Apollo Tyres- Do not understand the valuation

Stock Opportunities
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All

I am new to Valuepickr, however must say very impressed with the input people provide, and all most all shares I had identified and increased were mentioned by one or the other on this forum

Just want to write about Apollo Tyres.

Few Details
Market Cap 8000 Cr.
Debt Approx. 1200 Cr.
Enterprise Value 9200 Cr.
Last Year 2015 EBITDA 1800 Cr.
EBITDA in 2011 972 Cr. and continuous growth year on year.
Profit for 2015 977 Cr.
Profit in 2011 440 Cr. and continuous growth year on year.

Current plans of the company
Setting up a plant in Hungary to supply in High value European market.
Increasing capacity in Chennai for radial tyres
company has closed down its South African loss making operations resulting into lower turnover but higher margins
Market Dynamics

Rubber prices are at its lowest resulting into higher margins, which may be difficult to sustain
Chinese imports of commercial vehicle tyres is increasing at an alarming speed and has now increase to around 10% of the total market for commercial vehicles and Passenger cars, it may spoil the margins in the short run, as Govt has not done anything to protect the interest of Tyre companies
While the plant in hungary can be an opportunity and can increase substantial margin, however it is only a marginal player and any adverse market condition can wipe it out

Ownership

There is a clear succession plan in the company and chairman son is being groomed to take over the chairman position
It is number 2 player in the Indian market and as the market grows it should benefit major players

I had bought this stock and it form 10 percent of my portfolio however in huge loss,
Would need expert advise from senior members of what had gone wrong with this stock, which has givens CAGR growth of more than 40 percent in last 5 years is being quoted at less than 10 PE

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It is not just Apollo Tyres, shares of all tyre companies are traded at very low PE. Have a look at MRF.

There are media reports that this is due to Chinese dumping of CV tyres in Indian market.

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Here is an article about the tyre industry in India. The author has covered major companies as well as reasons for slowdown in the industry. That said, I am also wondering that why the industry is spending a huge amount in CAPEX to increase the capacity.

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Hi,

May I request you to also consider the following points in your analysis :

  1. Tyre imports in India grew 22% to Rs 2360 cr in FY2015. Imported tyres now constitute 10% of replacement market for motorcycles and 20% of passenger car radials (PCR)

  2. Truck and Bus Radials (TBR) imports grew 60% in FY2015 to 0.78 mn tyres. Recent data points to 2.5 mn TB tyres imported per month.

  3. Imported tyres are sold at a steep discount compared to locally manufactured tyres. For eg: Chinese TBR’s are available at 14 to 15000 per set vs locally produced tyres at 21 - 22000 per set. Locally produced bias tyres (TBB) are sold at 17 - 18000 per set.

As a result, capacity utilisation of domestic players is declining as imports garner higher market share.

Anti dumping duty (ADD) process takes 1.5 to 2 years and requires evidence of impact on profitability. Currently Tyre companies are enjoying cycle peak margins and hence ADD may not be applicable

Domestic companies have started passing on benefits of raw material prices to customers. Price reduction rounds have been led by MRF and so far realisations have declined by ~8 - 10% over the past 6 - 8 months.

A bunching up of replacement demand was experienced in FY2015 when the replacement market grew by 17%. ICRA now expects volume growth in replacement market to be 4 to 5% p.a. for the next 2 to 3 years.

Replacement cycle is 3 to 4 years for two wheelers and passenger cars. Currently subdued volumes do not point towards higher replacement demand for the next 2 -3 years.

The only positive factor is softer raw material prices which can allow margins to remain healthy. But lower utilisation and market share losses will cap margins from here on.

Given this, I surmise that the margin cycle for the industry has turned.

Valuations : These sectors typically look cheap at peak of the cycle as profits are high and expensive near bottoms when profits are very low.

Hope this is of help.

Data is from ATMA’s publication for FY2015 and could have changed. FY2016 publication is expected in Aug 2016.

