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may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.


All worn out
As radialisation progresses in the truck-bus tyre market and as MNCs
presence in the Indian tyre market increases, domestic manufacturers,
like Apollo, are likely to lose market share. This combined with capacity
constraints at Vredestein and highly capital-intensive nature of the
industry is likely to pull down Apollos RoE sharply over FY14-18. Given
that the stock is up 62% in the last three months, we change our stance
to SELL in spite of raising our TP from `130 to `186.

Competitive position: MODERATE Changes to this position: NEGATIVE
Increasing truck-bus radialisation to impact domestic players
We believe the increased focus of MNCs (such as Michelin and Bridgestone) and
technological advantages in truck bus & radial (TBR) tyres would result in market
share loss for domestic players such as Apollo. Similarly, increased radialisation
means that demand for truck & bus bias tyres would remain stagnant in the
coming years. Overall, we believe Apollos standalone revenues would record
only 8% CAGR over FY14-18E.
Capacity constraint to limit revenue growth at Vredestein
Limited headroom for capacity expansion at Vredestein in the near term (with
the new plant in Eastern Europe to kick off production only in 2HFY17) could
restrict Vredesteins revenue growth to only 5% over FY14-16. Furthermore,
whilst exports from Apollo to Vredestein have been increasing, it is unlikely to
meaningfully contribute to Vredesteins volumes.
Decline in rubber prices offset by increase in other raw material costs
The management has indicated that the positive impact of declining rubber
prices would be offset by an increase in the prices of other raw materials, such
as carbon black and tyre rod fabric. We believe this would restrict EBITDA
margin expansion to around 50bps over FY14-16. That said, a significant drop
in rubber prices from the current levels could lead to sharp increases in margins,
which is the key risk to our earnings and valuation estimates.
Downgrade to SELL with TP of `186, implying 8.7x FY16 EPS
The intensely competitive nature of the domestic market and the highly capital-
intensive nature of the business are likely to result in RoEs falling post FY14. Our
DCF assumes a WACC of 14% and terminal growth of 4%, translating into a July
2015 target price of `186 (7% downside and 43% higher than our previous TP).
Our TP implies 8.7x FY16 net earnings. The stocks run up in recent months (up
62% in the last three months) forces us to turn SELLers.

Apollo Tyres
SELL
CHANGE IN STANCE APTY IN EQUITY June 16, 2014
Auto & Auto Ancillaries
Recommendation
Mcap (bn): `101/US$1.7
3M ADV (mn): `915/US$15.4
CMP: `200
TP (12 mths): `186
Downside (%): 7
Flags
Accounting: AMBER
Predictability: AMBER
Earnings Momentum: GREEN
Catalysts
Market share loss in replacement TBR tyre
segment
Performance

Source: Bloomberg, Ambit Capital research



Analyst Details
Ashvin Shetty, CFA
+91 22 3043 3285
ashvinshetty@ambitcapital.com
Ritu Modi
+91 22 3043 3292
ritumodi@ambitcapital.com

50
100
150
200
250
15,000
20,000
25,000
30,000
J
u
n
-
1
3
J
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-
1
3
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p
-
1
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1
4
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-
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4
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-
1
4
Sensex Apollo Tyres (Rs)
Key financials (consolidated ` mn unless specified)
Year to March FY12 FY13 FY14 FY15E FY16E
Net Sales 121,533 127,946 133,378 142,547 151,113
EBITDA 11,661 14,567 18,363 19,452 19,947
EBITDA (%) 9.6% 11.4% 13.8% 13.6% 13.2%
EPS (`) 8.72 11.8 19.5 20.5 21.4
RoE (%) 16.7% 19.1% 24.7% 20.6% 18.0%
RoCE (%) 15.5% 17.9% 23.9% 25.9% 23.8%
P/E (x) 23.0 16.9 10.2 9.8 9.3
Source: Company, Ambit Capital research


Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 2

Increasing radialisation in TBR tyres An
advantage for MNCs?
After remaining stagnant for a large part of the last decade, radialisation in truck &
bus tyres has caught on strongly in recent years. Some of the reasons for this
phenomenon are:
Increased adoption of truck-bus radial (TBR) tyres by OEMs in India, especially
with the advent of the global OEM players such as Volvo and Daimler and also
the development of advanced truck platforms by domestic OEMs such as Tata
Motors (Prima trucks) and Ashok Leyland (U-trucks); and
Increasing affordability of TBR tyres due to the influx of the cheap Chinese radial
tyres, which also helped in creating awareness/increasing use of TBR tyres.
Whilst TBR tyre imports accounted for nearly 56% of the total Indian TBR tyre
consumption until FY11, its share has declined significantly since FY12 due to the
implementation of BIS norms governing the quality of the tyres and due to significant
TBR tyre capacity additions by the domestic players.
As per industry sources, the level of radialisation in the truck-bus segment has
increased from around 5% in FY08 to around 25-30% currently. The level of
radialisation is much higher in the truck-bus OEM segment (45-50%) as compared to
the after-sales market (20-25%).
TBR tyres have clear advantages over truck bus bias (TBB) tyres. Some of the areas
where TBR tyres score over TBB tyres are:
Higher mileage partly driven by lower breakdown levels;
Longer life radial tyres have longer life during the original run (which is around
1.5x that of the radial tyres) as well as post retreading;
Safety; and
Lower cost of ownership (a derivative of higher mileage and lower breakdown).
Whilst TBR tyres enjoy several advantages over TBB tyres, the replacement market
continues to be dominated by bias tyres due to:
(a) High initial cost of TBR tyres (20-25% premium to TBB tyres);
(b) Rampant overloading and poor road conditions in most parts of India which
negate the effectiveness of radial tyres. To counter this, many tyre manufacturers
have started offering radial tyres which can withstand overloading to some extent
(though not to the extent of bias tyres).
Despite the current preference towards bias tyres over radial tyres particularly
amongst fleet operators, we believe that radialisation would continue to increase in
the coming years. Our belief stems from:
(a) Continued step-up in the adoption of TBR tyres in the OEM segment: One of the
factors for the near 100% radialisation in the passenger vehicle (PV) segment was
aggressive adoption of the radial tyres by the PV OEMs in the 1990s. As more
and more new vehicles are factory fitted with radial tyres, the adoption of the
radial tyres would increase when these tyres are due for replacement.
(b) A significant increase in the radial tyre capacities by domestic as well as
international players (see Exhibit 2 on page 3): With significant capacities coming
on stream, we believe tyre manufacturers would strive to raise the awareness of
the benefits/advantages of TB`.
(c) An improvement in road infrastructure, over the longer term in India.
(d) Regulations regarding overloading and stricter enforcement of the same in the
coming years.
Increasing penetration of
radial tyres in the truck & bus
segment

Source: Industry, Ambit Capital research

0%
10%
20%
30%
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
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1
0
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1
1
F
Y
1
2
F
Y
1
3
Radial tyres score over bias
tyres on most parameters
Performance
factors
Radial Bias
Life
Fuel consumption
Safety
Cost of Ownership
Overloading
Source: Industry, Ambit Capital research



Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 3

We estimate that the level of radialisation in the truck-bus tyre segment would
increase from 25-30% currently to 50% by FY18. Whilst this is nearly twice the current
radialisation levels, it would be still lower than that of radialisation levels in other
countries (refer to the exhibit below). We believe that even five years hence, bias
would still account for around 50% of the overall truck-bus tyre market due to its
preference amongst the price-conscious small fleet operators. However, at the same
time, the rising trend of radialisation implies that the bias market would remain
stagnant (and in fact decline) over the coming years.
Exhibit 1: Radialisation levels in India are significantly lower than in other countries

Source: Industry, Ambit Capital research
Advantage MNCs in TBR
Given that radialisation has reached a respectable level in the Indian truck-bus tyre
market, several international players have recently forayed/announced their intention
to set up TBR tyre capacities in India (see the exhibit below). MNCs have been absent
in the Indian TBB segment, except for Continental Tyres which has some TBB tyre
capacity owing to the acquistion of Modi Rubber in July 2011. Our dealer discussions
indicate that Michelins plant in India has come on stream and it has started
supplying TBR tyres from this plant to the Indian market. (Michelin was hitherto
relying on imports to cater to the Indian TBR demand.)
Exhibit 2: Expansion plans of tyre companies
Company
Existing capacity
(MT/day)
Comments
Apollo Tyres 360
The capacity at Chennai can be expanded 50% further,
based on the demand.
Ceat 81 No expansion plans in TBR
JK Tyres 244 133MT capacity to be added at Chennai and Vikrant tyres
MRF 150
Company has not indicated any plans, however there is
enough land available for brownfield expansion
Birla 85 No expansion plans in TBR
Michelin 15 Capacity to ramp up to 300 MT/day
Bridgestone 24
Additional 60MT/day at Chakan (Pune) by CY15. Eventual
plan to expand to 180MT/day at Chakan by CY17
Continental - Capacity to ramp up to 167 MT/day
Source: Industry, Press articles, Ambit Capital research. Note: We have assumed 60kg per tyre weight and 360
operational days in a year for conversion into metric tonnes (MT)/day
Our discussions with industry sources (dealers, domestic tyre companies and fleet
operators) indicate that MNCs have clear technological/quality advantages over their
domestic counterparts in the TBR segment. On the other hand, domestic players score
higher on competitive pricing (currently Michelin TBR tyres are priced at a nearly 10-
15% premium to its domestic peers) and superior dealer/service network. Based on
the current announcements available, we believe MNCs would account for nearly
30% of the total TBR capacities by FY18 as compared to the very negligible capacity
of around 2-3% currently. We expect MNC players market share in the TBR
segment to mirror their capacity share by FY18.
100%
96%
95%
87%
72%
68%
65%
52%
26%
0% 20% 40% 60% 80% 100%
Western Europe
North America
Central Europe
China
Africa/Middle East
World
South America
Asia
India


Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 4

Implication for Apollo Tyres
Amongst the Indian players, Apollo Tyres is ranked higher on brand/quality than
other domestic players as far the TBR segment is concerned, partly emanating from
Apollos first-mover advantage in the TBR segment. As per company filings, Apollo
currently commands a market share of close to 28% in the domestic TBR segment.
Given the increasing radialisation of truck-bus tyres and rising focus of MNCs in the
TBR segment, we believe domestic players would cede market share to the
international players. (As explained above, we expect the MNCs market share in TBR
to increase to 30% by FY18 from ~2-3% currently.) Hence, we expect Apollos market
share in TBR tyres to decline from 28% currently to 22% by FY18.
We expect the overall truck-bus replacement market to record volume CAGR of 5%
over FY14-18E (marginally lower than the historical long-term average of 7-8% due
to the higher life of radial tyres). Given our expectation of TBR accounting for nearly
50% of total replacement industry by FY18 (vs 25-30% now), we expect the
replacement industrys TBR volumes to record 17% CAGR over FY14-18E. However,
with Apollo losing market share in the TBR segment, we expect its replacement TBR
volumes to expand lower than the industry at a CAGR of 10% over FY14-18E. On the
other hand, due to overall industry growth challenges in the truck bias tyres space
(due to the reasons explained above), we expect Apollos TBB tyre volumes in the
replacement segment to record a decline of 3% CAGR over FY14-18 (despite it
retaining its market share in the TBB segment).
Given that the truck-bus segment accounts for 64% of Apollos standalone
revenues and given the volume growth challenges in this segment, we
believe Apollos standalone volume growth would be restricted to 7% over
FY14-18E (vs 14% over FY10-14).
Exhibit 3: We expect Apollos volumes to record 7% CAGR over FY14-18
YoY volume growth
(standalone business)
FY14 FY15 FY16 FY17 FY18
TBB tyres -8% -1% 0% 0% -1%
TBR tyres 9% 15% 12% 7% 9%
Total truck bus tyres (OEM +
replacement)
-2% 5% 5% 3% 4%
PCR tyres 8% 10% 10% 10% 9%
Others segments 7% 15% 15% 15% 10%
Total volumes 1% 8% 8% 7% 6%
Source: Company, Ambit Capital research.


Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 5

Capacity constraints at Vredestein to
restrict revenue growth
Currently, Apollo Vredestein is operating at utilisation levels of more than 90%. The
management has indicated that there is very little scope for further capacity
expansion at Vredestein. (Vredesteins capacity has been recently expanded from
6.5mn tyres p.a. to 7mn tyres p.a.) The trend of exports from Apollo to Vredestein has
been increasing; however, Apollo with its lower price positioning caters to a different
segment as compared to Vredesteins niche premium category positioning. Also, as
per the managements guidance itself (for FY15), incremental exports from Apollo to
Vredestein will account for only 5% of total volumes of Vredestein for FY15.
The company plans to set up a greenfield project in Eastern Europe at a cost of
Euro500mn over the next four years. The plant would have a capacity of 16,000
passenger car tyres/day and 3,000 truck bus radial tyres/day. The capex on this
project will commence from FY16 and production at these plants is likely to start in
2HFY17. Hence, this plant would not be able to cater to Vredesteins FY15 and FY16
requirements.
As a result of the above, we expect Vredestein revenues to record only 5% CAGR over
FY14-16E.
Exhibit 4: We expect Vredesteins revenues to record 5% CAGR over FY14-16
` mn unless specified FY13 FY14 FY15 FY16
Revenues 29,821 39,426 43,349 43,349
YoY growth 5% 32% 10% 0%
% contribution to consolidated revenues 22% 28% 29% 26%
Source: Company, Ambit Capital research




Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 6

Key risks Rubber price movement
Given the current declining trend in rubber prices, we have factored in a 5% YoY
decline in rubber prices for FY15. However, the management has indicated the
increase in prices of other raw materials (carbon black and tyre rod fabric) has offset
the positive impact of declining rubber prices, which will restrict the scope of
significant margin expansion. We expect EBITDA margins to expand 50bps over
FY14-16. Any significant drop in rubber prices from the current levels could lead to
sharp increases in margins and pose a risk to our earnings and valuations
estimates.
Exhibit 5: Sensitivity of earnings and target price to rubber price movement

