Apollo Tyres' Q4FY18 results (Neutral) - Meets expectations

Q4FY18 results

• Consolidated PAT in line with estimates: Apollo Tyres reported consolidated PAT at Rs2.5bn (+10% yoy) which was ~3% ahead of expectations. While the operating results matched our expectations, lower than estimated tax rate offset higher depreciation costs.
• Strong operating performance: On a consolidated basis, APTY’s revenues grew by 21% yoy to Rs40.2 bn with India sales rising 19% yoy Consolidated EBITDA margins came in at 12.8% (up 50 bps qoq,+170 bps qoq). Standalone: The Indian revenues registered a volume increase of 17% yoy led primarily by the TBR segment (truck segment grew to 63% of revenues) and supported by Passenger Car growth. The EBITDA margins expanded to 14.2% (+260bps yoy; +50bp qoq) driven by lower other expenses while the RM basket remained constant. Europe: Inspite of 4QFY18 being a lukewarm quarter for the European market, Revenues grew by 13% yoy to EUR 134mn while EBITDA margins were about 10% (Q3:12%). However Reifencom recorded an EBITDA loss for 4QFY18 on revenues of EUR 24mn leading to overall EBITDA margins of 7.2% for the Europe operations.
• Concall highlights: (a) Management expects RM costs to rise going forward led by higher crude based derivatives. It plans to undertake a price hike to offset rise in RM costs. (b) ) It expects demand momentum to continue in FY19 with lower double digit growth in CVs. (c) Hungary capacity ramp up on track with current run rate of 6500 car TPD expected to reach 13000 car TPD by end of FY19. The management expects the cost structure of Hungary plant in FY19 to be more cost competitive than the Dutch operations (d) Capacity expansion: The greenfield plant at AP is expected to commence operations from 2HFY20. It plans to produce 16000 car TPD and 1500 truck TPD.

Key positives: Steady RM costs

Key negatives: Losses in Reifencom

Change in estimates: We maintain our estimates for FY18 and FY19

Valuations & view

While APTY is well placed in the domestic commercial vehicle space where it is gaining market share, However, this is tempered by the fact that FCF will likely remain negative as capex continues to remain high with the company expanding capacities in Europe and India. Also, APTY’s pricing power in the increasingly important European market will be tested with commodity inflation now visible. Maintain a Neutral rating with a target price of Rs285 (13xFY20).