Apollo Tyres' Q3FY18 results (Neutral) - India business Strong; Europe weak

Q3FY18 results

• Consolidated PAT above estimates: Apollo Tyres reported consolidated PAT at Rs2.5bn (-18% yoy) was above estimates of Rs2.1bn. The variance was largely on account of higher than estimated margin expansion in the domestic business and higher other income on account of QIP linked cash on the balance sheet.
• Margin recovery below expectations: On a consolidated basis, APTY’s revenues grew by 17% yoy to Rs40.5 bn with India sales rising 21% yoy Consolidated EBITDA margins came in at 12.3% (up 180 bps qoq, down 220 bps qoq).Standalone: The Indian revenues registered a volume increase of 16% yoy led primarily by the TBR segment (truck segment grew to 62% of revenues from 60% previously). The EBITDA margins expanded to 13.7% (down 80bps yoy; up 220bp qoq) driven by lower raw material costs (the raw material basket declined 3% yoy). Europe: European revenues grew by 11% yoy with the Reifencom business contributing strongly. Vredestein revenues including the Hungary plant grew only marginally to EUR121mn. The EBITDA margins at Vredestein rose by 12% (Q2: 8.5%) on account of seasonality.
• Concall highlights: (a) It expects RM costs to move up in 4QFY18 It hopes to be able to pass on the cost increases in the domestic market, even though it might be difficult in the European market. b) The domestic growth came primarily from the TBR segment (overall truck market grew by 22%) while the passenger car segment was flat due to capacity constraints. (C)The Chinese tyre sales post anti dumping is down to 50,000 units per month (peak of 140,000 units). The increase in customs duty should help pricing power in the domestic market (d) Hungary capacity to rise from 5000/tpd to 7000 tpd by 4QFY18. It is expected to start contributing to profitability from FY19.

Key positives: Strong domestic revenue growth

Key negatives: Weak European operations

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

Valuations & view

Apollo trades at ~12x Sep-19E earnings, at a substantial discount to peers. However, with low earnings visibility in FY17-20E, the inherent risks associated with high capacity expansion justify lower-than-peer valuations. We do not forsee any major improvement in profitability in the next 3-4 quarters. Hence, our neutral view. We value Apollo Tyres at 12x Sep-19 EPS to arrive at a price target of Rs 260.