Base
assumption
YoY change in rubber prices (FY15)
-5% 0% -3% -5% -8% -10% -12%
EBITDA margin

FY15 (bps) 13.1% (195) (78) - 117 195 273
FY16 (bps) 12.7% (199) (80) - 120 199 279
EPS (`)

FY15 11.7 -22% -9% 0% 13% 22% 31%
FY16 13.4 -22% -9% 0% 13% 22% 31%
Target Price (`) 182 167 179 186 198 206 213
change in TP 0% -8% -2% 2% 9% 13% 17%
Source: Ambit Capital research. Note: We have kept FY16 YoY growth in rubber prices constant while doing the
sensitivity analysis









Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 7

Key assumptions and estimates
Exhibit 6: Key assumptions and estimates
` mn unless specified FY13 FY14 FY15E FY16E Remarks
India business (standalone)


Revenue 85,075 86,375 93,476 101,813
Given our expectation of recovery in the OEM segment in 2HFY15,
we factor a volume CAGR of 8% over FY14-16 vs 2% over FY12-14.
Revenue growth 4.3% 1.5% 8.2% 8.9%
EBITDA 8,982 10,547 12,230 12,930
Benign rubber prices to continue aiding margins going forward. As a
result, we expect EBITDA margin in FY15 and FY16 to be higher than
FY14 level.
EBITDA margin 10.6% 12.2% 13.1% 12.7%
Europe (Vredestein)

Revenue 29,821 39,426 43,349 43,349
We expect Apollo Vredestein to post revenue growth of only 5% over
FY14-16 given capacity constraint at Apollo Vredestein.
Revenue growth 4.6% 32.2% 10.0% 0.0%
EBITDA 5,282 6,645 6,936 6,719
FY13 and FY14 margin had one-off benefits; hence, FY15 and FY16
margin to be lower than FY13/FY14 levels.
EBITDA margin 17.7% 16.9% 16.0% 15.5%
Consolidated (post inter-company elimination)
Revenue 127,946 133,378 142,547 151,113
We expect revenue growth of 6% over FY14-16 (marginally higher
than FY13 and FY14 levels) driven to improvement in demand in the
OEM segment.
Revenue growth 5% 4% 7% 6%
EBITDA 14,567 18,363 19,452 19,947
Consolidated EBITDA margin to marginally decline in FY15 and FY16
(despite an improvement in standalone business margin) due to
decline in Vredestein margin.
EBITDA margin 11.4% 13.8% 13.6% 13.2%
PAT (normalised) 5,958 9,846 10,420 10,914
Net earnings performance to mirror the EBITDA performance of 4%
CAGR over FY14-16. Higher tax rates will more than offset the
positive impact of decrease in interest expenses (due to reduction in
debt levels), impacting the net earnings.
Normalised PAT margin 4.7% 7.4% 7.3% 7.2%
Fully Diluted EPS (`) 11.8 19.5 20.5 21.4
Fully Diluted EPS growth 36% 65% 5% 5%
Capex (ex-acquisitions) (5,999) (3,500) (2,851) (15,054)
Significant portion of capex in FY16 towards setting up a new facility
in Eastern Europe and expansion of TBR capacity in India.
Net CFO 12,781 18,068 15,893 16,063
Strong CFO and limited capex to result in healthy FCF generation
and net debt reduction in FY15. However, significant capex in FY16
will limit FCF generation.
Net debt 26,507 16,141 13,141 8,141
Free cash flow 6,782 14,569 13,042 1,008
Source: Company, Ambit Capital research
Exhibit 7: Change in estimates

New estimates Old estimates Change (%)
Comments
FY15E FY16E FY15E FY16E FY15E FY16E
Standalone


Net sales (` mn) 93,476 101,813 90,228 95,641 4% 6%
Our expectation of a recovery in the OEM segment leads to
upgrades to our FY15 and FY16 revenue assumptions.
EBITDA (` mn) 12,230 12,930 11,378 11,774 7% 10%
We have upgraded our FY15/FY16 margin estimates based on
continued benign rubber prices.
EBITDA margin (%) 13.1% 12.7% 12.6% 12.3% 47bps 39bps
PBT (` mn) 8,407 9,631 7,156 8,023 17% 20%
Reduction in debt estimates lead to reduction in interest
expenses resulting in higher (vs EBITDA) upgrades to our
FY15/16 PBT estimates.
PAT (` mn) 5,969 6,838 4,795 5,375 24% 27%
Lower tax rate (as guided by the management in 4QFY14) leads
to significant upgrades to our FY15/16 earnings estimates.
EPS (`) 11.7 13.4 9.5 10.7 23% 26%
Consolidated


