Apollo Tyres CMP Target Rating Rs. 216 Rs. 250 BUYmailers.sparkcapital.in/uploads/Mukesh/Apollo...
Transcript of Apollo Tyres CMP Target Rating Rs. 216 Rs. 250 BUYmailers.sparkcapital.in/uploads/Mukesh/Apollo...
Apollo Tyres
Stock Performance (%)
1m 3m 12m
APTY 24% 46% 12%
Sensex 2% 6% 9%
BSE Auto 4% 14% 27%
Date Sep 21, 2016
Market Data
SENSEX 28523
Nifty 8776
Bloomberg APTY IN
Shares o/s 604mn
Market Cap Rs. 111bn
52-wk High-Low Rs. 224-127
3m Avg. Daily
VolRs. 604mn
Index member BSE 200
Latest shareholding (%)
Promoters 44.2
Institutions 41.9
Public 13.9
Company UpdateWe continue to be positive on Apollo Tyres (APTY, TP of Rs. 250, basis 10.5x FY18 EPS). Despite the onslaught of the Chinese
imports on the overall T&B industry (factored in our projections), APTY, the leader in the segment maintains its dominant share,
while importantly, not letting its capacity utilisation levels flag. With the prognosis on the RM continuing to be favourable and with
turning around of the EU ops, we expect better outlook for margin over the medium term. With additional domestic TBR capacities
(higher contribution %) and commissioning of the lower cost facilities in Hungary over the near term, expect APTY to capitalise on
the favourable demand prospects in these geographies. But first, addressing the two elephants in the room right off the bat:
Chinese TBR imports – though not tamed, handled with elan thus far by APTY. Nevertheless, continues to be a source of concern:
Imports of TBR tyres (predominantly Chinese) rose 63% YoY in FY16 to 1.3mn tyres, which represented ~21% of the domestic TBR
production in FY16 (14% in FY15). Per industry estimates, Chinese tyres now account for ~25% of the replacement market, up from ~10% in
FY15, while industry wide TBR capacity utilisation has declined from ~80-85% in FY15 to ~60-65% in FY16. Despite the onslaught of the
Chinese imports on the overall T&B industry, APTY, maintains its dominant share in both the TBB and TBR segments at ~25%. Importantly,
while its TBR capacities continue to operate flat out, its overall domestic utilisation levels were steady at ~75-80% through FY15-FY16. In
fact in 1QFY17, when the imports witnessed its peak volumes, APTY’s utilisation levels improved to ~85%.
To understand this incongruence, we interacted with tyre dealers (including Chinese tyre dealers) and fleet operators across
Mumbai/Surat/Chennai and Namakkal: Fleet operators in the South were majorly against the deployment of Chinese tyres due to lack of
warranty, higher maintenance and lower fuel economy which outweighed the lower initial cost. In the West and the North, however, operators
were more open to consider the usage of Chinese TBR tyres as an alternative to domestic TBB tyres. Chinese Tyre usage is
geographically concentrated: ~95% of Chinese tyre imports take place through the Nhava Sheva port and the Thuglakabad ICD. Chinese
tyre dealers indicated that the high cost of transportation inhibited opportunities to penetrate significantly within the country.
APTY trumps most other brands in the T&B segment in terms of consumer preference: APTY was the top-of-the-mind brand for T&B
tyres in the South, with fleet operators acclaiming its superior quality. However, in other parts of the country, credit offered by the dealers
played a larger role. MRF was indicated as being a strong player in the TBB segment, more – or – less across the country.
Hardening raw-mat prices: The rise in natural rubber (NR) prices from Mar16 to June 16, was led by extraneous factors including the
Centre imposed ban on duty-free import of NR under the Adv. Auth. Scheme till Mar16 and intervention by the Kerala govt. to prop up prices
ahead of elections in May16. However, prices have since softened led by prognosis of increasing production and indications of a favourable
crop for FY17, supported by significant global stocks of natural and synthetic rubber. Also, global tyre majors including Michelin,
Bridgestone, have guided for RM tailwinds in CY16. The expected NR policy is expected to lend stability to prices over the long term.
Incremental domestic TBR capacities and lower cost Hungary plant coming on-stream, coupled with the turning around of the EU
operations (FY16 performance was impacted by several one-offs) to have a favourable impact on overall revenue and profitability.
Expect domestic revenue to register a CAGR of ~10%% (FY16-FY18), with avg. margins of ~17%. Expect subsidiaries to register
revenue CAGR of ~19%(with further upside potential post ramping up of Hungary ops), with avg. margins of ~13.9%.
Pricing discipline : Interactions with mgmts./industry experts, suggest that the industry has matured in terms of pricing, resorting to price
cuts largely with the intention to only pass on RM benefits rather than undercut, boding well for a more stable price regime.
MUKESH SARAF [email protected] +91 44 4344 0041
RAMAKRISHNAN SESHAN [email protected] +91 44 4344 0020Find Spark Research on Bloomberg (SPAK <go>),
Thomson First Call, Reuters Knowledge and Factset
Page 1
Financial Summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) EBITDA Margin Adj. PAT (Rs. mn) Adj. EPS (Rs.) P/E(x) EV/EBITDA(x)
FY16 117,801 19,673 16.7% 11,116 21.8 9.9 6.0
FY17E 133,676 21,586 16.1% 11,755 23.1 9.4 6.4
FY18E 148,383 23,809 16.0% 12,155 23.9 9.0 6.0
CMP
Rs. 216
Target
Rs. 250
Rating
BUY
To go the -_-_-_-_-_-_-_-_-_-_-_-_-distance
Apollo Tyres
Contribution to volumes and revenue across tyre segments
Source: Industry, Spark Capital Research
Page 2
The T&B segment is critical to the fortunes of the Indian tyre industry with
~55% revenue contribution to the overall revenue
Source: Company Presentations, Spark Capital Research
T&B55%
PC/Light Truck22%
Others23%
Revenue Segmentation - Indian Tyre Industry
However, in terms of volumes, unsurprisingly, the 2w/3w segment
dominates albeit with lower contribution to overall revenue
Source: ATMA, Spark Capital Research
T&B11.1%
PCLT32.1%
Farm3.8%
2W/3W52.2%
OTR and Others0.8%
Tyre Production by Segment - FY16
The overall Indian Tyre Industry, dominated by the T&B segment, registered flat YoY revenue growth in FY16
Other
Two-Wheeler
Passenger Cars
Truck/Bus
Light Trucks
Farm
Other
Farm
Light Trucks
Two-Wheeler
Passenger Cars
Truck/Bus
The size of the Indian tyre industry stood at an estimated Rs.
500bn (USD 7.5bn) in FY16. Exports of tyres stood at an
estimated Rs. 105bn (USD 1.6bn).
The industry reported a flat YoY growth in FY16 on the back of
de-growth in the production of T&B tyres (-2% YoY) despite a
strong growth in the MHCV production volumes (+27% YoY)
The industry growth was stymied by a steep increase in the
import of Chinese TBR tyres (+61% YoY), which acted as a more
economical replacement to TBB tyres, in addition to the
inherent operational advantages of TBR tyres.
Also adding to the downward pressure on overall revenue was
price cuts taken by major tyre manufacturers on the back of soft
raw material prices including natural rubber and other crude
based raw materials.
