Apollo Tyres
Rating: Buy
Apollo Tyres Ltd is the second largest tyre manufacturer in India. The company’s standalone business is in a sweet spot as the domestic CV segment (64% of standalone business) is on the cusp of a recovery while key raw material prices (rubber and crude) have softened substantially (Q2FY15 India gross margins up by 380 bps quarter-on-quarter.) Natural rubber prices are expected to remain muted, as supply will continue to outpace demand over the next two years. This will drive an EPS CAGR (earnings per share, compound annual growth rate) of 23% over FY14-17e for ATL.
The company is more than doubling its capacity in Europe to tap new geographies (Russia & Eastern Europe) and segments (CV & OEM), where it has already demonstrated capabilities by doubling its market share (1.7% to 3%). The domestic market dynamics and the company’s long-term strategy for overseas markets give us visibility that ATL will remain resilient in a largely cyclical industry.
Europe realisations and Ebitda (earnings before interest taxes depreciation and amortisation) per tyre are 3x vs Indian operations, which will lead to improved growth once enhanced capacity kicks in from FY17e. We initiate coverage with a ‘Buy’ and a target price of R300. ATL will be biggest beneficiary of domestic CV (commercial vehicle) cycle recovery and radialisation. It commands a 27% market share in the CV segment.
Spurred by the revival in domestic economic activity, fleet utilisation levels have started improving, which is expected to translate into pent-up demand for CVs in the near future. That, in turn will aid ATL in growing its Indian operations’ revenue by 15%/20%/8% in FY15e/FY1e/ FY17e, respectively..
The company is expanding aggressively to capture incremental demand. With improvement in radial mix in the revenue pie, ATL is expected to report better margins going forward.
Expansion/dual brand strategy to drive growth in Europe: To achieve a global footprint, ATL acquired Vredestein in Europe. Post-acquisition, the company doubled the market share to 3% and its revenue grew at 19% CAGR due to geographic expansion and entry into new segments. ATL has adopted a dual brand strategy in Europe, positioning Vredestein as a premium tyre brand while launching Apollo-branded tyres to cater to the mid-market segment.
Further, the company is expanding its European presence by setting up capacity in Hungary to tap new geographies like Eastern Europe and Russia. Apollo-Vresdestein’s successful dual brand strategy and consistently better-than-industry growth rate give us confidence about ATL’s planned foray in Eastern Europe and Russia over the long term.
—Edelweiss