Net sales (` mn) 142,547 151,113 141,940 149,502 0% 1%
Revenue performance of the international business (Vredestein)
likely to be impacted by capacity constraints.
EBITDA (` mn) 19,452 19,947 17,654 18,300 10% 9%
Benign rubber prices lead to upgrades in our FY15/FY16 margin
estimates.
EBITDA margin (%) 13.6% 13.2% 12.4% 12.2% 121bps 96bps
PBT (` mn) 14,187 14,924 11,607 12,513 22% 19%
Reduction in debt estimates at the standalone level lead to
reduction in overall interest expenses and thus upgrades to our
PBT estimates.
PAT (` mn) 10,420 10,914 8,231 8,759 27% 25%
Lower tax rate guidance (both for standalone as well as
international operations) leads to significant upgrades to our
earnings estimates.
EPS (`) 20.5 21.4 16.3 17.4 25% 23%
Source: Ambit Capital research


Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 8

Exhibit 8: Ambit vs consensus (consolidated)

Ambit Consensus Divergence Remarks
Revenues (` mn)

Our revenue, margin and net
earnings estimates are largely in line
with consensus estimates.
FY15E 142,547 144,166 -1%
FY16E 151,113 159,040 -5%
EBITDA (` mn)

FY15E 19,452 19,157 2%
FY16E 19,947 20,934 -5%
EPS (`)

FY15E 20.5 20.3 1%
FY16E 21.4 22.6 -5%
Source: Bloomberg, Ambit Capital research



Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 9

Valuation Turning SELLers
We expect RoE to fall sharply post FY14 due to the intensely competitive nature of the
domestic market as well as the highly capital-intensive nature of the business. Our
DCF assumes a WACC of 14% and terminal growth of 4%, translating to a July 2015
target price of `186, implying 7% downside and 43% higher than our previous TP on
the stock. The fair value so arrived at implies a multiple of 8.7x FY16 net earnings,
which is at a premium of around 20% to the average multiple at which Apollo has
traded over the past four years and 13% higher than the valuation multiple implied
by our previous valuation. Given the sustained drop in rubber prices over the past 2-
2.5 years, we have increased our near term (as discussed in Exhibit 7 above) as well
as long-term sustainable EBITDA margin for the company, which results in a premium
to the historical multiple.
Whilst we have upgraded our earnings and valuation estimates for the stock,
the stock price run-up in recent months (up 62% in the last three months)
leaves no room for an upside. Consequently, we turn SELLers on the stock.
Exhibit 9: FCF profile (consolidated)

Source: Ambit Capital research
Exhibit 10: FCF assumptions (consolidated)
PV of FCF for forecasting period (FY16- FY25) (` mn) 44,834
Terminal value (` mn) 48,841
Enterprise value (` mn) 93,674
Less: net debt/ (cash) at 31 March 2015 (` mn) (1,207)
Implied equity value (` mn) 94,881
Fully diluted equity shares (mn) 509
Implied equity value (`/share) 186
Source: Ambit Capital research


10%
12%
14%
16%
18%
20%
(500)
1,000
2,500
4,000
5,500
7,000
8,500
F
Y
1
6
E
F
Y
1
7
E
F
Y
1
8
E
F
Y
1
9
E
F
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2
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2
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2
2
E
F
Y
2
3
E
F
Y
2
4
E
F
Y
2
5
E
PVFF (LHS) WACC (RHS) RoE (RHS)


Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 10

Relative valuation
On a relative valuation comparison with domestic peers, Apollo Tyres is trading at a
premium of 52% based on FY16 net earnings and a 35% premium on FY16
EV/EBITDA. However, the peer group coverage suffers from inadequate coverage
(with only 6-7 broker estimates for the peer group). The recent rally in the stock price
(up 62% in the past three months) has further led to the valuation multiple expansion.
On the other hand, Apollo Tyres is trading at a significant discount to global players.
Exhibit 11: Comparative valuation
Crcy CMP
Mcap EV/EBITDA (x) P/E (x) CAGR (FY14-16) ROE (%)
Price perf
(%)
US$ mn FY14 FY15 FY16 FY14 FY15 FY16 Sales EBITDA EPS FY14 FY15 FY16 3m 6m 1 yr
India
MRF# INR 23,867 1,709 5.7 5.6 5.0 12.6 12.1 10.1 12 7 12 25 20 20 15 22 63
Apollo Tyres INR 209 1,774 5.8 5.7 5.2 10.5 10.4 9.3 9 6 6 25 20 19 62 151 127
Ceat^ INR 465 282 4.1 3.7 3.3 6.5 5.7 5.0 14 13 14 30 25 23 18 43 336
JK Tyres INR 287 199 3.9 3.7 3.2 4.5 4.0 3.3 10 10 17 26 27 29 79 74 153
Average (ex-Apollo)