Source: Industry, Spark Capital Research
The Indian Tyre Industry
Apollo Tyres
Industry volume growth in FY16 was led by PV and 2W tyre segments
Source: ATMA, Spark Capital Research
The downward pressure on rubber prices in FY16 prompted tyre manufacturers
to take price cuts, impacting overall revenue growth
Source: ATMA, Spark Capital Research
Domestic tyre production volumes registered modest growth YoY in FY16
Source: ATMA, Spark Capital Research
Page 3
0
200
400
600
800
1000
1200
1400
1600
0.00
0.50
1.00
1.50
2.00
2.50
Ap
r/14
Ma
y/1
4
Jun
/14
Jul/14
Au
g/1
4
Se
p/1
4
Oct/14
Nov/1
4
Dec/1
4
Jan
/15
Fe
b/1
5
Ma
r/15
Ap
r/15
Ma
y/1
5
Jun
/15
Jul/15
Au
g/1
5
Se
p/1
5
Oct/15
Nov/1
5
Dec/1
5
Jan
/16
Fe
b/1
6
Ma
r/16
Average monthly rubber prices
TSR20 ($/kg) SGP/MYS ($/kg) RSS - 4 (Rs/MT)
Segment FY14 FY15 FY16
M&HCV (T&B) 16.5 17.1 16.8
YoY change (%) -0.4% 3.9% -2.0%
Passenger cars (Incl. Jeeps) 31.7 35.7 38.7
YoY change (%) -1.3% 12.9% 8.3%
Light Trucks (LCV and SCV) 9.3 10.2 9.7
YoY change (%) 13.9% 9.2% -4.6%
Tractor 6.7 6.0 5.7
YoY change (%) 19.4% -11.0% -5.2%
Scooter (2W) 11.0 14.6 17.2
YoY change (%) 13.9% 25.8% 16.8%
3W 4.7 4.4 5.0
YoY change (%) 1.3% 21.8% 15.8%
Motorcycle/Moped 47.7 57.0 56.5
YoY change (%) 7.4% 17.5% 0.0%
OTR 0.5 0.4 0.5
YoY change (%) 11.1% 19.2% -1.0%
Other tyres (industrial + Adv) 0.8 0.7 0.7
YoY change (%) 10.2% -1.9% -7.8%
Total 128.9 146.2 150.8
YoY change (%) 4.9% 13.2% 3.1%
The size of the Indian tyre industry is estimated at upwards of Rs.
500bn (USD 7.5bn) in FY16. Exports of tyres are estimated at Rs.
105bn (USD 1.6bn).
FY16 saw de-growth in T&B (particularly TBB) production & price cuts led by softer RM prices and increased competition
The Indian Tyre Industry
125.4 122.8128.9
146.2 150.8
5.2%
-2.1%
5.0%
13.4%
3.2%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
20
40
60
80
100
120
140
160
FY12 FY13 FY14 FY15 FY16
Production in mn nos.
Apollo Tyres
Replacement cycle across tyre categories
Source: Company Presentations, Spark Capital Research
Page 4
Category wise
supply of tyres to
various segments
(mn. nos)
Replacement As % of (a) OEMAs % of
(a)Govt.
As % of
(a)Export
As % of
(a)
Total
Domestic
prodn
As % of
(a)Imports
As % of
(a)Total (a)
As % of
(a)
M&HCV (T&B) 12.9 71% 3.2 18% 0.2 1% 1.9 11% 16.8 92% 1.5 8% 18.3 100%
Passenger Car(Incl.
Jeep)24.8 56% 17.1 39% 0.0 0% 2.3 5% 38.7 87% 5.6 13% 44.3 100%
L. C. V./SCV 5.6 58% 2.4 25% 0.0 0% 1.7 17% 9.7 100% 0.0 0% 9.7 100%
Tractor (Front) 1.3 53% 1.1 45% 0.0 0% 0.1 2% 2.5 100% 0.0 0% 2.5 100%
Tractor (Rear) 0.7 38% 1.1 58% 0.0 0% 0.1 5% 2.0 100% 0.0 0% 2.0 100%
Scooter 6.6 38% 10.6 61% 0.0 0% 0.1 1% 17.2 100% 0.0 0% 17.2 100%
3 Wheelers 0.5 9% 3.7 75% 0.0 0% 0.8 15% 5.0 100% 0.0 0% 5.0 100%
Motorcycle/Moped 30.7 52% 27.1 46% 0.0 0% 1.3 2% 56.5 96% 2.5 4% 59.0 100%
TOTAL 83.1 53% 66.4 42% 0.2 0% 8.3 5% 148.4 94% 9.6 6% 158.0 100%
Source: ATMA, Industry, Spark Capital Research
Note: 1) Sales to STU's included in Replacement Market. 2) Breakup of Import (by OEMs and for replacement market) NOT available. Hence all Imports are included in Replacement
Replacement dominates T&B demand, with imports contributing a meaningful portion of domestic TBR demand
Imports in the T&B segment comprise primarily of TBR tyres.
With domestic radialisation levels (OEM + Replacement) in the TBB
segment increasing to 44% in FY16 (33% in FY15) the proportion of the
contribution of Chinese imports to overall domestic TBB requirement is
on the rise.
The Indian Tyre Industry
6-8 months
3-4 years
1-2 years
1-3 years
2-3 years
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
MHCVs PVs LCVs Tractors 2W
Apollo Tyres
While the MHCV volumes grew 27% YoY, the domestic T&B production growth was abysmal with Chinese tyres eating into the replacement pie which is ~ 75%
of T&B demand
Source: Company, Spark Capital Research
Increasing radialisation coupled with increasing Chinese imports impacted
production of TBB tyres
Source: Industry, Spark Capital Research
Production of domestic TBB tyres impacted the most on the back of increasing Chinese TBR imports
T&B Segment
OE Demand, ~25%
Replacement demand,
~75%
Production of TBB tyres declined sharply in FY16 led by increasing
radialisation and also stymied by rising Chinese imports
While MHCV production volumes grew 27% YoY in FY16, domestic
production of T&B tyres degrew by ~2% YoY.
