Apollo Tyres CMP Target Rating Rs. 216 Rs. 250 BUYmailers.sparkcapital.in/uploads/Mukesh/Apollo Tyres.pdfChinese Tyre usage is geographically concentrated: ~95% of Chinese tyre imports

Apollo Tyres

Stock Performance (%)

1m 3m 12m

APTY 24% 46% 12%

Sensex 2% 6% 9%

BSE Auto 4% 14% 27%

Date Sep 21, 2016

Market Data

SENSEX 28523

Nifty 8776

Bloomberg APTY IN

Shares o/s 604mn

Market Cap Rs. 111bn

52-wk High-Low Rs. 224-127

3m Avg. Daily

VolRs. 604mn

Index member BSE 200

Latest shareholding (%)

Promoters 44.2

Institutions 41.9

Public 13.9

Company UpdateWe continue to be positive on Apollo Tyres (APTY, TP of Rs. 250, basis 10.5x FY18 EPS). Despite the onslaught of the Chinese

imports on the overall T&B industry (factored in our projections), APTY, the leader in the segment maintains its dominant share,

while importantly, not letting its capacity utilisation levels flag. With the prognosis on the RM continuing to be favourable and with

turning around of the EU ops, we expect better outlook for margin over the medium term. With additional domestic TBR capacities

(higher contribution %) and commissioning of the lower cost facilities in Hungary over the near term, expect APTY to capitalise on

the favourable demand prospects in these geographies. But first, addressing the two elephants in the room right off the bat:

Chinese TBR imports – though not tamed, handled with elan thus far by APTY. Nevertheless, continues to be a source of concern:

Imports of TBR tyres (predominantly Chinese) rose 63% YoY in FY16 to 1.3mn tyres, which represented ~21% of the domestic TBR

production in FY16 (14% in FY15). Per industry estimates, Chinese tyres now account for ~25% of the replacement market, up from ~10% in

FY15, while industry wide TBR capacity utilisation has declined from ~80-85% in FY15 to ~60-65% in FY16. Despite the onslaught of the

Chinese imports on the overall T&B industry, APTY, maintains its dominant share in both the TBB and TBR segments at ~25%. Importantly,

while its TBR capacities continue to operate flat out, its overall domestic utilisation levels were steady at ~75-80% through FY15-FY16. In

fact in 1QFY17, when the imports witnessed its peak volumes, APTY’s utilisation levels improved to ~85%.

To understand this incongruence, we interacted with tyre dealers (including Chinese tyre dealers) and fleet operators across

Mumbai/Surat/Chennai and Namakkal: Fleet operators in the South were majorly against the deployment of Chinese tyres due to lack of

warranty, higher maintenance and lower fuel economy which outweighed the lower initial cost. In the West and the North, however, operators

were more open to consider the usage of Chinese TBR tyres as an alternative to domestic TBB tyres. Chinese Tyre usage is

geographically concentrated: ~95% of Chinese tyre imports take place through the Nhava Sheva port and the Thuglakabad ICD. Chinese

tyre dealers indicated that the high cost of transportation inhibited opportunities to penetrate significantly within the country.

APTY trumps most other brands in the T&B segment in terms of consumer preference: APTY was the top-of-the-mind brand for T&B

tyres in the South, with fleet operators acclaiming its superior quality. However, in other parts of the country, credit offered by the dealers

played a larger role. MRF was indicated as being a strong player in the TBB segment, more – or – less across the country.

Hardening raw-mat prices: The rise in natural rubber (NR) prices from Mar16 to June 16, was led by extraneous factors including the

Centre imposed ban on duty-free import of NR under the Adv. Auth. Scheme till Mar16 and intervention by the Kerala govt. to prop up prices

ahead of elections in May16. However, prices have since softened led by prognosis of increasing production and indications of a favourable

crop for FY17, supported by significant global stocks of natural and synthetic rubber. Also, global tyre majors including Michelin,

Bridgestone, have guided for RM tailwinds in CY16. The expected NR policy is expected to lend stability to prices over the long term.

Incremental domestic TBR capacities and lower cost Hungary plant coming on-stream, coupled with the turning around of the EU

operations (FY16 performance was impacted by several one-offs) to have a favourable impact on overall revenue and profitability.