4.6 4.3 3.8 7.9 7.2 6.1

Other Asia/Japan*

Bridgestone Corp JPY 3,694 29,421 5.2 4.8 4.6 11.1 9.5 9.0 5 7 11 17 16 15 (1) (2) 15
Sumitomo Rubber JPY 1,577 4,063 6.2 5.6 5.3 9.9 8.6 8.0 6 9 11 15 14 14 16 11 5
Cheng Shin Rubber TWD 80 8,650 9.7 8.5 8.0 14.4 13.2 12.2 6 10 9 26 23 22 3 7 (0)
Average

7.1 6.3 6.0 11.8 10.4 9.7

Europe*

Pirelli & C SpA EUR 12 8,206 6.9 6.6 5.9 16.9 13.8 11.9 3 8 19 14 16 17 4 12 39
Continental AG EUR 173 46,903 8.1 7.2 6.5 15.4 13.7 12.0 7 11 13 23 25 23 2 14 74
Michelin EUR 92 23,207 5.4 5.1 4.6 12.3 11.6 10.3 2 8 9 15 15 15 5 23 40
Nokian Renkaat EUR 30 5,409 8.1 8.6 7.8 13.6 14.8 12.7 2 2 4 17 20 22 3 (12) (2)
Delticom AG EUR 34 542 0.5 0.9 1.4 29.3 27.5 19.3 14 22 23 22 23 30 (4) (3) (11)
Average

5.8 5.7 5.3 17.5 16.3 13.2

North America*

Goodyear Tire USD 26 6,502 6.3 5.7 5.2 10.4 9.1 8.0 (0) 11 14 64 36 30 (4) 17 75
Cooper Tire USD 29 1,872 5.7 4.7 4.7 16.6 11.2 11.2 4 11 22 13 16 14 28 23 (15)
Titan USD 17 893 6.5 11.8 7.3 18.1 37.6 17.2 1 (6) 3 11 8 NA (8) (1) (7)
Average

6.2 7.4 5.7 15.0 19.3 12.1

Source: Bloomberg, Ambit Capital research. Note: * indicates December-ending (CY13=FY14); ^ indicates that financials pertain to standalone entity; #indicates
September-ending company







Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 11

Cross-cycle valuation
On a cross-cycle basis, Apollo Tyres is currently trading at 10.0x 12-month rolling
forward consensus net earnings. This is at a significant 50% premium to the three-
year average. Despite improving outlook and benign rubber prices, we expect the
company to record an earnings growth of only 4% over FY14-16 due to higher tax
rates.
Exhibit 12: Cross-cycle P/E band

Source: Bloomberg, Ambit Capital research. Note: P/E bands arrived at
using Bloomberg consensus estimates for respective periods
Exhibit 13: Cross-cycle EV/EBITDA band

Source: Bloomberg, Ambit Capital research. Note: EV/EBITDA bands arrived
at using Bloomberg consensus estimates for respective periods

Exhibit 14: Explanation for our forensic accounting scores on the cover page
Segment Score Comments
Accounting AMBER
Apollos average accounting score based on Ambits forensic accounting analysis ranks in line with the sector
(auto-ancillary) average.
Predictability AMBER
Quarterly earnings reported by the company tend to be unpredictable. Given the high level of fixed costs
(including depreciation and interest expenses), any marginal outperformance/underperformance at the topline
level tends to have a magnified impact at the net earnings level. However, this is an industry-wide
phenomenon. That said, the company has been regular in communicating any exceptional events such as the
Perambra facility shutdown in 2010 to shareholders.
Earnings momentum GREEN Bloomberg consensus earnings show significant upgrades in the past one month.
Source: Ambit Capital research


3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
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1
2
J
u
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-
1
2
S
e
p
-
1
2
D
e
c
-
1
2
M
a
r
-
1
3
J
u
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-
1
3
A
u
g
-
1
3
N
o
v
-
1
3
F
e
b
-
1
4
M
a
y
-
1
4
Apollo 1-yr fwd P/E Avg 1-yr fwd P/E
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
J
u
n
-
1
2
S
e
p
-
1
2
D
e
c
-
1
2
M
a
r
-
1
3
J
u
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-
1
3
A
u
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-
1
3
N
o
v
-
1
3
F
e
b
-
1
4
M
a
y
-
1
4
Apollo 1-yr fwd EV/EBITDA Avg 1-yr fwd EV/EBITDA


Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 12

Balance sheet (consolidated)
Year to March (` mn) FY12 FY13 FY14 FY15E FY16E
Shareholders' equity 504 504 504 509 509
Reserves & surpluses 27,824 33,397 45,134 54,962 64,989
Total networth 28,328 34,009 45,746 55,471 65,498
Minority Interest 8 - - - -
Debt 28,720 26,507 16,141 13,141 8,141
Deferred tax liability 4,025 4,928 5,241 5,241 5,241
Total liabilities 61,081 65,444 67,128 73,853 78,880
Gross block 80,344 85,219 90,657 93,508 108,562
Net block 40,238 41,693 43,022 41,569 51,835
CWIP 4,225 3,878 2,000 2,000 2,000
Goodwill on Consolidation 1,338 1,436 1,376 1,376 1,376
Investments (non-current) 158 546 637 637 637
Cash & Cash equivalents 1,730 3,348 6,541 14,348 8,651
Debtors 11,458 9,908 10,427 10,622 10,932
Inventory 19,991 20,311 20,664 21,259 22,695
Loans & advances 4,781 4,136 5,672 6,023 6,435
Total current assets 37,961 37,703 43,304 52,252 48,713
Current liabilities 17,811 13,928 16,247 16,949 18,103
Provisions 5,028 5,884 6,963 7,031 7,577
Total current liabilities 22,839 19,812 23,211 23,980 25,680
Net current assets 15,121 17,891 20,093 28,272 23,032
Total assets 61,081 65,444 67,128 73,853 78,880
Source: Company, Ambit Capital research

Income statement (consolidated)
Year to March (` mn) FY12 FY13 FY14 FY15E FY16E
Net Sales 121,533 127,946 133,378 142,547 151,113
% growth 37% 5% 4% 7% 6%
Operating expenditure 109,872 113,380 115,015 123,096 131,166
EBITDA 11,661 14,567 18,363 19,452 19,947
% growth 19% 25% 26% 6% 3%
Depreciation 3,256 3,966 4,109 4,304 4,789
EBIT 8,405 10,601 14,254 15,147 15,158
Interest expenditure 2,873 3,128 2,838 1,859 1,351
Non-operating income 326 944 698 899 1,117
Adjusted PBT 5,858 8,418 12,115 14,187 14,924
Tax 1,444 2,448 2,269 3,767 4,010
Adjusted PAT/ Net profit 4,393 5,958 9,846 10,420 10,914
% growth 0% 36% 65% 6% 5%
Extraordinary Expense/(Income) (294) 169 204 - -
Reported PAT / Net profit 4,687 5,789 9,642 10,420 10,914
Source: Company, Ambit Capital research




Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 13

Cash flow statement (consolidated)
Year to March (` mn) FY12 FY13 FY14E FY15E FY16E
Net Profit Before Tax 5,565 8,586 12,319 14,187 14,924
Depreciation 3,256 3,966 4,109 4,304 4,789
Others 2,825 2,817 2,750 1,692 1,113
Tax (953) (1,134) (1,955) (3,767) (4,010)
(Incr) / decr in net working capital (3,100) (1,454) 846 (524) (753)
Cash flow from operations 7,593 12,781 18,068 15,893 16,063
Capex (net) (7,895) (5,999) (3,500) (2,851) (15,054)
(Incr) / decr in investments (43) (13) (91) - -
Other income (expenditure) 58 67 88 167 239
Cash flow from investments (7,879) (5,944) (3,503) (2,684) (14,816)
Net borrowings 3,372 (1,782) (10,367) (3,000) (5,000)
Issuance of equity - 108 2,127 (103) 0
Interest paid (2,769) (3,085) (2,838) (1,859) (1,351)
Dividend paid (293) (293) (295) (439) (592)
Cash flow from financing 309 (5,053) (11,373) (5,401) (6,943)
Net change in cash 23 1,784 3,193 7,807 (5,696)
Closing cash balance 1,730 3,347 6,540 14,348 8,651
Free cash flow (302) 6,782 14,569 13,042 1,008
Source: Company, Ambit Capital research

Ratio analysis (consolidated)
Year to March FY12 FY13 FY14E FY15E FY16E
EBITDA margin (%) 9.6% 11.4% 13.8% 13.6% 13.2%
EBIT margin (%) 6.9% 8.3% 10.7% 10.6% 10.0%
Net profit margin (%) 3.6% 4.7% 7.4% 7.3% 7.2%
Dividend payout ratio (%) 6% 4% 4% 5% 7%
Net debt: equity (x) 1.0 0.7 0.2 (0.0) (0.0)
Working capital turnover (x) 10.2 9.0 9.3 10.0 10.1
Gross block turnover (x) 1.8 1.7 1.7 1.8 1.9
RoCE (pre-tax) (%) 15.5% 17.9% 23.9% 25.9% 23.8%
RoIC (%) 11.7% 12.7% 19.4% 19.0% 17.4%
RoE (%) 16.7% 19.1% 24.7% 20.6% 18.0%
Source: Company, Ambit Capital research