This is also borne out by the 7% YoY decline in truck bias tyre
production in FY16, compared to ~9% growth in the truck radial tyre
production
This was impacted by two factors:
Increasing radialization: The trend of radilisation is fast gaining
momentum, with the radialisation % of OEMs estimated at 72% (61% in
FY15), and overall radialisation levels estimated at ~44% for FY16
(33% in FY15)
Growing Chinese imports: These acted as a more economical
replacement to TBB tyres, in addition to the inherent operational
advantages of TBR tyres, leading to growing preference for the same
11.5 10.7
5.6 6.1
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
FY15 FY16
TBR production (mn nos) TBB production (mn nos)
YoY
growth
-7.3%
12%
-28%
-20%
21% 27%
2.7%
2.8%-0.4%
3.9%-2.0%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
15.4
15.6
15.8
16.0
16.2
16.4
16.6
16.8
17.0
17.2
FY12 FY13 FY14 FY15 FY16
M&HCV (T&B)Tyres (Mn Nos) YoY Growth in CV (%)
YoY growth in tyre production (%)
YoY
growth
+8.8%%
T&B
tyres
Page 5
Apollo Tyres
Page 6
Radial T&B tyres increasingly finding favor over Bias T&B tyres
Source: Industry, Spark Capital Research
Radialisation % to increase significantly over the medium term
Source: Company, Spark Capital Research
6% 11%17% 19% 22% 26%
33%
44%53%
60%67%
72%
8%
25%34% 34%
42%51%
61%
72%78% 81% 84% 86%
0.0
0.2
0.4
0.6
0.8
1.0
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17E
FY
18E
FY
19E
FY
20E
Radialisation (%)
Domestic OEM
T&B Segment
The Tyre Industry is inexorably embracing TBR tyres over TBB tyres in the T&B segment
The move towards radialisation
is being driven by :
Cost - Benefit Ratio
Road Development
Overload Control
User Education
Retreading Infrastructure
71.6%63.1%
28.4% 36.9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Ap
r/14
Ma
y/1
4
Jun
/14
Jul/14
Au
g/1
4
Se
p/1
4
Oct/14
Nov/1
4
Dec/1
4
Jan
/15
Fe
b/1
5
Ma
r/15
Ap
r/15
Ma
y/1
5
Jun
/15
Jul/15
Au
g/1
5
Se
p/1
5
Oct/15
Nov/1
5
Dec/1
5
Jan
/16
Fe
b/1
6
Ma
r/16
Radial and Bias production as % of total T&B production
Bias % Radial %
Apollo Tyres
Imports of TBR have increased significantly
Source: ATMA, Spark Capital Research
..leading to an increase in the % of imports as % of domestic TBR production
Source: ATMA, Spark Capital Research
Page 7
78
156126 131
168 176210
230
302
354313 317
423
0%
20%
40%
60%
80%
100%
120%
140%
0
100
200
300
400
500
1QFY14 3QFY14 1QFY15 3QFY15 1QFY16 3QFY16 1QFY17
Trend in TBR imports (000s nos)
TBR imports (000s) YoY Growth (%)
5.66.1
0.81.3
14.1%
21.2%
0%
5%
10%
15%
20%
25%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
FY15 FY16
Domestic TBR production (mn Nos)
Imports (mn Nos)
Imports as % of Domestic TBR production
Chinese Imports and the TBR Segment
Imports of TBR have increased manifold post the lifting of the anti-dumping duty by India, on the heels of USA imposing it
Imports of TBR have increased significantly led by China especially with anti-dumping duty levied by USA, closely followed by India lifting antidumping duty
Source: Industry, Spark Capital Research
78
156126 131
168 176210
230
302
354
313 317
423
0%
20%
40%
60%
80%
100%
120%
140%
0
50
100
150
200
250
300
350
400
450
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17
TBR imports (000s) YoY Growth (%)
Jan15- USA Imposes anti-dumping
duty of ~80%+ on Chinese tyres
Feb 15- India lifts anti-dumping duty
on Chinese tyres
Apollo Tyres
Share of imports from China have increased considerably in FY16
Source: Industry, Spark Capital Research
Page 8
Chinese Imports and the TBR Segment
Adverse policy actions – lifting of anti-dumping duty combined with yuan devaluation gave an impetus to Chinese imports
China70%
Spain13%
Japan9%
Thailand2%
Others6%
China90%
Spain2%
Japan3%
Thailand3%
Others2%
FY15 FY16
The Yuan devaluation in Aug 2015 has given a further boost to Chinese
imports
Source: Industry, Spark Capital Research
Chinese tyre companies looking for outlets especially given the low growth
exhibited by their truck industry
Source: Industry, Spark Capital Research
2,501 2,561
3,407
4,368 3,934 3,748
4,032 3,803
3,424
-15%-10%-5%0%5%10%15%20%25%30%35%40%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
CY
07
CY
08
CY
09
CY
10
CY
11
CY
12
CY
13
CY
14
CY
15
Chinese CV production (000s) YoY growth (%)
0.1520
0.1540
0.1560
0.1580
0.1600
0.1620
0.1640
0.1660
1Q
FY
14
2Q
FY
14
3Q
FY
14
4Q
FY
14
1Q
FY
15
2Q
FY
15
3Q
FY
15
4Q
FY
15
1Q
FY
16
2Q
FY
16
3Q
FY
16
4Q
FY
16
1Q
FY
17
54
56
58
60
62
64
66
68
70
INR/USD CNY/USD
Apollo Tyres
Page 9
Chinese Imports and the TBR Segment
• The tyre industry suffers from an inverted duty structure, whereby the duty on the import of raw materials (rubber) at ~20% is higher than
the import duty on tyre radials, thus impacting domestic production.
• Chinese TBRs are replacing the TBB segment as they are of a comparable cost as the latter and at least 30% cheaper than domestic TBRs.
• We understand that the capacity utilisation levels in China Tyre companies are currently around 50%. Hence, given the imposition of the
anti-dumping duty by the USA coupled with the lifting of the same in India, the spectre of cheap Chinese tyres would continue to loom
large
Duty Structure on Tyres 2016 (in %)
HSN
ClassificationCategory
Customs
Duty
(Basic)
Asia Pacific
Trade
Agreement
India-Singapore
ECA
India- South
Korea CEPAIndia -ASEAN
India - Malaysia
Trade
Agreement
40112010 Truck/Bus (Radial) 10 8.6 10 1.56 5 5
Adverse policy actions – lifting of anti-dumping duty combined with yuan devaluation gave an impetus to Chinese imports
Apollo Tyres
Efforts being made by the Industry to get the anti-dumping duty reinstated being met with protests by dealer associations
Page 10
ATMA estimates that investments in
domestic capacity for TBR tyres have
aggregated ~Rs 250 bn in the last 3-4 years.
However, given the steep increase in
Chinese TBR imports, the utilisation of the
facilities has come down to ~60-65 percent.
According to an ATMA official, over the past
two years, the Indian tyre prices have come
down anywhere between 10 and 15 per cent
and is still climbing down. On the other hand,
Chinese tyres are still around 30 per cent
cheaper.
Additionally, in the past, competition was
limited between three and four tyre
manufacturing companies. However, the
scene has changed entirely now with the
entry of several foreign players like Michelin,
Yokohama and Continental Tyres, thus
inhibiting any accusations of limited
competition/cartelisation.
Quoting Mr. SP Singh Convenor, All India Tyre Dealers Association: ”Quality and price of truck tyres, has direct bearing on viability and livelihood of
vehicle owners. After, mandatory quality certification of these tyres by BIS for domestic and imported radials, the quality issue has been settled. Domestic
tyres are overpriced. AITDF further argues that the ATMA now have 11 domestic tyre makers but incidentally the new TBR tyre makers i.e. Michelin and
Bridgestone in India have not joined the ATMA to seek tariff and non tariff barrier, while these new global players are totally dependent on radial
technology and their tyre prices are 10-15 percent higher than existing companies like CEAT, J.K. and Apollo tyres”
Highlighting the impact of the Chinese
imports on the domestic market, Mr. Satish
Sharma, President, APMEA, Apollo Tyres
indicated that the TBR industry is around four
lakh tyres a month. Apollo Tyres sells about
one lakh tyres. Whereas, it is 1.50 lakh units
a month in case of Chinese tyres.
Significant capacity additions by domestic
tyre manufacturers in the recent past in
serious trouble
Steep decline in the prices of domestic TBR
tyres in the recent past still unable to
bridge the yawning price gap with Chinese
TBR
Anti-dumping plea accepted by
Government in May 2016
In the light of the above, the anti-dumping plea of the Industry has been accepted by Government in May 2016
Chinese Imports and the TBR Segment
However, tyre dealers present a contrarian view accusing the large tyre manufacturers of collusion and impacting the livelihood of dealers
and fleet operators
Apollo Tyres
Post wise share in imports of Tyres
Source: Industry, Spark Capital Research
Page 11
Takeaways from interactions with fleet operators and Chinese tyre dealers based in Mumbai/Gujarat/Namakkal/Chennai
South India a bigger market for radials in general
Usage of radials depends on the loads carried and the quality of the roads plied on. In states down South, there is relatively greater discipline exercised
in terms of loads accrued while the quality of the roads too is relatively better.
However, with converse trucking conditions particularly in the North, the usage of TBRs is inhibited.
Tyre dealer and Fleet Operator Interactions :T&B Segment
Relative brand recall and preference amongst domestic tyre brands
APTY was the top-of-the-mind brand for T&B tyres in the South, with fleet operators acclaiming its superior quality.
However, in other parts of the country, the brand preference was stated to be towards the dealer (irrespective of brand) who gives more credit.
MRF was indicated as being a strong player in the TBB segment, more – or – less across the country.
