RESULT REVIEW SELL TP: Rs 140 | 38% APOLLO TYRES | Auto Components | 05 August 2021 Dull quarter; maintain SELL . Q1 revenue in line but EBITDA margin disappoints at 12.4% due to Mayur Milak | Nishant Chowhan, CFA [email protected] gross margin pressure and lower operating efficiency . Expect sustained gross margin stress from rising commodity prices and inability to fully pass on costs . Maintain SELL with an unchanged Mar’22 TP of Rs 140, set at 16x FY23E EPS Revenue in line: APTY’s Q1FY22 consolidated revenue declined 9% QoQ to Key changes Rs 45.8bn, in line with our estimate. India revenue dipped 11% QoQ and Europe Target Rating sales were flat. É É Gross margin weakens: Gross margin slipped further by 240bps QoQ to 42.8%, Ticker/Price APTY IN/Rs 225 reflecting the sharp increase in rubber and crude oil prices as well as the inability of Market cap US$ 1.7bn tyre companies to take sufficient price hikes to negate cost inflation. EBITDA margin Free float 62% contracted 385bps QoQ to 12.4% (13% est.), leading to a 30% QoQ fall in EBITDA 3M ADV US$ 16.9mn to Rs 5.7bn (Rs 6.4bn est.). Adj. PAT stood at Rs 1.3bn with EPS at Rs 2. EBIT 52wk high/low Rs 261/Rs 110 margin was at 5.5% (-645bps QoQ) for the India business and 3.9% (-80bps QoQ) Promoter/FPI/DII 41%/23%/17% Source: NSE | Price as of 4 Aug 2021 for Europe. Key financials Surge in commodity prices to further undermine margins: Given the 12% QoQ Y/E 31 Mar FY21A FY22E FY23E cost increase in the raw material basket during both Q4FY21 and Q1FY21 (per Total revenue (Rs mn) 173,970 194,362 215,347 management), together with the inability of tyre companies to fully pass on the EBITDA (Rs mn) 27,975 24,288 26,917 burden, we anticipate gross margin deterioration across the sector in FY22. We Adj. net profit (Rs mn) 9,579 5,031 5,708 bake in a further decline of ~300bps in APTY’s FY22 gross margin over FY21, Adj. EPS (Rs) 15.1 7.9 9.0 resulting in a weaker operating margin. Consensus EPS (Rs) 15.1 14.4 18.0 Adj. ROAE (%) 8.4 3.9 4.3 Estimates unchanged: We maintain our revenue and earnings estimates for Adj. P/E (x) 14.9 28.5 25.1 FY22/FY23 and introduce forecasts for FY24, projecting a revenue/EBITDA /adj. EV/EBITDA (x) 6.4 7.1 6.0 PAT CAGR of +10%/+2%/-11% for APTY over FY21-FY24. Our FY22/FY23 EPS Adj. EPS growth (%) 81.2 (47.5) 13.4 Source: Company, Bloomberg, BOBCAPS Research estimates are at Rs 7.9/Rs 9, which is 50%+ less than consensus. We diverge widely from the street as our gross margin assumptions of 43% for both years are Stock performance ~200bps below consensus. APTY NSE Nifty (Relative) 420 Maintain SELL: APTY’s Q1 gross margin has weakened considerably and we do 350 not see scope for quick recovery in the near term considering the steep increase in 280 input cost and lag in price hikes taken by companies. We maintain our Mar’22 TP of 210 140 Rs 140, set at an unchanged 16x FY23E EPS, in line with the stock’s seven-year 70 average. Reiterate SELL. Feb-21 Feb-20 Feb-19 Nov-20 Nov-19 Nov-18 Aug-21 Aug-20 Aug-19 Aug-18 May-21 May-20 May-19 Source: NSE BOB Capital Markets Ltd is a wholly owned subsidiary of Bank of Baroda Important disclosures, including any required research certifications, are provided at the end of this report. APOLLO TYRES Fig 1 – Quarterly performance – Consolidated (Rs mn) Q1FY22 Q1FY21 YoY (%) Q4FY21 QoQ (%) FY21 FY20 YoY (%) Net Revenues 45,845 28,734 59.5 50,257 (8.8) 173,356 163,270 6.2 Total Income (A) 45,845 28,734 59.5 50,257 (8.8) 173,356 163,270 6.2 Operating Expenses: Raw materials consumed 26,245 16,308 60.9 27,585 (4.9) 93,945 90,756 3.5 Employee Expenses 6,536 5,370 21.7 6,704 (2.5) 25,134 24,822 1.3 Other Expenses 7,396 4,684 57.9 7,821 (5.4) 26,917 28,537 (5.7) Total Expenditure (B) 40,177 26,362 52.4 42,110 (4.6) 145,995 144,115 1.3 EBITDA (A-B) 5,668 2,373 138.9 8,147 (30.4) 27,361 