Apollo Tyres' Q2FY20 results (Neutral) - Muted quarter; Capex weighs on profitability

Q2FY20 results

• Operating performance below expectations: Apollo Tyres operating profit at Rs4.3bn (-8% yoy) was ~10%/5% below our and consensus expectations largely on lower than expected revenues. Adjusted PAT at Rs830mn (down 55% yoy) was also ~38% below estimates was impacted due to lower other income, higher interest cost and a sharp rise in depreciation (up 40% yoy).
• OEMs drag domestic business; Europe remains weak: On a consolidated basis, APTY’s revenues declined to Rs39.9bn (-6% yoy) with the India business declining by ~11%yoy while Europe showed a marginal growth of 3%. Consolidated EBITDA margins came in at 10.8% (-13 bps qoq; -14bps yoy) which was in line with expectations. Gross margins improved by 30bps qoq, this was however offset by negative operating leverage. The operating deleverage impact though was minimised by lower employee costs  Standalone: The domestic revenues declined by ~11% yoy (to Rs27.2bn) due to 13% decline in volume partially offset by product/pricing mix. OEM sales decrease of 45% led to volume decline. EBITDA margins came in at 11.7% (flat qoq; down 26bps yoy) in line with estimates.  Notably, other income decreased significantly possibly reflecting forex loss. Europe: The European EBIT losses increased to Rs396mn (Q1FY20 loss: Rs299mn, Q2Fy19: Rs211mn). This is despite a 3% yoy (6% in EUR terms) growth in revenues and reflects higher depreciation costs.
• Concall highlights: (a) The replacement market in India reported a growth of ~6% versus 45% decline in OEM market (CV/PC down by 60%/40%) (b) The company is expecting retainable raw material price decline of 2-3% in Q3FY20 (c) In Europe, despite a weak market, the company gained market share. While EBITDA margins (6.7%) showed a small improvement on a sequential basis, EBIT losses widened on higher depreciation. (d)The company has cut the capex guidance for FY20/FY21 to Rs23bn/Rs14bn (earlier Rs27bn/Rs17bn).

Key positives: Stable margins in the domestic business

Key negatives: Widening losses in the European business; weak domestic revenues

Change in estimates: We cut our FY20/21 EBITDA estimates by 32%/20% 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 Rs170 (13XFY21E EPS).