Low quality perceptions hurting brand image claim Chinese dealers
Dealers indicated that not all Chinese brands are poor in quality. A few brands including
Triangle Tyres, Ling Long Tyres amongst others have obtained BIS certification and are of a
quality close to that of branded tyres.
Dealers indicated that some degree of brand awareness creation would go a long way in
changing the perception in the minds of consumers, however, literally ruled out the
possibility of the same happening.
High transportation cost of tyres possibly inhibits penetration, which results in sales
being concentrated geographically,
With the Nhava Sheva Port accounting for the largest share of Tyre imports, while the share of
Kolkata and Chennai are lower.
Nhava Sheva75%
Chennai3%
Kolkata3%
Tughlakabad ICD20%
Low cost TBR tyres introduced by tyre majors
In 2016, Bridgestone and Michelin launched launched low-cost TBRs. These tyres, like the Chinese tyres are sold without warranty.
Our feedback on the same was mixed, with some fleet operators indicating the same as worth replacements for Chinese tyres, while others not
enthused with their quality.
We understand that the other major tyre companies in the segment including Apollo and JK have not launched tyres with similar features.
Apollo Tyres
Significant TBR capacities have come –onstream in the recent past; more on the anvil particularly Apollo’s and Michelin’s
Source: Spark Capital Research
Page 12
Significant investments made in the TBR segment by the domestic Industry
Company Current Capacity Location Commissioned in Capacity expansion plans LocationExpected date of
commissioning
Michelin0.3 mn tyres p.a./
1000 tyres per day
Tiruvallur,
ChennaiCommissioned in 1QFY14
1.7 mn tyres p.a./
5700 tyres per day
Tiruvallur
Chennai
To be commissioned in
phases through FY20
JK 3.5 mn tyres p.a.
~equally spread
across Chennai
and Laskar
Chennai to take full effect
in FY17
Laskar capacities taken
over from CIL in FY16
NA NA NA
Apollo 6000 tyres per day Chennai NA 6000 tyres per day Chennai
In phases through FY18,
first phase to be
operational in Oct 2016
Ceat 80 TPD NA NA NA NA NA
Bridgestone 3000 tyres/dayChakan and
Indore2013
The capacity utilisation as
at Dec 15 was stated at
1000 TBR/day. This
translates into further ramp
up potential by 2000
tyres/day
NA NA
T&B Segment
ATMA estimates that domestic capacity set up with an investment of Rs 25,000 crore in the last 3-4 years
Note: MRF announced a capacity expansion in Apr15, however details of the same are not available.
Apollo Tyres
The Big – 4 see a heavy concentration of revenue from the T&B segment
Source: Company, Spark Capital Research
Differing views on who leads the market – with leadership being claimed by
both JK and Apollo in their respective communication
Source: JK Tyres Investor Presentation – June 2016, Spark Capital Research
Page 13
ATMA estimates that the capacity utilization of TBR capacity has declined ;
the same is also reflective of significant capacities having come on-stream
Source: Industry, Spark Capital Research
80-85%
60-65%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
FY15 FY16
Domestic TBR capacity utilisation
TBR imports now account for ~25% of the replacement market
Source: Industry, Spark Capital Research
10%
25%
0%
5%
10%
15%
20%
25%
30%
FY15 FY16
TBR Imports as % of replacement market
67%
48% 48%
38%
0%
10%
20%
30%
40%
50%
60%
70%
80%
JK APTY MRF CEAT
JK Tyre, 28%
Apollo Tyres, 24%
MRF, 13%
Birla, 5%
CEAT, 5%
Others/Imports, 26%
Domestic T&B Radial market share - FY16
T&B Segment
Impact on the Indian industry on the back of the sustained Chinese import of tyres
Apollo Tyres
Composition of raw material basket for a typical tyre manufacturer
Source: Industry, Spark Capital Research
Crude oil prices have trended downwards , softening prices of synthetic
rubber and carbon black
Source: Industry, Spark Capital Research
Gross margins of major tyre manufacturers have trended in line with the reduction in rubber prices
Source: Industry, Spark Capital Research
Page 14
0
20
40
60
80
100
120
Ap
r/14
Jun
/14
Au
g/1
4
Oct/14
Dec/1
4
Fe
b/1
5
Ap
r/15
Jun
/15
Au
g/1
5
Oct/15
Dec/1
5
Fe
b/1
6
Ap
r/16
Jun
/16
Au
g/1
6
Crude Oil ($/bbl)
Raw-Mat
Natural Rubber, 35%
Synthetic Rubber, 14%
Carbon Black, 13%
Tyre Cord Fabric, 11%
Steel Cord Fabric, 7%
Others, 20%
0
200
400
600
800
1000
1200
1400
1600
30%
32%
34%
36%
38%
40%
42%
44%
46%
1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17
Average RSS 4 prices (Rs/100kg) Apollo CEAT JK Tyres MRF
Raw material prices to trend structurally downward over the near-medium term
Apollo Tyres
Extraneous, government led actions led to a spike in raw material prices from March – June 2016
Source: Industry, Spark Capital Research
Page 15
0
200
400
600
800
1000
1200
1400
1600
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16
TSR20 ($/kg) SGP/MYS ($/kg) RSS - 4 (Rs/MT)
Domestic Rubber prices hit
record lows in Feb’16
Centre bans duty-free import of natural rubber
under the Advance Authorisation Scheme, till 31
March
State government also intervened in the
market to prop up prices ahead of
elections held in May.
Prices start correcting
once the aforesaid
props cease
Raw material prices to trend structurally downward over the near-medium term
Raw-Mat
Apollo Tyres
Page 16
Keeping in mind elections in Kerala, Centre had hiked the import duty on natural rubber. In January, the Centre had also
prohibited duty-free import of natural rubber under the Advance Authorisation Scheme, till 31 March.
We understand that the Kerala Govt also intervened in the market to prop up prices. However, post the elections, in the
absence of external props, the prices corrected.
Cessation of
government intervention
led to rubber price
softening post a brief
rally
The weakness in crude oil prices is also keeping the price of natural rubber in check, with synthetic rubber being a quasi
substitute to natural rubber.
Softness in crude prices
also keeping prices of
natural rubber under
check
Domestic natural rubber prices have corrected by about 11% over the last two months through Aug 16 and Sep 16, led
by increased tapping post monsoon leading to enhanced rubber production.
Given the increased tapping in the winter season, the rubber prices are likely to remain subdued.
Improved production led
by increased tapping
also contributed to
softening prices
The Central Government is also working on a National Rubber Policy, which aims to increase the domestic rubber
production in the long run in order to control surging imports. These factors are expected to reduce domestic rubber
prices under check in the medium to long term
National rubber policy
on the anvil; expected to
prevent significant
fluctuations in rubber
prices going forward
The global stock of natural and synthetic rubber has been surging on the back of continue weakness in Chinese demand
- the largest consumer of rubber. In the absence of a significant uptick in demand from that region, expect rubber prices
to continue to be soft.