Expect domestic revenue to register a CAGR of ~10%% (FY16-FY18), with avg. margins of ~17%. Expect subsidiaries to register

revenue CAGR of ~19%(with further upside potential post ramping up of Hungary ops), with avg. margins of ~13.9%.

Pricing discipline : Interactions with mgmts./industry experts, suggest that the industry has matured in terms of pricing, resorting to price

cuts largely with the intention to only pass on RM benefits rather than undercut, boding well for a more stable price regime.

MUKESH SARAF [email protected] +91 44 4344 0041

RAMAKRISHNAN SESHAN [email protected] +91 44 4344 0020Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

Page 1

Financial Summary

Year Revenues (Rs. mn) EBITDA (Rs. mn) EBITDA Margin Adj. PAT (Rs. mn) Adj. EPS (Rs.) P/E(x) EV/EBITDA(x)

FY16 117,801 19,673 16.7% 11,116 21.8 9.9 6.0

FY17E 133,676 21,586 16.1% 11,755 23.1 9.4 6.4

FY18E 148,383 23,809 16.0% 12,155 23.9 9.0 6.0

CMP

Rs. 216

Target

Rs. 250

Rating

BUY

To go the -_-_-_-_-_-_-_-_-_-_-_-_-distance

Apollo Tyres

Contribution to volumes and revenue across tyre segments

Source: Industry, Spark Capital Research

Page 2

The T&B segment is critical to the fortunes of the Indian tyre industry with

~55% revenue contribution to the overall revenue

Source: Company Presentations, Spark Capital Research

T&B55%

PC/Light Truck22%

Others23%

Revenue Segmentation - Indian Tyre Industry

However, in terms of volumes, unsurprisingly, the 2w/3w segment

dominates albeit with lower contribution to overall revenue

Source: ATMA, Spark Capital Research

T&B11.1%

PCLT32.1%

Farm3.8%

2W/3W52.2%

OTR and Others0.8%

Tyre Production by Segment - FY16

The overall Indian Tyre Industry, dominated by the T&B segment, registered flat YoY revenue growth in FY16

Other

Two-Wheeler

Passenger Cars

Truck/Bus

Light Trucks

Farm

Other

Farm

Light Trucks

Two-Wheeler

Passenger Cars

Truck/Bus

The size of the Indian tyre industry stood at an estimated Rs.

500bn (USD 7.5bn) in FY16. Exports of tyres stood at an

estimated Rs. 105bn (USD 1.6bn).

The industry reported a flat YoY growth in FY16 on the back of

de-growth in the production of T&B tyres (-2% YoY) despite a

strong growth in the MHCV production volumes (+27% YoY)

The industry growth was stymied by a steep increase in the

import of Chinese TBR tyres (+61% YoY), which acted as a more

economical replacement to TBB tyres, in addition to the

inherent operational advantages of TBR tyres.

Also adding to the downward pressure on overall revenue was

price cuts taken by major tyre manufacturers on the back of soft

raw material prices including natural rubber and other crude

based raw materials.


The Indian Tyre Industry

Apollo Tyres

Industry volume growth in FY16 was led by PV and 2W tyre segments


The downward pressure on rubber prices in FY16 prompted tyre manufacturers

to take price cuts, impacting overall revenue growth


Domestic tyre production volumes registered modest growth YoY in FY16


Page 3

0

200

400

600

800

1000

1200

1400

1600

0.00

0.50

1.00

1.50

2.00

2.50

Ap

r/14

Ma

y/1

4

Jun

/14

Jul/14

Au

g/1

4

Se

p/1

4

Oct/14

Nov/1

4

Dec/1

4

Jan

/15

Fe

b/1

5

Ma

r/15

Ap

r/15

Ma

y/1

5

Jun

/15

Jul/15

Au

g/1

5

Se

p/1

5

Oct/15

Nov/1

5

Dec/1

5

Jan

/16

Fe

b/1

6

Ma

r/16

Average monthly rubber prices

TSR20 ($/kg) SGP/MYS ($/kg) RSS - 4 (Rs/MT)

