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Investment Guru India 2019-09-09 09:55:07

Market share gains continue, but tough environment impacting financials, retain LONG

APTY continues to do extremely well in the replacement market and gain market share. During 1Q, its replacement volumes grew 12% yoy; however, a 20%+ decline in OEM and sluggish exports led to a 2% yoy decline in overall volumes. As OEM demand is set to remain weak and replacement market is also not as buoyant as earlier, we cut FY20E/ FY21E standalone volumes by 6%/8%. We also slash FY20/FY21 Europe EBITDA by 24%/ 22% due to lower volume growth (amid a weak market) and its impact on EBITDA. Overall, we cut our FY20/FY21E EBITDA by 7% each but EPS by 24% (of which a ~4% cut is due to INDAS 116). However, due to APTY’s higher R&D-driven market share gains, we maintain LONG on the stock with a Sep’20 TP of Rs 200 at 15x Sep’20 EPS (Jun’20 TP: Rs 252).


Market share gains to continue on better product quality with higher R&D focus: Despite sluggish market conditions, APTY’s replacement volumes grew 12% yoy driven by 25% volume growth in TBR and 10% in PCR, even as TBB volumes were up marginally. As we have been highlighting over the past few years, APTY will be one player to gain market share due to its industry-leading R&D spends, in turn leading to better-quality products. Its tyres command a reasonable premium vs other domestic players in the TBR segment. In the PCR segment, the company is gaining share in larger rim sizes (14 inch +) where the market is slowly shifting towards.


Europe ― market share gains but growth lower than investor expectations: Europe’s R&D spends have gone up 3x over FY14-FY19 and by 350bps as a percentage of sales ― a reason behind the margin drop. The company has focused on gaining market share in OEMs, summer and all-season tyre segments. However, tough market conditions in Europe and increased fixed expenses hit profitability over the last two quarters, despite market share gains. Management highlighted that 2QFY20 has started on a better note, even as Europe contribution to PAT would be negligible in FY20. Its recent tyre launches have got good ratings in tests and therefore European profitability should improve over FY21-22 due to market share gains.


India performance in line but for one-off donations: APTY shifted ~Rs 320mn of expenses from other expenses to depreciation and interest cost due to INDAS 116; however, a similar quantum of one-off donations during the quarter meant no benefit visible at the margin level. While RM prices are expected to go up marginally from 2QFY20, a 1-1.5% price hike taken in truck and PCR segments from August 01 should help the company better its margins a bit from 2Q.


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