Valuation parameter (consolidated)
Year to March FY12 FY13 FY14E FY15E FY16E
EPS (`) 8.7 11.8 19.5 20.5 21.4
Diluted EPS (`) 8.7 11.8 19.5 20.5 21.4
Book value per share (`) 56.2 67.5 90.7 109.0 128.7
Dividend per share (`) 0.5 0.5 0.7 1.0 1.5
P/E (x) 23.0 16.9 10.2 9.8 9.3
P/BV (x) 3.6 3.0 2.2 1.8 1.6
EV/EBITDA (x) 9.5 7.6 6.0 5.7 5.5
EV/EBIT (x) 13.1 10.4 7.7 7.3 7.3
Source: Company, Ambit Capital research



Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 14


Institutional Equities Team
Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 saurabhmukherjea@ambitcapital.com
Research
Analysts Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infrastructure / Cement (022) 30433241 nitinbhasin@ambitcapital.com
Aadesh Mehta Banking / Financial Services (022) 30433239 aadeshmehta@ambitcapital.com
Achint Bhagat Cement / Infrastructure (022) 30433178 achintbhagat@ambitcapital.com
Aditya Khemka Healthcare (022) 30433272 adityakhemka@ambitcapital.com
Akshay Wadhwa Banking & Financial Services (022) 30433005 akshaywadhwa@ambitcapital.com
Ashvin Shetty, CFA Automobile (022) 30433285 ashvinshetty@ambitcapital.com
Bhargav Buddhadev Power / Capital Goods (022) 30433252 bhargavbuddhadev@ambitcapital.com
Dayanand Mittal, CFA Oil & Gas / Metals & Mining (022) 30433202 dayanandmittal@ambitcapital.com
Deepesh Agarwal Power / Capital Goods (022) 30433275 deepeshagarwal@ambitcapital.com
Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 gauravmehta@ambitcapital.com
Karan Khanna Strategy (022) 30433251 karankhanna@ambitcapital.com
Krishnan ASV Real Estate (022) 30433205 vkrishnan@ambitcapital.com
Nitin Jain Technology (022) 30433291 nitinjain@ambitcapital.com
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankajagarwal@ambitcapital.com
Paresh Dave Healthcare (022) 30433212 pareshdave@ambitcapital.com
Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 paritaashar@ambitcapital.com
Pratik Singhania Retail (022) 30433264 pratiksinghania@ambitcapital.com
Rakshit Ranjan, CFA Consumer / Retail (022) 30433201 rakshitranjan@ambitcapital.com
Ravi Singh Banking / Financial Services (022) 30433181 ravisingh@ambitcapital.com
Ritesh Vaidya Consumer (022) 30433246 riteshvaidya@ambitcapital.com
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritikamankar@ambitcapital.com
Ritu Modi Automobile (022) 30433292 ritumodi@ambitcapital.com
Tanuj Mukhija, CFA E&C / Infrastructure (022) 30433203 tanujmukhija@ambitcapital.com
Utsav Mehta Technology (022) 30433209 utsavmehta@ambitcapital.com
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 sarojini@panmure.com
Deepak Sawhney India / Asia (022) 30433295 deepaksawhney@ambitcapital.com
Dharmen Shah India / Asia (022) 30433289 dharmenshah@ambitcapital.com
Dipti Mehta India / USA (022) 30433053 diptimehta@ambitcapital.com
Nityam Shah, CFA USA / Europe (022) 30433259 nityamshah@ambitcapital.com
Parees Purohit, CFA UK / USA (022) 30433169 pareespurohit@ambitcapital.com
Praveena Pattabiraman India / Asia (022) 30433268 praveenapattabiraman@ambitcapital.com
Production
Sajid Merchant Production (022) 30433247 sajidmerchant@ambitcapital.com
Sharoz G Hussain Production (022) 30433183 sharozghussain@ambitcapital.com
Joel Pereira Editor (022) 30433284 joelpereira@ambitcapital.com
Nikhil Pillai Database (022) 30433265 nikhilpillai@ambitcapital.com
E&C = Engineering & Construction



Apollo Tyres

June 16, 2014 Ambit Capital Pvt. Ltd. Page 15


Explanation of Investment Rating

Investment Rating Expected return
(over 12-month period from date of initial rating)
Buy >5%
Sell <5%

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