Segment FY14 FY15 FY16

M&HCV (T&B) 16.5 17.1 16.8

YoY change (%) -0.4% 3.9% -2.0%

Passenger cars (Incl. Jeeps) 31.7 35.7 38.7

YoY change (%) -1.3% 12.9% 8.3%

Light Trucks (LCV and SCV) 9.3 10.2 9.7

YoY change (%) 13.9% 9.2% -4.6%

Tractor 6.7 6.0 5.7

YoY change (%) 19.4% -11.0% -5.2%

Scooter (2W) 11.0 14.6 17.2

YoY change (%) 13.9% 25.8% 16.8%

3W 4.7 4.4 5.0

YoY change (%) 1.3% 21.8% 15.8%

Motorcycle/Moped 47.7 57.0 56.5

YoY change (%) 7.4% 17.5% 0.0%

OTR 0.5 0.4 0.5

YoY change (%) 11.1% 19.2% -1.0%

Other tyres (industrial + Adv) 0.8 0.7 0.7

YoY change (%) 10.2% -1.9% -7.8%

Total 128.9 146.2 150.8

YoY change (%) 4.9% 13.2% 3.1%

The size of the Indian tyre industry is estimated at upwards of Rs.

500bn (USD 7.5bn) in FY16. Exports of tyres are estimated at Rs.

105bn (USD 1.6bn).

FY16 saw de-growth in T&B (particularly TBB) production & price cuts led by softer RM prices and increased competition


125.4 122.8128.9

146.2 150.8

5.2%

-2.1%

5.0%

13.4%

3.2%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

20

40

60

80

100

120

140

160

FY12 FY13 FY14 FY15 FY16

Production in mn nos.

Apollo Tyres

Replacement cycle across tyre categories

Source: Company Presentations, Spark Capital Research

Page 4

Category wise

supply of tyres to

various segments

(mn. nos)

Replacement As % of (a) OEMAs % of

(a)Govt.

As % of

(a)Export

As % of

(a)

Total

Domestic

prodn

As % of

(a)Imports

As % of

(a)Total (a)

As % of

(a)

M&HCV (T&B) 12.9 71% 3.2 18% 0.2 1% 1.9 11% 16.8 92% 1.5 8% 18.3 100%

Passenger Car(Incl.

Jeep)24.8 56% 17.1 39% 0.0 0% 2.3 5% 38.7 87% 5.6 13% 44.3 100%

L. C. V./SCV 5.6 58% 2.4 25% 0.0 0% 1.7 17% 9.7 100% 0.0 0% 9.7 100%

Tractor (Front) 1.3 53% 1.1 45% 0.0 0% 0.1 2% 2.5 100% 0.0 0% 2.5 100%

Tractor (Rear) 0.7 38% 1.1 58% 0.0 0% 0.1 5% 2.0 100% 0.0 0% 2.0 100%

Scooter 6.6 38% 10.6 61% 0.0 0% 0.1 1% 17.2 100% 0.0 0% 17.2 100%

3 Wheelers 0.5 9% 3.7 75% 0.0 0% 0.8 15% 5.0 100% 0.0 0% 5.0 100%

Motorcycle/Moped 30.7 52% 27.1 46% 0.0 0% 1.3 2% 56.5 96% 2.5 4% 59.0 100%

TOTAL 83.1 53% 66.4 42% 0.2 0% 8.3 5% 148.4 94% 9.6 6% 158.0 100%

Source: ATMA, Industry, Spark Capital Research

Note: 1) Sales to STU's included in Replacement Market. 2) Breakup of Import (by OEMs and for replacement market) NOT available. Hence all Imports are included in Replacement

Replacement dominates T&B demand, with imports contributing a meaningful portion of domestic TBR demand

Imports in the T&B segment comprise primarily of TBR tyres.

With domestic radialisation levels (OEM + Replacement) in the TBB

segment increasing to 44% in FY16 (33% in FY15) the proportion of the

contribution of Chinese imports to overall domestic TBB requirement is

on the rise.


