Apollo Tyres' Q3FY19 results (Outperformer) - Domestic disappoints; Europe improves

Q3FY19 results

• Operating performance inline: Apollo Tyres operating profit at Rs5.3bn (+6% yoy) broadly met expectations. However, PAT of Rs198mn (-19% yoy) was impacted by a Rs 600 mn provision on account of a default of inter corporate deposits of Rs 2bn from IL&FS.
• Domestic profitability disappoints; Europe shows improvement: On a consolidated basis, APTY’s revenues grew to Rs47.2bn (+16% yoy) with India (+16% yoy) and Europe (+12% yoy) both contributing to the growth. Consolidated EBITDA margins came in at 11.2% (down 90 bps yoy; +20 bps qoq). Standalone: The Indian revenues registered an increase of 16% yoy (to Rs32bn) on a mix of volume growth (+11% yoy) and a price/mix increase of 5% yoy. EBITDA margins though declined to 11.2% (-270bp yoy; est: 12.3%). While operating leverage benefits were visible, the RM costs showed a sharper than expected increase (up 260bps qoq) despite price hikes and moderate increase in RM costs (+2% qoq).  Europe: The European revenues grew by 12% yoy on marketshare gains (European market was flat). The EBITDA margins at 10% (v/s 8% in 2QFY19) surprised positively.

Concall highlights: (a) The management had rolled back price hikes taken in November as volume growth slowed down. However, hikes taken in October were retained. (b) During the quarter, the RM basket rose by ~2% as prices of crude linked derivatives increased. The company expects the benefit current decline in crude prices to start reflecting from 4QFY19. (c) The finished goods inventory carried during the quarter showed as the festival season demand was below expectations. (d) Total capex over the next 3 years( till FY21) is expected to be Rs65 bn (Rs55bn for India operations). (e)In the Hungary plant the exit CV production was 8000 tpd. The company expects it to increase to 12,000tpd by the end of Q4. It will take the company a few years to reach the profitability levels of the Netherlands plants (EBITDA margins of 15-17%).

Key positives: Strong European performance

Key negatives: Weak domestic margins

Change in estimates: We cut our FY19/20 estimates by 13%/12% respectively on account of margin pressures.

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. Further, a downturn in the CV cycle could impact APTY’s volume growth as well as pricing power. Maintain Neutral with a TP of Rs. 220 (11XSept FY20E EPS).​