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Apollo Tyres Ltd>
  • CMP : 477.6 Chg : 4.25 (0.90%)
  • 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%

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

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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.

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