19,155 42.8 Other Income 405 268 50.7 619 (34.6) 1,908 469 306.9 Depreciation 3,404 3,091 10.1 3,477 (2.1) 13,150 11,381 15.5 EBIT 2,669 (450) NA 5,288 (49.5) 16,119 8,243 95.6 Finance Costs 1,046 1,172 (10.7) 1,042 0.4 4,429 2,808 57.7 PBT before excep items 1,623 (1,622) NA 4,247 (61.8) 11,690 5,434 115.1 Exceptional loss/ (profit) (10) - NA 13 (176.1) 127 - NA PBT after excep items 1,632 (1,622) NA 4,234 (61.4) 11,562 5,434 112.8 Tax expense 336 (276) NA 1,361 (75.3) 3,598 670 436.6 Reported PAT 1,297 (1,346) NA 2,873 (54.9) 7,965 4,764 67.2 Adjusted PAT 1,287 (1,346) NA 2,885 (55.4) 8,092 4,764 69.9 Adj EPS (Rs) 2.0 (2.1) NA 4.5 (54.9) 13.9 8.3 67.2 Source: Company, BOBCAPS Research Fig 2 – Key parameters – Consolidated (%) Q1FY22 Q1FY21 YoY (bps) Q4FY21 QoQ (bps) FY21 FY20 YoY (bps) Gross margin 42.8 43.2 (49) 45.1 (236) 45.8 44.4 139 EBITDA margin 12.4 8.3 411 16.2 (385) 15.8 11.7 405 EBIT margin 5.8 (1.6) 739 10.5 (470) 9.3 5.0 425 PBT margin 3.5 (5.6) 918 8.5 (491) 6.7 3.3 341 Tax rate 20.6 17.0 353 32.2 (1159) 31.1 12.3 1,878 Adj PAT margin 2.8 (4.7) 749 5.7 (293) 4.7 2.9 175 Source: Company, BOBCAPS Research Fig 3 – Region-wise performance – Consolidated (Rs mn) Q1FY22 Q1FY21 YoY (%) Q4FY21 QoQ (%) FY21 FY20 YoY (%) Revenues India 32,735 18,182 80.0 36,876 (11.2) 119,187 112,555 5.9 Europe 14,090 10,903 29.2 14,044 0.3 56,138 52,505 6.9 Other segment 9,987 2,575 287.8 8,872 12.6 25,276 25,781 (2.0) (less) Intersegment and others (10,958) (2,925) 274.6 (9,535) 14.9 (27,245) (27,571) (1.2) Total 45,854 28,734 59.6 50,257 (8.8) 173,356 163,270 6.2 EBIT India 1,795 360 398.5 4,400 (24.4) 14,695 8,000 83.7 Europe 544 (902) (160.3) 648 (45.2) 649 (571) (213.5) Other segment 330 91 260.8 240 (5.3) 775 814 (4.8) (less) Interest and other expenses (1,046) (1,172) (10.7) (1,042) (0.7) (4,429) (2,808) 57.7 Total 1,623 (1,622) (200.1) 4,246 (31.6) 11,689 5,434 115.1 EBIT Margin (%) (bps) (bps) (bps) India 5.5 2.0 350 11.9 (645) 12.3 7.1 522 Europe 3.9 (8.3) 1,213 4.6 (76) 1.2 (1.1) 224 Other segment 3.3 3.5 (25) 2.7 60 3.1 3.2 (9) Source: Company, BOBCAPS Research EQUITY RESEARCH 2 05 August 2021 APOLLO TYRES Valuation methodology We maintain our revenue and earnings estimates for FY22/FY23 and introduce forecasts for FY24, projecting a revenue/EBITDA /adj. PAT CAGR of +10%/+2%/-11% for APTY over FY21-FY24. Our FY22/FY23 EPS estimates are at Rs 7.9/Rs 9, which is 50%+ less than consensus. We diverge widely from the street as our gross margin assumptions of 43% for both years are ~200bps below consensus. APTY’s Q1 gross margin has weakened considerably and we do not see scope for quick recovery in the near term considering the steep increase in input cost and lag in price hikes taken by companies. We maintain our Mar’22 TP of Rs 140, set at an unchanged 16x FY23E EPS, in line with the stock’s seven-year average. Reiterate SELL. Fig 4 – Key assumptions (Rs mn) FY21 FY22E FY23E FY24E Indian Revenues 119,188 137,410 154,723 169,022 European Revenues 56,754 61,295 66,198 71,494 Total Revenues* 173,970 194,362 215,347 234,227 EBITDA 27,975 24,288 26,917 29,601 EBITDA (%) 16.1 12.5 12.5 12.6 Adj. PAT 3,502 5,031 5,708 6,737 EPS (Rs) 15.1 7.9 9.0 10.6 Source: Company, BOBCAPS Research| *Includes revenues from other segment and intersegment revenues Fig 5 – Peer comparison Target Revenue CAGR EPS (Rs) ROE (%) Target Company Ticker Rating Price (Rs) FY21-23E (%) FY22E FY23E FY22E FY23E P/E (x) CEAT CEAT IN SELL 840 15.7 57.5 59.9 7.0 6.8 14 Apollo Tyres APTY IN SELL 140 11.3 7.9 9.0 4.0 4.2 16 Balkrishna Inds BIL IN SELL 1,550 12.4 64.8 70.3 17.9 16.8 22 MRF MRF IN SELL 67,000 15.9 2,769.2 3,080.1 7.7 7.9 22 TVS Srichakra SRTY IN SELL 1,200 15.2 78.3 85.2 6.8 7.1 14 JK Tyres JKI IN SELL 90 12.8 8.0 12.6 6.6 9.6 7 Source: BOBCAPS Research Key risks Key upside risks to our estimates are: .