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Growth momentum continues; Outlook intact

Apollo Tyres Limited manufactures tires and tubes for cars, trucks, farm equipment, and light commercial vehicles. The company markets its products with two global brands: Apollo and Vredestein in APMEA (Asia Pacific, Middle East and Africa) and Europe regions.

* Topline expanded 14.2% YoY (+17.3% QoQ) in Q3FY21 on robust sales seen across domestic and abroad markets in both OEM & replacements.

* EBITDA margin improved 760bps YoY to 19.9% due to high margin product mix and lower costs. Adj. PAT rose 158.5% YoY to Rs. 449 cr.

* We expect growth momentum to continue with ongoing cost containment measures, focus on digitalization, capex conservation, strong recovery from replacement market in India and focus on premium products in Europe. Hence, we reiterate our BUY rating on the stock with a rolled forward TP of Rs. 289 based on 18x FY23E adj. EPS.

Demand recovery aids topline, PAT more than doubles

Company recorded revenue growth of 14.2% YoY (+17.3% QoQ) to Rs. 4,965cr in Q3FY21 driven by robust performance in APMEA (+22.7% YoY, +16.4% QoQ to Rs. 3,449cr), as the demand in replacement business for most of the products reported double digit volume growth along with robust increase in the OEM segment for some of the key products. Similarly in Europe, sales grew 7.5% YoY (+27.3% QoQ) to Rs. 1,747cr, as the company improved its market share in premium segment, despite a demand weakness seen in winter tyres. Despite the unfavourable conditions, company also managed to gain market share in both PCR (+26bps in UHP) and TBR (+75bps) segments.

Margin expands with effective cost control measures

In Q3FY21, EBITDA grew by 85.4% YoY to Rs. 989cr, supported with margin expansion of ~760bps YoY to 19.9%, owing to favorable operating leverage, lower raw material cost and staff expenses and prudent control over fixed overheads. Resultantly, the company posted robust growth in adj. net profit of 158.5% YoY to Rs. 449cr partially offset by increase in interest and tax expenses. Management plans to continue its focus on reducing fixed costs and remain cautious over capex and capital allocation

Key highlights

* During Q3FY21, Apollo commenced production at its plant at Andhra Pradesh.

* Within India, company estimates to have gained market share of ~500bps in Agri, ~400bps in Passenger Vehicles, and ~300bps in Truck & Bus segments.

* Despite continued adverse market conditions in Europe, company added 300 new customers on YTD basis during FY21.

* Company expanded its distribution footprint further during the quarter, with total dealer addition of 451 on YTD basis in FY21.

* Raised Rs. 10.8bn from Warburg Pincus to strengthen its balance sheet and fund further growth. Net Debt/EBITDA stood at 1.6x as of Dec. 31, 2020.

Valuation

We expect company’s earnings to grow at healthy 30% CAGR over FY20-22E. With a roadmap in place outlining further investments to be made towards capacity additions, R&D of new high margin products, and improving its distribution network, Apollo Tyres is well-placed to leverage recovery in demand thereby aiding its future growth. We reiterate our BUY rating on the stock with a rolled forward target price of Rs. 289 based on 18x FY23E adj. EPS.

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