Buy Apollo Tyres Ltd : Moving toward a higher growth trajectory - Emkay Global
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Moving toward a higher growth trajectory
* In its analyst meet, APTY highlighted revenue target of USD5bn in FY26, implying 16% CAGR over FY21-26E vs. 8% CAGR over FY16-21. Revenue growth will be driven by underlying industry growth, premiumization, and market share gains in India and Europe.
* Management expects ROCE (pre-tax) to increase from 9% in FY21 to 12-15% by FY26E, led by better asset turnover. Future capacity expansions would be only through debottlenecking and brownfield capacities.
* Medium-term EBITDA margin guidance stands at over 15%, driven by premiumization and cost-reduction initiatives, such as reduction in material usage, digitization efforts and plant specialization initiatives.
* We are factoring in revenue/earnings CAGRs of 12%/14% over FY21-24E. We maintain Buy with a TP of Rs290 (unchanged), implying an EV/EBITDA of 7x and P/E of 16x on FY23E estimates.
Key takeaways from Analyst Meet FY26 revenue target at USD5bn: Management has guided for revenue CAGR of 16% over FY21-26E, driven by expectations of: 1) Volume growth in underlying industry in India at 10- 13% CAGR for PCR tyres, 5-8% CAGR for CVs, and 2-4% for Tractors; 2) Continuing radialization in Truck & Bus industry from 47% in FY21 to 55-60% in FY25E; 3) Increase in exports for standalone from 9% of revenue in FY21 to 20% in FY26E, with focus on Europe, USA, Middle East and Africa regions; 4) Launch of new products: Vredestein brand in India for PCRs/2Ws and all-season PCRs, OHT as well as EV tyres for Europe/US markets; 5) Increase in revenue share of UHP/UUHP categories in Europe PCR from 36% in FY21 to over 40% in FY26E; 6) Increase in OEM revenues in Europe; 7) Increase in distribution reach in rural India; and 8) Increase in distribution reach in Europe and US markets.
ROCE target at 12-15% for FY26E: EBITDA margin of over 15% and better asset turnover are expected to drive ROCE from 9% in FY21 to 12-15% in FY26E. Future capacity expansions would be through de-bottlenecking and brownfield capacities. For instance, doubling of capacities in the Andhra Pradesh plant for TBR and PCR segments could be achieved at ~25% lower spends in comparison with initial Greenfield investments. In addition, a capacity expansion of 20-25% in the Hungary plant could be achieved with some debottlenecking efforts. Going forward, capex is likely to be in a staggered manner and not bunched up, resulting in positive FCF generation.
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