Significant global stocks
of natural rubber
Raw material prices to trend structurally downward over the near-medium term
Raw-Mat
Source: Industry, Spark Capital Research
Apollo Tyres
Page 17
Global stocks of natural and synthetic rubber characterized by significant stock surpluses
('000 tonnes)2014 2015 2016
Year Q1 Q2 Q3 Q4 Year Q1
NATURAL RUBBER PRODUCTION
Asia-Pacific 11,236 2,610 2,411 3,106 3,219 11,345 2,599
EMEA 564 153 125 155 166 599 160
Americas 335 92 98 69 75 334 89
TOTAL 12,136 2,855 2,634 3,330 3,460 12,278 2,848
NATURAL RUBBER CONSUMPTION
Asia-Pacific 8,916 2,111 2,307 2,278 2,145 8,840 2,213
EMEA 1,553 392 399 431 376 1,597 415
Americas 1,712 430 468 427 384 1,709 413
TOTAL 12,181 2,932 3,174 3,135 2,905 12,146 3,042
WORLD NR SUPPLY-DEMAND SURPLUS/DEFICIT (45) (77) (540) 194 555 132 (194)
WORLD NR STOCKS 3,181 3,104 2,564 2,759 3,314 3,314 3,119
SYNTHETIC RUBBER PRODUCTION
Asia-Pacific 7,321 1,817 1,849 1,861 1,868 7,395 1,836
EMEA 3,887 1,005 1,056 940 985 3,985 1,050
Americas 2,970 750 784 759 786 3,079 742
TOTAL 14,179 3,572 3,690 3,560 3,639 14,460 3,628
SYNTHETIC RUBBER CONSUMPTION
Asia-Pacific 7,800 1,933 2,033 1,985 1,894 7,845 1,916
EMEA 3,537 906 945 883 914 3,648 906
Americas 2,930 734 775 765 795 3,068 756
TOTAL 14,267 3,572 3,754 3,633 3,602 14,561 3,579
WORLD SR SUPPLY-DEMAND SURPLUS/DEFICIT (88) - (64) (73) 37 (101) 50
WORLD SR STOCKS 3,535 3,535 3,471 3,397 3,434 3,434 3,484
% SR IN TOTAL RUBBER CONSUMPTION 54 55 54 54 55 55 54
Source: IRSG, Spark Capital
Raw-Mat
Raw material prices to trend structurally downward over the near-medium term
Apollo Tyres
Page 18
Michelin in its 1HCY16 investor presentation dated July 2016, has guided for a positive
tailwind from RM to the tune of Euro 100mn for 2HCY16
Per the 2QCY16 earnings call held in July 2015, Continental now expects positive raw
material tailwind of €150m in Rubber (vs. €100m prev).
Goodyear in its 2QCY16 earnings call held in July 2016, reiterated its guidance for a
Price/Mix-to-Raw Materials tailwind of +$75 mn this year, and expects commodity costs to
now actually be a greater source of tailwind than previously anticipated
Per the 2QCY16 earnings call the raw material tailwind for the year was guided at positive
Euro 15mn
Raw-Mat
Global Tyre majors have guided for significant RM tailwinds for FY16
Apollo Tyres
1Q
FY
16
Revenue de-grew 7% YoY, impacted equally by
lower volumes and price mix of 3.5% each. Mgmt
indicated that operations continued to be
impacted primarily by the decline in the TBB
market (Truck Bias), due to the influx of Chinese
imports.
Revenue grew 0.5% growth YoY driven
mainly by volume growth of 5.5% and price
and mix contributed to negative 5%.
Revenue de-grew ~5% YoY due to decline of
~1.5% & ~3% in volume and price growth
respectively in the domestic business
2Q
FY
16
Revenue was flat YoY, with 4% volume growth
was offset by the price reductions that were
offered as per the “industry dynamics”
Revenue de-grew 2% YoY driven by volume
growth of about 6% and price and mix
contributed to a negative growth of 8%.
Revenue declined 1.6% YoY, while volumes
grew ~2%, the decline was caused by price
and mix reasons.
3Q
FY
16
Sales for the grew 1% YoY, with 7% growth from
volumes offset by 6% decline on the pricing front.
Mgmt. indicated that there were price reductions
taken by various peers, and that they had to
follow suit on some of those.
Revenue de-grew 2% YoY growth largely
because of price drops that have taken place
over the last one year. In volume terms, the
growth was about 6%
Domestic volumes degrew by 2.5% YoY
during the quarter while the impact of price
and mix contributed 6.4% decline, with
overall revenue declining 8.9%
4Q
FY
16
Revenue saw a de-growth of 5% YoY, led by
negative price and mix, though volumes were
positive.
Revenue de-grew 2% YoY driven mainly by
volume growth of about 8% and price and
mix contributed to negative 10%
Standalone revenue declined 0.3% YoY with
volume growth of ~4% offset by pricing
decline
1Q
FY
17
Revenue saw a growth of 6% YoY led by a
volume growth of 13% and a negating impact of
7% from the price reductions of the previous
year.
APTY also took a small price cut in TBR in July16
of ~2%. In 4QFY16, APTY took a small price cut
in cars and then in truck bias of 1-2%.
Revenue registered a 4% revenue growth
YoY basis driven mainly by volume growth of
13%, price and mix resulted in a negative 9%
impact
Revenues declined 1.5% YoY with volume
growth of ~11% offset by ~13% decline
in price
Page 19
Snapshot of pricing action impacting revenue growth for major companies for the last 5 quarters through 1QFY17
Pricing action
Apollo Tyres
Page 20
1972
1991
1995
2006
2009
2010
2011
2013
20142015
2016
First Plant in
Perambara, Kerala
Second Plant in
Limda, Gujarat
Acquired plant in
Kalamassery, Kerala
Acquired Dunlop Tyres,
South Africa
Acquired Vredestein
Banden BV
Netherlands
Truck Radial Plant in Oragadam, Tamil Nadu
Sales & Marketing Office, Dubai
Sales & Marketing Office,
Thailand
R&D Center, EA in
Enschede, Netherlands
Global Marketing Office in
London, UK
Part divestment of South
Africa Business
R&D Center, APMEA in Oragadam, Tamil Nadu
Closure of SA manufacturing operations
Foundation stone laying – Hungary Greenfield plant
Global procurement office, Singapore
Acquired Reifencom –
German tyre
distribution company
Two wheeler tyre launch
in India
Sales & marketing
office, Malaysia
APTY
Apollo Tyres : A global player with presence across geographies and segments
Apollo Tyres
Pricing
SegmentBrand
Brand
Positioning
UHP &
Winter
Tyres
Passenger
vehicles
Tyres
Commercial
vehicles
Tyres
Farm
vehicle
tyres
Off highway
tyres
Two
wheeler
tyres
Bicycle ture
TOP
Global
Niche
Premium
MEDIUM Global
Others
Global
Challenger
Global
Challenger
Source: Company, Spark Capital Research
Page 21
Brand positioning – Vredestien and Apollo vis a vis global peers
Management indicated that Vredestein is typically about a 15% plus lower than Michelin pricing. The Apollo brand sells at around 10% to
15% further discount.
Apollo Tyres
Revenue Segmentation - By product – India Operations
Source: Company, Spark Capital Research
Revenue Segmentation - By Customer Segment - Consolidated
Source: Company, Spark Capital Research
Revenue Segmentation - By product – Consolidated Operations
Source: Company, Spark Capital Research
Revenue Segmentation - By geography
Source: Company, Spark Capital Research
Page 22
T&B, 48%
PCLT, 34%
LCV, 7%
Farm and others, 11%
Replacement, 76%
OEM, 24%
India, 66%
Europe, 26%
Revenue Segmentation - By Geography
APTY
Apollo Tyres caters to a diversified market base across geographies
T&B, 65%PCR, 17%
LCV, 9%
Farm and others, 9%
Apollo Tyres
Revenue Break down - By Product Segment
Source: Company, Spark Capital Research
APTY – Standalone revenue growth on firm footing
Source: Company, Spark Capital Research
APTY is the market leader in the T&B segment and will capitalize on growing demand in this
segment
Source: Company, Spark Capital Research
Page 23
T&B65%
PCR17%
LCV9%
Farm and others
9%
385
279
222
269
34111.7%
-27.6%
-20.5%
21.2%27.0%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
0
50
100
150
200
250
300
350
400
450
FY12 FY13 FY14 FY15 FY16
MHCV Production (000s) YoY Growth (%)
The T&B segment – APTY being the market le
OE demand in the T&B segment is expected to
continue to be strong in FY17, on the back of the
with pick up in economic activities projected to
lead growth, which would also translate into
higher replacement demand
Management commentary indicates that 1QFY17
in particular has also seen growing demand in the
TBB segment led by pick up in the mining and
OTR segment.
