Thursday, October 4, 2012

Apollo Tyre (March 2010)


OVERVIEW ABOUT THE COMPANY – APOLLO TYRES
Apollo tyres Limited is incorporated in 1972 and engaged in manufacture of automobiles tyres and tube. The Company has 9 tyre manufacturing site across the globe and annual consolidated revenue of Rs. 8,120 Crores for March 2010. The company is 17th largest producer of tyre in the world with installed capacity of 13.15 million per annum of automobiles tyres and tubes, is operating at 80% of its installed capacity.
The distribution network comprises sale of tyres to Original Equipment Manufacturers (OEM), Replacement category and for export. Replacement Category is the major contributor to the revenue consisting of approx 85% of total revenue of the company.

KEY DRIVERS FOR THE COMPANY
  1. Execution Capabilities: The Company is in tyre manufacture business since 39 years and has developed expertise in its line of operation. The Company is a leading player in Indian market commanding  20% to total market share.
  2. Diversified Customer Base: Segment wise major component of Revenue is from India comprising of 60% followed by Europe 27% and South Africa 13% based on Dec 2010(unaudited Result). Replacement category comprises 85% of revenue segmentation by customer and Original Equipment Manufacturers contributes to 15% of total revenue.
  3. Multiple Product: A wide range of products required by Indian Automobiles Industry is catered namely, Truck and Bus Tyre, Passenger Car Tyre, Light Commercial Vehicle tyres. The Company earns its major revenue from sale of Commercial Vehicle tyres. To take the advantage of increasing disposal income in India supported by availability of a variety of vehicle models meeting diverse needs and preferences and easy financing scheme for automobiles, the Company has launched passenger cars tyres for booming small car tyre segment. The increase in disposable income has led to increase in demand for passenger cars thereby the demand for tyres has also increased. The additional demand for passenger cars will create replacement demand in next 24- 48 months. Also, the growing economy has raised demand for freight movement across the nation. This has led to increase in demand for commercial vehicles and tyre demand from Original Equipment Manufacturers, supported by replacement demand in next 12 -18 months.
  4.  First Mover Advantage: The Company has a first mover advantage in its Chennai Plant. Chennai plant currently produces 7000 passenger vehicle tyres and 1300 commercial vehicle tyres a day. And by March 2012, its estimated production is expected to reach 16,000 passenger vehicle and 6,000 commercial vehicle tyres a day.
  5. Established Distribution Channel: The company is enjoying robust distribution network in India. Post acquisition of Vredestein Banden BV in Europe in May 2009, the company is benefitted with healthy distribution channel in Europe. This acquisition adds feature to company’s plan to become market leader in Europe region. For this, the Company has launched ‘Winter Tyres’ for European Region in range of passenger cars of 4X4 tyres. The European market provides profitability margin to the tune of 16% compare to Indian market of 8-10%.
  6. Beneficial Government Policies: To secure the interest of domestic player, Government of India has imposed anti dumping duty on imports from China and Thailand for the period of 5 years from February 2010 onwards. 

CHALLENGES FOR THE COMPANY
  1. No Presence in Two and Three Wheeler Category:The Company does not have much presence in two and three wheeler tyre segment in India. With Increase in disposal income, the demand of two and three wheeler is expected to increase.
  2. Increase in cost of raw Material: Tyre Industry is highly raw-material intensive. Raw materials cost accounts for approx. 63% of tyre industry turnover and 72% of production cost. Raw Material primarily comprises of natural rubber, nylon tyre cord and carbon black. With rise in price of natural rubber touching mark of Rs. 185/kg in Q3FY11 there is huge pressure on profitability margin.
  3. Threat from Multinational Players: Multinational players like Bridgestone and Goodyear Tyres has robust research and development facilities and spends huge on marketing to capture market share.
  4. Foreign Currency Volatility: The export comprises 40% of total revenue. As a result the company is exposed to foreign currency fluctuations in respect of proceeds received in various foreign currency.  Major Customers are located in Europe and South Africe. The fluctuation in the exchange rate between the rupee and other currencies, including the USD, Pound Sterling, Euro etc. may adversely impact the financials.

