, they might have financial interests or actual/ beneficial ownership of one percent or more or other material conflict of interest various companies including the subject company/companies mentioned in this report.

 

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

 

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

 

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

 

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

 

Read More