With additional TBR capacities expected to come
on-stream beginning Oct16, expect APTY to
further capitalise on its leadership position.
Poised to capitalize on strong domestic growth levels, particularly in the T&B market backed by its leadership position
APTY – INDIAN OPS.
55
82 85 87 89 87
9.0%
48.6%
4.3% 2.4% 2.6%-2.8%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
0
10
20
30
40
50
60
70
80
90
100
FY11 FY12 FY13 FY14 FY15 FY16
Revenue Standalone (Rs. Bn) YoY growth (%)
Apollo Tyres
Significant TBR capacities have come –onstream in the recent past; more on the anvil particularly Apollo’s and Michelin’s
Source: Industry, Spark Capital Research
Page 24
Current Capacity Location Commissioned in Capacity expansion plans LocationExpected date of
commissioning
Michelin0.3 mn tyres p.a./
1000 tyres per day
Tiruvallur,
ChennaiCommissioned in 1QFY14
1.7 mn tyres p.a./
5700 tyres per day
Tiruvallur
Chennai
To be commissioned in
phases through FY20
JK 3.5 mn tyres p.a.
~equally spread
across Chennai
and Laskar
Chennai to take full effect
in FY17
Laskar capacities taken
over from CIL in FY16
NA NA NA
Apollo 6000 tyres per day Chennai NA 6000 tyres per day Chennai
In phases through FY18,
first phase to be
operational in Oct 2016
Ceat 80 TPD NA NA NA NA NA
Bridgestone 3000 tyres/dayChakan and
Indore2013
The capacity utilisation as
at Dec 15 was stated at
1000 TBR/day. This
translates into further ramp
up potential by 2000
tyres/day
NA NA
ATMA estimates that domestic capacity set up with an investment of Rs 25,000 crore in the last 3-4 years
Significant TBR capacities expected to come on-stream for Apollo beginning Oct16, existing capacity being used flat out
APTY – INDIAN OPS.
Apollo Tyres
Domestic T&B Radial market share - FY16
Source: JK Tyres Investor Presentation – June 2016, Spark Capital Research
PVs and LCVs too expected to register a strong growth in FY17 led by new launches and improvement in private fila consumption expenditure
Source: Industry, Spark Capital Research
Page 25
3,146 3,234
3,088
3,220
3,414
5.3%
2.8%
-4.5%
4.3%
6.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
2,900
3,000
3,100
3,200
3,300
3,400
3,500
FY12 FY13 FY14 FY15 FY16
PV Production (000s) YoY Growth (%)
Market leader in the T&B segment
The year saw Apollo Tyres maintaining its leadership position in the
Truck and Bus (TB) segment. Even as the Indian market was flooded
with low cost TB imports, the Company’s robust and quality product
portfolio ensured that it led the market with over 25% market share.
Customers acknowledge the Company’s TBR tyres as the best in the
market on both counts quality and value.
Major OEMs including Tata, Eicher and Bharat Benz continue to use
Apollo tyres as OEM fitments.
Note: Differing views on who leads the market – with leadership being
claimed by both JK and Apollo in their respective communications
544 553
477 430 442
33.4%
1.6%
-13.7%-10.0%
2.8%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
-
100
200
300
400
500
600
FY12 FY13 FY14 FY15 FY16
LCV Production (000s) YoY Growth (%)
JK Tyre, 28%
Apollo Tyres, 24%
MRF, 13%
Birla, 5%
CEAT, 5%
Others/Imports, 26%
Given the expected uptick in the PV/LCV volumes on the back of improvement in rural income in addition to continued urban demand led by favourable
sentiment, the OE demand from these segments is expected to be positive.
Also, given the typical replacement cycles for PVs/LCVs at ~2.5-3.5 years, the strong volumes reported in FY12-FY13 would hold the replacement
demand in good stead
Poised to capitalize on strong domestic growth levels driven by strong OE and replacement growth across major segments
APTY – INDIAN OPS.
Apollo Tyres
Tractors to be a strong growth driver for FY17
Source: Industry, Spark Capital Research
Page 26
708
613 586
22.3%
-13.4%
-4.4%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
-
100
200
300
400
500
600
700
800
FY14 FY15 FY16
Tractor Production (000s) YoY Growth (%)
4,300
4,900
4,000
-
1,000
2,000
3,000
4,000
5,000
6,000
CEAT Apollo JK
Farm sector to be a strong growth driver with the favourable monsoons; strong distribution network to drive AM sales
APTY derives ~9% of its revenue from the farm and ORT segment.
With tractor volumes reporting a strong uptick in 1QFY17, with major
OEMs guiding for a strong YoY growth, the demand prognosis for this
segment is extremely strong.
Growth in the demand from the farm segment and the mining
segment was highlighted as a key driver of growth by APTY for
1QFY17
Comparison of distribution networks across major tyre companies
Source: Industry, Spark Capital Research
6-8 months
3-4 years
1-2 years
1-3 years
2-3 years
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
MHCVs PVs LCVs Tractors 2W
Comparison of replacement cycles across segments
Source: Industry, Spark Capital Research
APTY – INDIAN OPS.
Apollo Tyres
Page 27
Apollo Tyres announced its entry into the two wheeler tyre segment in India with the launch of all new Apollo Acti series for bikes and scooters.
Apollo Tyres, which is already manufacturing four wheeler and commercial vehicle tyres, will initially be outsourcing the manufacturing to a third party
based in South India. The company said that, with the growth in volumes, they will decide on manufacturing at a later stage.
In first phase, company will be present in the mass segment of below 250cc with only cross-ply tyres. The initial capacity will be around 1,20,000 units a
month which is expected to touch 5,00,000 units a month in next two years.
In the second phase, Apollo will get into radial tyres as well for high performance motorcycles.
“We continue to make good inroads. Our volumes today vis-à-vis the entire market size is not significant. Even in just the replacement market here we
operate today our market share would be low single digits. But we do have plans and ambition to be a decent player in that overall segment.
we will not pursue two-wheeler volumes at the cost of profitability. We have in fact had a fairly significant launch expense coming in when we started in
previous quarter and that was factored into the overall costs and we still maintained profitability. And yes, there are typically higher expenses in the
initial stages of entry into any segment but we are not looking at subsidizing this segment as just a strategic segment and sacrificing profitability.
The penetration of two-wheeler tyres is particularly more significant in the rural markets. Earlier given the fact that we did not have two-wheeler tyres
there were certain tyre distribution people who would have an inclination to go with some of our peers because we did not have this particular segment
in our arsenal. And that sometimes was the limitation in some cases. Four months back when we got into this segment and the fact that we have been
able to establish a certain product quality we see this as an added arsenal with us to try and now add distribution network particularly in the rural
segment.
We started with the replacement market but already some of the OEMs have reached out to us and we have begun a dialogue. But like for any product
category the OEM approval goes through a certain process. So we are unlikely to have any OEM volumes in the current year”
Foray into 2W segment to enhance the range of offerings
Quotes from the management
APTY has forayed into the 2W segment; making good inroads into the AM segment
APTY – INDIAN OPS.
Apollo Tyres
Page 28
Capacity utilization levels continue to be healthy; TBR capacities utilization sustained at close to 100%
Approximate capacity utilization levels across domestic facilities
Source: Company Earnings calls, Spark Capital Research
APTY – INDIAN OPS.
