Apollo Tyres' Q1FY20 results (Neutral) - Steady quarter; pressure points persist

Q1FY20 results

• Operating performance above expectations: Apollo Tyres operating profit at Rs4.7bn (-10% yoy) was ~7% above expectations. PAT at Rs1.4bn (down 40% yoy) was also ~7% above estimates.
• Europe remains weak; domestic surprises a bit: On a consolidated basis, APTY’s revenues grew to Rs43.3bn (+1% yoy) with the India business growing by ~2%yoy while Europe showed a marginal decline. Consolidated EBITDA margins came in at 11% (up 103 bps qoq; down 135 bps yoy) which was ~60bps above expectations. Higher gross margins offset negative operating leverage (sub-par utilization of the Hungary plant). Standalone: The domestic revenues grew ~2% yoy (to Rs31.3bn) – the growth rates are significantly lower than the past quarters (FY19 growth: +17%).  EBITDA margins came in at 11.6% (+16bps qoq; down 190bps yoy est: 11.3%) as the company benefited from lower RM costs (+271bps qoq). This was offset by higher staff costs and other expenses.  Notably, depreciation costs rose sharply (+44% yoy) possibly reflecting the Chennai plant coming on stream. Europe: The European operations revenues in INR terms declined by ~1% despite a ramp up in the Hungary plant. This seems to indicate that while production capacity at the plant has been ramped up, demand uptick continues to remain sluggish. The slower ramp up impacted profit and consequently, European operations suffered an EBIT loss of Rs299mn (versus a profit of 269mn in Q1FY19).
• Concall highlights: (a) The replacement market in India reported a strong growth of ~12% - this may have been due to market share gains (b) The company has taken a price hike of 1-1.5% that should help it offset recent raw material price hikes (c) In Europe, despite a decline in the market, the company gained market share which aided the lower sequential EBIT loss in the quarter (d) The company has cut its FY20 capex to Rs30bn (from Rs35bn).  The FY21 capex (Rs18bn) will depend on the cashflows.

Key positives: Lower RM costs

Key negatives: Weak volume growth in India/Europe

Change in estimates: We cut our FY20/21 EBITDA estimates by 10% each respectively on weaker volume growth and pressure in Hungary.

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. Maintain Neutral with a TP of Rs160 (10XFY21E EPS).