Apollo Tyres' Q1FY19 results (Neutral) - Meets expectations; High capex a concern

Q1FY19 results

• Consolidated PAT in line with estimates: Apollo Tyres reported consolidated PAT at Rs2.5bn (+185% yoy on a low base) was ~4% ahead of estimates. While the operating results matched our expectations, lower than estimated tax rate accounted for the beat.
• In-line operating performance: On a consolidated basis, APTY’s revenues grew to Rs42.9bn (+31% yoy) with India sales rising 32% yoy driven largely by volumes. Consolidated EBITDA margins came in at 12.3% (down 50 bps qoq,+400 bps qoq). While the revenue growth was ~5% ahead of estimated (due to stronger than anticipated volumes from the India business), the EBITDA margins were ~100bps below expectations on higher raw materials costs (+5% qoq). This was partially offset by operating leverage benefits. Standalone: The Indian revenues registered an increase of 32% yoy (to Rs31bn) led by strong volume growth across all segments. EBITDA margins though declined to 13.5% (-70bp qoq) driven by the stronger RM basket. Europe: The European revenues grew by 9% yoy to Euro 119m led by a 7% mix improvement and supported by 2% volume growth. EBITDA margins were at 9.1% (v/s 8.1% in 1QFY18; 10% in 4QFY18). However higher depreciation costs led to EBIT margins declining to 2.1% from 2.4% yoy.
• Concall highlights: (a) Management expects RM costs to increase by 5% in 2QFY18. It has taken a price hike of 2% in the TBR segment in 1QFY19 and is expected to take another price hike in 2QFY19 to counter increase in RM costs.(b)Hungary plant has started producing TBR tyres from 1QFY19 while peak capacity for PCR tyres (~12k TPD) will be achieved by end of FY19. (c)Domestic TBR to reach peak capacity of 12k TPD in 2QFY19 from current 10k TPD.(e) It will incur a capex of Rs38bn for a greenfield  plant at AP plant with a capacity of 5.3mn/1mn tyres pa in FY20. Total capex over the next 2 years is expected to be Rs65 bn (Rs55bn for India operations).

Key positives: Strong domestic operations

Key negatives: Higher RM costs

Change in estimates: We maintain our estimates

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).