78%
80%
78%
85%
74%
76%
78%
80%
82%
84%
86%
4QFY15 3QFY16 4QFY16 1QFY17
India utilisation %
Utilisation levels and capex
APTY has a capacity of 6,000 plus tyres per day for TBR, truck bias capacity of about 10,000 tyres per day and passenger car capacity of 32,000
tyres per day.
Management indicated that in 1QFY17, the utilisation levels of the TBR capacity was close to 100% (as was the case in the preceding few
quarters as well).
The overall capacity utilisation levels in 1QFY17 improved to ~85% led by increased demand in the farm segment as also the OTR segment (led
by pick up in mining activities) which improved utilisation levels of the TBB capacity as well.
The company is undertaking a capex to enhance the TBR and PCR capacity at the Chennai plant by 6000 tyres per day and 8000 tyres per day
respectively. These facilities are expected to come on-stream in phases beginning October 2016.
Apollo Tyres
Page 29
APTY – Subsidiaries: Revenue and EBITDA margin for FY16 were stymied by one-off and possibly non-recurring factors
Source: Company, Spark Capital Research
INR/EURO – Revenue was also impacted by adverse FX movement
Source: Industry, Spark Capital Research
65.00
70.00
75.00
80.00
85.00
90.00
1QFY14 3QFY14 1QFY15 3QFY15 1QFY16 3QFY16
INR/EURO
Several, mostly non-recurring factors, contributed to revenue
degrowth in FY16
FY16: Revenue registered a 19% YoY degrowth, on the back of the
depreciation of the Rupee vis a vis the Euro and also the exclusion of
South African operations.
Refer next slide for a quarter by quarter break down of items impacting
revenue growth in the European operations in FY16
Revenue growth for FY16 was impacted by several one-offs; see multi-pronged growth levers going forward
APTY – EUROPE
34
40 43
47
38
31
9.5%
18.3%
7.3%9.6%
-18.1% -19.6%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0
5
10
15
20
25
30
35
40
45
50
FY11 FY12 FY13 FY14 FY15 FY16
Revenue Subsidiaries (Rs. Bn) YoY growth (%)
4 5 6
8
6
4
13.2%12.5% 13.0%
16.5% 16.0%
13.2%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
0
1
2
3
4
5
6
7
8
9
FY11 FY12 FY13 FY14 FY15 FY16
EBITDA (Rs. Bn) EBITDA %
Apollo Tyres
Page 30
Sales for the quarter were at Rs 7.4 billion declined 13% YoY on the back of the exchange rate impact. In Euro terms, revenue grew
by 2% YoY led by volume growth of 8%. The car tyre industry grew by 3% YoY. The EBITDA margins at 13.5%, declined YoY given the
price and mix pressures.1QFY16
Sales for the quarter at Rs 7.7 billion degrew 21% YoY, led by 9% volume decline, 2% due to price & mix and the balance 9% due to
adverse exchange rate impact.
Weak winters in the last 2 years impacted the pre winter sales of tyres in August and September.
Improvement in label values which is a regulatory up-gradation in technology, impacted the available production capacity.
Lastly, maintenance related breakdowns too impacted volumes. Drop in volumes impacted the EBITDA margin for the quarter came
down to 11.2% compared to 17.1% YoY.
2QFY16
Sales for the quarter were Rs. 8.2 billion, a 6% degrowth YoY primarily due to currency impact, though in EU terms there was a
growth. This was in light of a fairly tough quarter for European operations given the very mild winter, led to lower winter tyre sales which
resulted and showed up in the operating margin. The EBITDA margin for the quarter was down from just below 20% last year to 15.3%
during this year.
Secondly, the cost incurred in preparation of OEM business including working on a large number of new SKU introductions
and thirdly, a decline in one particular product category; Space Master - the spare tyre sold to OEMs (only Volkswagen till that
quarter) and sales to them were declining sharply added to further pressure on the margins
3QFY16
Sales for the quarter were Rs.7.4 billion, a degrowth of 17% over same period last year, all of it essentially coming through volumes.
Teething troubles with the SAP introduction which went live at the beginning of January. This resulted into lower sales which
led to margin decline given the share of fixed cost in Europe. EBITDA for the quarter was Rs. 0.8 billion at 11.1% compared to
14.7% margin for the same period last year.
We also had Reifencom operations with us for the first quarter, which performed in line with their last year figures even though the sales
prices were lower. The Reifencom operations had revenue of Euro 23 million, which are reported together with the European operation
results. On a year on year comparison the revenues were flat as the lost sales were made up by the revenues from Reifencom which
were reported in the European operations.
4QFY16
APTY – EUROPE
Revenue growth for FY16 was impacted by several one-offs; see multi-pronged growth levers going forward
Apollo Tyres
Test results in 2015 across segments for APTY were encouraging with number one position for Quatrac 5 in All-Season test, test
winner Sportrac 5 in the summer segment, Ultrac Satin in the premium segment and highly recommended rating for Ultrac Vorti.
These results will help in building a stronger position in the market.
Page 31
Multi-pronged growth levers in the European business
POSITIVE TYRE Test Results TO AID ACCEPTANCE AND VISIBILITY
This fiscal saw the introduction of the new brand positioning with the high decibel ‘Rock the Road’ digital campaign
in our key European markets. Later in the year, the European region launched the dealer partnership programme and plans to have
over 800 programme partners by 2020 throughout Europe.
Increased spends on building the corporate brand including Apollo Tyres’ association with is starting to make Apollo a
globally recognised brand
HIGH Decibel ADVERTISEMENT CAMPAIGNS INCLUDING THE SPONSORSHIP DEAL WITH MAN u
To further expand its reach in key European markets, APTY acquired the Germany-based (Reifencom GmbH) - one of
the leading tyre retail organisations in Germany with over 37 stores in the country.
The success of Reifencom GmbH is attributed to its highly efficient logistics system, which ensures there is a guarantee of a high
degree of availability of all kinds of tyres and rims, even during busy periods like spring and autumn.
While it is expected to give APTY brands increased visibility, its strong online presence in many countries including Austria,
Switzerland and France will not only support the growth of the retail network in Europe but is also expected to support APTY’s
endeavour to sell tyres online in other key markets outside Europe.
It will also help Apollo in selling additional volumes that will start coming out of its plant under construction in Hungary once it is
ready in early 2017.
Acquisition OF REIFENCOM – A SHOT IN THE ARM
APTY – EUROPE
Apollo Tyres
Vredestein Distribution Network: Ability To Deliver Within 90% Of Europe Within 24 Hours
Source: Company, Spark Capital Research
Page 32
883
449
279
438
254211 235 217
285 296
168
0
100
200
300
400
500
600
700
800
900
1000
Germany Holland France Scandinavia Belgium Italy Switzerland Austria Eastern Europe England, Ireland Spain
APTY – Distribution reach and production capacities
Utilisation levels and capex
Apollo currently has a capacity of 7m tyres in its Netherlands facility, which is close to being fully utilised.
The company has embarked upon a greenfield expansion programme at Hungary with a capacity to produce 5.5 million passenger car and light
truck and 675,000 heavy commercial vehicle tyres at a cost of ~EURO 300mn
The facility will produce both Apollo and Vredestein brand of tyres and will complement Apollo Tyres' existing facility in the Netherlands
The facility is expected to come on-stream in 4QFY17.