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CONFERENCE CALL - from Capital Markets

Apollo Tyres

The company is preparing to launch its 2-W tyres in the domestic market in April 2016

Apollo Tyres held a conference call on 10 February 2016 to discuss the third quarter of FY 2015-16 earnings. The call was addressed by Gaurav Kumar, CFO and other members of Finance and IR team.
Key Points from the discussion:

The domestic tyre industry continuesto face growth challenges and continues to be adversely impacted bycheaper imported Chinese tyres. However, import in Q3FY16 hasstabilised compared to Q2FY16 though the quantum of the same is still higher.

The company’s current TBR capacity is 6000 tyres/day and is operating atutilisation level of more than 90%.

For Q3FY16, domestic business remained muted. It registered 7% volume growth but was largely offset by 6% lower pricing.

The company had reduced its prices by 2-3% across its segments in Q3 FY 16 while in January 2016 it further reduced 4-5%, which is almostin line with other domestic peers.

Revenue from European operations in Q3FY16 declined 6% yoy mainly due to mild winters, loss in volumes for its spacemaster’s segments to one of its major OEMs and unfavourablecurrency movement impacting its performance.

The company feels that the overall European industry is growing with thepassenger car segment registering good growth.

The management feels that apart from domestic & European operations, its other businesses(mainly from Middle East, Africa, Asian countries) would maintain

their margins at the current level. The company does not see any majorimprovement from the same.

The company is preparing to launch its 2-W tyres in the domesticmarkets in a couple of monthsie in April 2016. The target segment wouldbe mass market and would initially be through the offtake route.

The management would broadly lay down its strategy for the 2W tyre segment after analysing consumer’s response over two or three quarters post the launch.

Radialisationis increasing by 5% every year. In line with this, the company is expanding its TBR capacity to 12,000 tyres/day. The phase 1 of this is expected to come in Q4CY16 and full capacity is likely to commence by mid-2018.

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Apollo Tyre in talks with the 2-Wheeler manufactures …

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update
Apollo Tyres Reaches for the Cloud to Zoom Ahead
https://www.cxotoday.com/case-studies/apollo-tyres-reaches-for-the-cloud-to-zoom-ahead/

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Apollo Tyres lined up a capex of Rs 1,400-1,500 crore for FY21 - already scaled down from Rs 1,700-1,800 crore decided in FY20. A further scaling down will take place in the coming period.

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Market Cap 14098 Cr.
Total Debt 6433 Cr.
Enterprise Value 18925 Cr.
52 Week High 261
52 Week Low 109
EV/EBITDA 6.7

Q1 FY22 ConCall Highlights
• Witnessing a steady demand recovery across all segments except Truck OEMs which may take another quarter to pick up
• Long-term strategy of diversification and de-risking their business model from any one geography
• Q1FY22 volume decline in India was at ~11% QoQ
• Raw material prices in Q1FY22 (Rs/kg) – natural rubber 170, synthetic rubber 155, carbon black 90, steel cord 155
• Consolidated FY22E capex guidance is for Rs. 2,000 crore (Rs. 1,800 crore in India, | 200 crore in Europe)
• Operating Leverage might kick in from September

Reasons for picking this stock

  • Commercial Vehicles and Passenger Vehicles’ demand is expected to rebound
  • APT is increasing its focus on the European markets

Disclaimer: Tracking, Not Invested

PS: I’m new to this so let me know if I missed anything

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Apollo tyres has been gaining market share on consistent basis. I feel it has already taken over MRF or will soon in near future. I am impressed by their R&D which is bringing up great products.

Among other things, I like their ambitious attitude and ESG work.

Would be happy to hear other’s views.

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Hi.

Can anyone share current outlook on the Apollo tyre

Thank you

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Hi Ravi, not specific for Apollo Tyres, but I would be cautious with the whole space as rising crude prices may lead to margin contraction.