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  • Stock Recommendation: Apollo Tyres — Buy — TP Rs 340

    Publish date: July 18, 2018

    Annual report analysis

    Apollo Tyres had its fair share of battles in FY2018. The gain in market share was offset by a sharp hike in raw material prices, increase in start-up costs and a substantial decline in operating margins in Europe.

    Key Highlights

    • The company’s standalone revenue growth stood at 15.3% yoy , which was reflected in the share markets. (Click on ‘full report’ to get a detailed analysis)
    • Besides share market gains, the company was able to improve its working capital management. This was due to reduction in inventory days and increase in payable days.
    • Its EU business grew by 3% due to price increases but the operating margins slid by 300 basis points to 8.6% in FY2018. The slump was due to rise in employee cost and higher-than-expected costs needed to fire up its Hungarian plant. The new plant gave a net profit loss of around £12 million.
    • The increase in raw material prices has pinched the company. Carbon black prices shot up by 33% yoy, while chemicals and rubber jumped by 26% and 19% yoy respectively.
    • Exports to Europe were flattish. We expect the export volume to decline in future, which would pave the way for stronger domestic growth.
    • The company has increased its R&D spending, especially in Europe.
    • The promoter’s salaries increased by 23% yoy.
    • The company’s tire production capacity increased by 8% in FY2018. We believe the production levels will be ramped up by a further 40% by FY2021E.
    • The tire manufacturer’s working capital needs increased due to upscaling of its production capacity, resulting in higher debt and lower free cash flow.

    Valuation & outlook

    We expect the profitability of its Europe business to improve once the Hungarian plant overcomes its teething problem. As a result, the company’s EBITDA margin is likely to improve by FY2021E.

    The truck, bus radial tires are also expected to perform better in the coming financial years.

    In short, we feel the company’s EPS will grow at 29% CAGR due to recovery in its Europe business, stronger commercial vehicle sales in India and a healthy market share gains.

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