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Apollo Tyres (APTY) is an Indian multinational tyre manufacturing company with prominent tyre brands in the Truck and Bus, Light Truck, Passenger Car, and Farm Vehicle segments. It caters to both original equipment manufacturers (OEMs) and the Replacement market.

India well-placed for growth: APTY is poised for growth, with a) a strong competitive positioning and b) ready capacities to benefit from strong recovery in the Truck and Bus Radial (TBR) Tyre and Passenger Car Radial (PCR) Tyre categories in the OEM/Replacement segments. On a fully expanded capacity by FY22-end, its PCR/TBR utilization is estimated at 71%/65%. We estimate 10% volume CAGR over FY21–23E, led by strong growth in the TBR and PCR segments and a 3% CAGR improvement in price realizations.

We estimate a ~15% revenue CAGR over FY21–23E. APTY’s India business has several levers to support margins and dilute the impact of the RM cost inflation. These comprise a) operating leverage, b) an increasing share of the most efficient AP plant (not factored in), and c) likely benefit from PCR exports to the EU. We expect 260bp decline in the FY23E EBITDA margin (to 14.7%) over FY21 levels, weighed by higher RM costs. On the other hand, operating leverage and balance sheet deleveraging would support PAT in the India business.

EU – the worst is behind: APTY’s EU operations are all set for a turnaround, led by strategic initiatives at both the front (product side) and back ends (Hungary plant and restructuring in the Netherlands). With improved competitiveness, APTY has gained market share in the Replacement segment and made inroads with OEMs. With a further ramp-up at the low-cost Hungary plant and specialization at the Netherlands plant, we estimate an 11% revenue CAGR over FY21–23E (on a low base) and ~460bp EBITDA margin expansion to 17% by FY23E. We estimate EU operations to turn profitable in FY22E.

Leaner balance sheet augurs well for future growth capex:

APTY raised funds through a preferential placement to an arm of Warburg Pincus. In Feb’20, it issued CCPS (already converted to equity) – equivalent to a 9.93% stake in the company for INR10.8b – at INR171.3/share. Post the fund infusion as well as FY21 FCF (post interest) of ~INR9.5b, consolidated net debt stood at INR43.5b as of Mar’21.

Net debt would be comfortable at 0.3x/0.2x equity for FY22E/FY23E and 1x/0.6x EBITDA. With a reduction in interest costs owing to the debt reduction, we estimate an adjusted PAT CAGR of ~42% over FY21–23. As a result, we estimate a 420bp improvement in RoE over FY21 to ~10.4% in FY23E.

Valuation and view:

APTY is geared for the next leg of growth, with sufficient capacity to cater to demand from India and Europe. Demand recovery in India as well as consistent price hikes would drive margin recovery in India. A turnaround in its EU operations and profitability in the mid-teens are expected to be structural and sustainable.

With the Phase II capex at the AP plant concluding in FY22E, an increase in capacity utilization would generate higher cash flows and further deleverage its balance sheet. Compared with peers, APTY offers the best blend of earnings growth and cheap valuations. It trades at 12.3x/9.6x FY22E/FY23E consolidated EPS. We value APTY at 12x Sep’23E EPS (v/s a 5-/10-year average P/E multiple of ~16x/12x). We maintain a Buy rating, with TP of INR290/share.

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