Apollo Tyres

Putting the slowdown blues behind,Apollo Tyres has acquired companies overseas and is investing to tap the domestic market which is on an uptick

APOLLO Tyres, the secondlargest player in the tyre industry, (in terms of revenues) is likely to overtake MRF to become India’s largest tyre-maker after the recent acquisition of Dutch company Vredestein Banden BV. Inorganic growth, expansion in domestic market and improving operational efficiency make Apollo Tyres a good long-term bet for the investors.

BUSINESS:

Apollo Tyres (ATL), the flagship company of the Raunaq Singh Group primarily engaged in manufacturing of automobile tyres, tubes and flaps had consolidated revenues of Rs 4,984 crore for the year ended March ‘09. It has production capacity of around 850 tonnes/day in the domestic market and 300 tonnes/day from international operations. The company is a dominant player in the commercial vehicles segment. Till FY09, the company had a 27.3% market share in truck & bus tyres and 24% share in the domestic light commercial vehicle tyres. Introduction of radial tyres in the passenger car category helped the company to increase its presence in the car segment in the recent years. The company is building up capacity for radial tyres for trucks, thus readying itself for the next generation trucks.

GROWTH PLANS:

The company has undertaken couple of overseas acquisitions in the last one year. This is as per its strategy to diversify its presence globally and generate nearly 60% of its revenues from the overseas market.

Recently in May this year, Apollo announced the acquisition of Dutch tyre-maker Vredestein Banden BV for Rs 1,200-1,500 crore. Apollo Tyres plans to fund this acquisition with a mix of internal accruals and debt financing. Vredestein Banden BV has a strong sales and marketing network besides a production unit in Enschede, The Netherlands with capacity of 55 lakh tyres. It will give Apollo access to the challenging European market. Revenues from Vredestein Banden BV will be reflected in Apollo’s accounts from the current quarter of April – June 2009. The company is also planning a greenfield unit in Hungary. But this project has now been deferred due to global economic slowdown, which has hit the auto sector badly.

However, the company is bullish on the domestic demand and is making investment also expanding to tap the market in the country. To increase its presence in the radial tyres segment of commercial vehicles, Apollo Tyres has made an investment of about Rs 1,300 crore in Chennai for a greenfield project, which is likely to be operational by the end of this year. This plant, with facilities to make radial tyres for both trucks and cars, is going to have capacity of 180 tonnes/day, which can be augmented, to 450 tonnes/day depending on the demand. On a consolidated basis, Apollo Tyres’ turnover is projected to reach around Rs 7,500-8,000 crore for the year ending March ‘10, making it the largest tyre company in India in terms of revenues. In 2006, Apollo Tyres had acquired Dunlop South Africa. The acquisition gave the company a strong foothold in the African continent including a sales network of branded Dunlop Zones, besides two manufacturing units in Durban and Ladysmith.

FINANCIALS:

The year ended March ‘09 had been a challenging year for the company. Sales growth slowed to 6% from compounded annual growth (CAGR) of 18% in the previous three years on the consolidated basis. But the positive news is that rubber price has come down and is expected to get reflected in the financials in the coming quarters. Further, with demand for automobiles improving, the company is expected to register reasonable sales growth in the coming quarters. The industry, which registered a growth of only 2.2% for nine months ending Dec’08, has since recovered and is estimated to have recorded better demand as auto sales have improved. During the latest quarter ended June ’09, Apollo Tyres topline rose 10% to Rs 1,180 crore from the year-ago level on the standalone basis. Operating profit grew 75% to Rs 194 crore, while net profit nearly doubled to Rs 94 crore.

VALUATIONS:

At its current market price, the stock is trading at 13.78 times its earnings per share (EPS) for the yearended march ‘09 on the consolidated basis. In contrast its closest competitor, MRF is trading at a price-to-earnings (P/E) multiple of nearly 24. Assuming a modest 12-15% annual growth in revenues and continued improvement in operating margins, Apollo Tyres oneyear forward P/E ratio works out to around 9.4, which provides ample upside potential to long-term investors. Besides, Apollo Tyre has a dividend yield of 1.2%, which will only improve as profit grows.