Apollo Tyres | Q1FY20 Result Update by IndiaNivesh

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# Analysis of results by IndiaNivesh

Apollo Tyres | Q1FY20 Result Update

Low cost inventory assists margins; Attractive valuations, maintain BUY

Despite slowdown in the OE demand across most segments, advantage of lower Chinese TBR imports, steady growth by the company in the domestic replacement markets and Europe led to Apollo Tyres’ Q1 FY20 consolidated revenue growth of 1% YoY. Low cost inventory aided margins but going forward, rising natural rubber prices and some increase in crude derivative raw materials should impact margins negatively. The increasing contribution of Hungary plant in the overall revenues (both in Europe and consolidated) will assist operating efficiencies. We adjust our margin estimates accordingly. Post the recent stock price correction, we believe valuations have turned attractive. We maintain BUY with a revised price target of Rs240.

Q1 FY20 results: Despite some slowdown in the OE demand across most segments, advantage of lower Chinese TBR imports and steady growth by the company in the replacement demand led to Apollo Tyres’ Q1 FY20 revenue growth of 1% YoY. The company reported its revenues at Rs43.3. Low cost inventory aided margins. The margin was at 11.0%, up 110bps QoQ. Accelerated depreciation (non-cash item) impacted profits. Adjusted PAT came in at Rs1.4bn.

Rising natural rubber prices to impact margins: Natural rubber prices have risen during the last three months from Rs128/kg to Rs150/kg. Rubber being ~40% of the total costs has a significant bearing on the margins. Accordingly, we have cut our margin estimates (assuming the slowdown may not allow the company to pass on the hike to the end consumer in the near term). We foresee a margin impact of ~13% on our earlier estimated EBITDA.   

Significant capex to pressurize balance sheet, earnings, RoE & RoCE: The company intends to incur a capex of Rs45bn in over FY20-FY21. This capex includes setting up a new green-field facility in Andhra Pradesh and further enhancing capacities at their existing plant in Chennai. This is over and above the Rs50bn that the company has spent during last two years. This will continue to impact earnings in the near term.

Valuation: Rising natural rubber prices will impact margins. The increasing contribution of Hungary plant in the overall revenues (both in Europe and consolidated) will assist operating efficiencies going forward. However, due to the aggressive capex incurred and planned, the interest burden and higher depreciation would hit profits and, accordingly, impact PAT.

We have projected revenue, EBITDA and PAT CAGRs over FY19-21E at respectively 11%, 18% and 12%. Due to favourable demand outlook and recent stock price correction, we believe valuations have turned attractive. The stock is currently trading at 8.3xFY21e. We value the company at 13xFY21e. We retain our BUY recommendation with a revised price target of Rs240 (earlier Rs270).

Risk: Slower than expected growth.