INDUSTRY OVERVIEW:

The Indian Tyre Industry has total turnover of Rs. 25,000 Crores with Tyre production is 13.50 lakh MT (FY 2009 -10E).  There are 50 tyre manufacturers across India. However, the industry is dominated by 4 Major Player namely, Apollo Tyres Limited, CEAT Limited, MRF Limited, JK Tyres and Industries Limited with total market share of 75%.Of total production, only 13.06% in value is exported by India. The major export element is Truck and Bus category followed by passenger car.

This industry is highly Capital Intensive. The success in the industry is depended on having robust distribution network and product branding.

The performance of commercial vehicle tyres is directly linked to the country’s economic development and the performance of automobiles industry.

According to research report “India Auto Component Market Analysis”, India’s fast and continuous economic growth has proved highly beneficial for its auto component industry. With advantages like low labor cost, easy availability of raw materials and well-qualified employees, India has established a solid platform for the growth of auto component suppliers. The report has also revealed that various supporting factors such as increasing demand from the domestic automobile industry and surging exports will support the auto component production grow at a CAGR of around 15% by FY 2014.

With rising Industrial and Agricultural output, Favourable demographic distribution with rising working population and middle class Urbanisation, and Fast growing economy  will infuse production of passenger carrier tyre demand in the country. It is anticipated that the commercial vehicle tyre market will climb to Rs 22.8 Billion by FY 2014.

Also, the connectivity among the villages and cities is improved with the country with better road infrastructure. The project of Golden Quadrilateral and Highways connecting North-South and East -West corridors has favored the tyre industry.

The radialisation in India has not reached its optimum capacity because of poor road condition and high inital cost. The passenger car tyre segment where radialisation has crossed 98% mark and is expected to reach 100% in two to three years. In the Medium and Heavy Commercial vehical segment current level of radialisation upto 12%, and that in the LCV segment is estimated at 18%. Compared to developed country which has achieved 100% radialisation, there is lots of scope for Indian players to expand. Introduction of Capex in Radialisation will enable Indian players to compete globally.
Retreading is a process of applying a new TREAD over the body of the worn tyre, thereby the tyre functions like a new one at 50% of the cost of new tyre. At present only 3 -4 organised players are operating in this segment. There exist ample of opportunity for the players to expand in this category.


RELATIVE VALUATION
Name of the Company
Apollo Tyres Ltd
  CEAT Ltd
  JK Tyre & Industries Ltd
  MRF Ltd
CMP (Rs.)
              65.00
            102.00
                        91.00
        6,589.00
TTM Sales (Rs. In Crores)
        5,041.63
        3,263.45
                  4,515.46
        7,950.84
M. Cap (Rs. In Crores)
        3,270.96
            350.28
                     372.00
        2,793.57
P/E (x)
                 7.90
                 2.20
                          2.30
                 8.10
EV/ Sales (x)
                 0.82
                 0.31
                          0.32
                 0.50
EV/ EBIDTA (x)
                 5.28
                 2.90
                          2.89
                 4.51
M. Cap / Sales (x)
                 0.65
                 0.12
                          0.10
                 0.38
OPM %
              15.60
              10.60
                        11.00
              11.00
NPM%
                 8.29
                 5.75
                          4.44
                 4.67
RONW%
              26.98
              28.95
                        31.71
              23.20
Price/ Book Value
                 1.90
                 0.56
                          0.64
                 1.65
EPS
                 8.20
              46.50
                        39.20
            811.00

Comments:
  1. Apollo Tyres Limited contributes to 32% of total market capital of tyre industries.
  2. Apollo tyres Limited has higher P/E compare to its peers CEAT Limited and JK Tyres and Industries Limited. The stock of Apollo Tyres Limited is overpriced indicating the investors perceive better opportunities in the company compares to its peers. 
  3. Higher price to book value for Apollo Tyres Limited indicated that that stock is overvalued compared to its peers.
  4. With operating Profit margin of 15.60% and net operating margin of 8.29%, the company is leading players in the sector in terms of profitability indicating better efficiency.
  5. RONW of 26.98% which is lower compared to its peers implies that company is not efficiently converting its capital into profit as its peers are.
  6. Apollo Tyres Limited has highest EV/EBITDA among its peers. High ratio indicates that it will be difficult for its peers to acquire it.  It also provides the company to acquire it peers as it would take approx 3 years for EBIDTA to pay off acquisition cost of CEAT Limited and JK Tyres and Industries Limited and approx 4 years for MRF Tyres Limited.