APTY – EUROPE
Apollo Tyres
Page 33
Revenue (Rs. Mn) and margin estimates FY15 FY16 FY17E FY18E
Standalone
Revenue (Rs. Mn) 89,378 86,887 92,347 104,664
Growth (YoY %) 2.6% -2.8% 6.3% 13.3%
EBITDA (Rs. Mn) 13,155 15,594 15,892 17,688
EBITDA (%) 14.7% 17.9% 17.2% 16.9%
Subsidiaries
Revenue (Rs. Mn) 38,473 30,914 41,329 43,719
Growth (YoY %) -18% -19.6% 33.7% 5.8%
EBITDA (Rs. Mn) 6,150 4,079 5,694 6,121
EBITDA (%) 16.0% 13.2% 13.8% 14.0%
Consolidated
Revenue (Rs. Mn) 127,851 117,801 133,676 148,383
Growth (YoY %) -4.7% -7.9% 13.5% 11.0%
EBITDA (Rs. Mn) 19,305 19,673 21,586 23,809
EBITDA (%) 15.1% 16.7% 16.1% 16.0%
Region wise revenue and margin estimates
Apollo Tyres
Page 34
Financial summary
Consolidated Financial Statements Key metrics
Rs. mn FY15 FY16 FY17E FY18E FY15 FY16E FY17E FY18E
Profit & Loss Growth ratios
Revenues 127,851 117,801 133,676 148,383 Revenues -4.7% -7.9% 13.5% 11.0%
Manufacturing & Other Expenses 108,547 98,128 112,090 124,574 EBITDA 2.9% 1.9% 9.7% 10.3%
EBITDA 19,305 19,673 21,586 23,809 PAT 1.2% 13.7% 5.8% 3.4%
Depreciation 3,883 4,097 4,522 5,479 Margins
EBIT 15,422 15,576 17,063 18,330 EBITDA 15.1% 16.7% 16.1% 16.0%
Net Interest Exp / (inc) 1,827 949 1,137 1,654 EBIT 12.1% 13.2% 12.8% 12.4%
Profit Before Tax 13,308 15,728 16,558 17,391 PAT 7.6% 9.4% 8.8% 8.2%
Tax 3,532 4,612 4,803 5,236 Leverage & WC ratios
Adj Net Profit 9,776 11,116 11,755 12,155 Debt to equity (x) 0.2 0.2 0.4 0.4
Balance Sheet (Rs. mn) Current ratio (x) 2.0 1.6 1.7 1.7
Shareholders Equity 50,423 60,318 70,851 81,785 Debtor days (Sales) 28 34 31 28
Loan funds 11,135 13,497 29,418 33,001 Inventory days (COGS) 51 61 55 55
SOURCES OF FUNDS 66,470 79,370 105,825 120,342 Creditor Days (COGS) 25 48 35 30
Net block 42,685 51,008 78,355 91,369 Performance & turnover ratios
Investments 1,470 1,226 1,226 1,226 RoACE 17.2% 15.1% 13.1% 11.3%
Capital WIP 2,182 2,182 2,182 2,182 RoAE 20.3% 20.1% 17.9% 15.9%
Current assets, loans & advances 38,352 51,607 48,830 50,524 Total asset turnover (x) 1.1 1.0 0.9 0.9
Current liabilities & provisions 19,384 31,448 29,564 29,755 Fixed asset turnover (x) 1.4 1.2 1.1 1.0
Net Current Assets 18,968 20,160 19,267 20,770 Valuation metrics
APPLICATION OF FUNDS 66,470 79,370 105,825 120,342 Current price (Rs.)
Cash Flows (Rs. mn) Shares outstanding (mn) 509 509 509 509
Cash flows from operations 14,016 11,067 13,231 15,442 Market capitalisation (Rs. mn) 109,963 109,963 109,963 109,963
Capex (6,269) (12,420) (31,870) (18,493) Enterprise value (Rs. mn) 115,152 117,573 137,434 141,707
Free cashflow 7,747 (1,353) (18,639) (3,051) Price-earnings multiple (x) 11.2 9.9 9.4 9.0
Cash flows from investments (7,396) (12,175) (31,870) (18,493) EV/EBIDTA (x) 6.0 6.0 6.4 6.0
Cash flows from financing (6,836) 1,132 14,699 2,362 Adj Per-share earnings (Rs.) 19.2 21.8 23.1 23.9
Cash and equivalents 5,946 5,887 1,947 1,258 Dividend yield (%) 0.9% 0.9% 0.9% 0.9%
216
Apollo Tyres – Crystal Ball Gazing
Expect trading
multiples to sustain
at similar levels
Margin expected to
settle at around 16%
levels, inhibited by
intense competition
CAGR of 11% in
consol revenue from
FY16 to FY20
Rs. Bn FY11 FY15 FY16 FY17E FY18E FY19E FY20E
Consol
Revenue89 128 118 130 148 160 169 ▲
Rs. BnFY11 FY15 FY16 FY17E FY18E FY19E FY20E
Consol
EBITDA10 19 20 22 24 26 27 ▲
EBITDA (%) 11.0% 15.1% 16.7% 16.1% 16.0% 16.1% 16.1% ▲
Entry =
Rs. 216
(9x FY18 EPS)
Cumulative Dividends of Rs. 8
Exit =
Rs. 280 at 11x FY20
EPS
TOTAL RETURN OF 50%
Over the medium term,
Apollo Tyres would
strongly benefit from the
expanded capacities
coming on-stream in the
form of its Brownfield
TBR plant in Chennai and
the Greenfield plant at
Hungary.
We believe that these will
enable APTY address
important product
segments meaningfully,
and thereby propel
revenue growth over the
medium term
Nevertheless, significant
margin improvement is
expected to be inhibited
by the intense
competition in the
industry, coupled with
the significant Chinese
imports.
P/E Multiple FY20 EPSTarget price
12x Rs.26Rs.320
Dividend (FY17-20) Rs. 8
Revenue
growth to
be aided by
capacity
expansions
Margins
improvement
to be inhibited
by the intense
competition
Trading History – % of times stock traded
PE
range
<9x 9-11x 11-13x 13-15x 15-17x >17x
37% 13% 11% 13% 13% 12%
FY11-16 CAGR %
Revenue EBITDA PAT Price
5.8% 15.0% 26.9% 20.3%
Expect
multiples to
sustain at
existing
levels
Page 35
Apollo Tyres
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Absolute Rating Interpretation
BUY Stock expected to provide positive returns of >15% over a 1-year horizon
ADD Stock expected to provide positive returns of >5% – <15% over a 1-year horizon
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0
50
100
150
200
250
300
Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16
Rs.
Price Target
Apollo Tyres – 3 Year Price and Rating History Report Date Price Target Reco.
11/Aug/16 172 195 Buy
13/May/16 155 180 Buy
11/Feb/16 150 180 Buy
03/Nov/15 170 155 Sell
13/Aug/15 187 200 Add
13/May/15 169 193 Add
15/Apr/15 188 217 Buy
09/Feb/15 212 206 Reduce
12/Nov/14 232 207 Reduce
07/Aug/14 168 200 Buy
19/May/14 172 200 Buy
13/Feb/14 118 138 Buy
Report Date Price Target Reco.
31/Dec/13 101 120 Buy
13/Nov/13 70 61 Reduce
Apollo Tyres
Disclaimer (Cont’d)
This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark Capital. While we would
endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory, compliance or
other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representatives shall be
responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions or actions taken in
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Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has
incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:
Disclosure of Interest Statement APTY
Analyst financial interest in the company No
Group/directors ownership of the subject company covered No
Investment banking relationship with the company covered No
Spark Capital’s ownership/any other financial interest in the company covered No
Associates of Spark Capital’s ownership more than 1% in the company covered No
Any other material conflict of interest at the time of publishing the research report No
Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:
Managing/co-managing public offering of securities
Investment banking/merchant banking/brokerage services
Products or services other than those above
In connection with research report
No
Whether Research Analyst has served as an officer, director or employee of the subject company covered No
Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No
Analyst Certification of Independence
The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s
compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.
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