Buy Apollo Tyres Ltd For Target Rs.290 - Emkay Global
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Demand outlook positive but cost pressures likely in near term
* EBITDA declined 10% yoy to Rs6.4bn, 6% above estimates, owing to better profitability in the Europe region. Revenue grew by 18% to Rs50.8bn, above our estimate of Rs49.3bn, due to higher revenues in the APMEA and Europe regions.
* We expect a 12% CAGR in APMEA revenue over FY22-24E, led by a recovery in the OEM segment and stable replacement demand. In our view, Europe revenues should register a 7% CAGR thanks to a pickup in replacement demand and market share gains.
* We reduce FY22E/23E/24E EPS by 9%/4%/3% to Rs12.1/Rs17.5/Rs21.7, mainly due to cost pressures. Accordingly, we expect revenue/earnings CAGRs at 11%/34% over FY22- 24E. Driven by better margins and asset turnover, we expect ROE to be in double digits (10%) by FY24E.
* With strong FCFs, we expect Net Debt/EBITDA to reduce from 1.7x in FY22E to 0.8x in FY24E. We maintain Buy with a revised TP of Rs290 (Rs305 earlier), applying 14x Dec’23E EPS (15x Sep’23E earlier) backed by DCF valuation.
* Results above estimates: Revenue grew by 18% yoy to Rs50.8bn, slightly above our estimate of Rs49.3bn, due to higher revenues in the APMEA and Europe regions. APMEA revenues grew by 25% and Europe revenues grew by 7%. EBITDA margin declined by 390bps to 12.6%, above our estimate of 12.2%, due to better-than-expected margin in the Europe region. APMEA EBIT margin contracted by 830bps to 5.6%, while Europe EBIT margin expanded by 730bps to 5.3%. Raw material cost inflation was steep at 35%+ yoy. Overall, adj. PAT declined by 50% to Rs1.8bn, above our estimate of Rs1.4bn, mainly due to a higher operating profit and a lower-than-expected tax rate. The tax rate stood at 20% vs. expectation of 25%.
* Retain Buy: Our positive stance is based on the prospects of a strong volume recovery in the domestic and Europe markets. We maintain Buy with a revised TP of Rs290 (Rs305 earlier), applying 14x Dec’23E EPS (15x Sep’23E earlier). Key downside risks are lowerthan-expected demand in key geographies, higher competitive intensity, further increase in commodity prices and adverse currency movements.
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