6-8 months

3-4 years

1-2 years

1-3 years

2-3 years

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

MHCVs PVs LCVs Tractors 2W

Apollo Tyres

While the MHCV volumes grew 27% YoY, the domestic T&B production growth was abysmal with Chinese tyres eating into the replacement pie which is ~ 75%

of T&B demand

Source: Company, Spark Capital Research

Increasing radialisation coupled with increasing Chinese imports impacted

production of TBB tyres


Production of domestic TBB tyres impacted the most on the back of increasing Chinese TBR imports

T&B Segment

OE Demand, ~25%

Replacement demand,

~75%

Production of TBB tyres declined sharply in FY16 led by increasing

radialisation and also stymied by rising Chinese imports

While MHCV production volumes grew 27% YoY in FY16, domestic

production of T&B tyres degrew by ~2% YoY.

This is also borne out by the 7% YoY decline in truck bias tyre

production in FY16, compared to ~9% growth in the truck radial tyre

production

This was impacted by two factors:

Increasing radialization: The trend of radilisation is fast gaining

momentum, with the radialisation % of OEMs estimated at 72% (61% in

FY15), and overall radialisation levels estimated at ~44% for FY16

(33% in FY15)

Growing Chinese imports: These acted as a more economical

replacement to TBB tyres, in addition to the inherent operational

advantages of TBR tyres, leading to growing preference for the same

11.5 10.7

5.6 6.1

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY15 FY16

TBR production (mn nos) TBB production (mn nos)

YoY

growth

-7.3%

12%

-28%

-20%

21% 27%

2.7%

2.8%-0.4%

3.9%-2.0%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

15.4

15.6

15.8

16.0

16.2

16.4

16.6

16.8

17.0

17.2


M&HCV (T&B)Tyres (Mn Nos) YoY Growth in CV (%)

YoY growth in tyre production (%)

YoY

growth

+8.8%%

T&B

tyres

Page 5

Apollo Tyres

Page 6

Radial T&B tyres increasingly finding favor over Bias T&B tyres


Radialisation % to increase significantly over the medium term


6% 11%17% 19% 22% 26%

33%

44%53%

60%67%

72%

8%

25%34% 34%

42%51%

61%

72%78% 81% 84% 86%

0.0

0.2

0.4

0.6

0.8

1.0

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17E

FY

18E

FY

19E

FY

20E

Radialisation (%)

Domestic OEM

T&B Segment

The Tyre Industry is inexorably embracing TBR tyres over TBB tyres in the T&B segment

The move towards radialisation

is being driven by :

Cost - Benefit Ratio

Road Development

Overload Control

User Education

Retreading Infrastructure

71.6%63.1%

28.4% 36.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Ap

r/14

Ma

y/1

4

Jun

/14

Jul/14

Au

g/1

4

Se

p/1

4

Oct/14

Nov/1

4

Dec/1

4

Jan

/15

Fe

b/1

5

Ma

r/15

Ap

r/15

Ma

y/1

5

Jun

/15

Jul/15

Au

g/1

5

Se

p/1

5

Oct/15

Nov/1

5

Dec/1

5

Jan

/16

Fe

b/1

6

Ma

r/16

Radial and Bias production as % of total T&B production

Bias % Radial %

Apollo Tyres

Imports of TBR have increased significantly


..leading to an increase in the % of imports as % of domestic TBR production


Page 7

78

156126 131

168 176210

230

302

354313 317

423

0%

20%

40%

60%

80%

100%

120%

140%

0

100

200

300

400

500

1QFY14 3QFY14 1QFY15 3QFY15 1QFY16 3QFY16 1QFY17

Trend in TBR imports (000s nos)

TBR imports (000s) YoY Growth (%)

5.66.1

0.81.3

14.1%

21.2%

0%

5%

10%

15%

20%

25%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY15 FY16

Domestic TBR production (mn Nos)

Imports (mn Nos)

Imports as % of Domestic TBR production

Chinese Imports and the TBR Segment

Imports of TBR have increased manifold post the lifting of the anti-dumping duty by India, on the heels of USA imposing it

Imports of TBR have increased significantly led by China especially with anti-dumping duty levied by USA, closely followed by India lifting antidumping duty


78

156126 131

168 176210

230

302

354

313 317

423

0%

20%

40%

60%

80%

100%

120%

140%

0

50

100

150

200

250

300

350

400

450

1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17

TBR imports (000s) YoY Growth (%)

Jan15- USA Imposes anti-dumping

duty of ~80%+ on Chinese tyres

Feb 15- India lifts anti-dumping duty

on Chinese tyres

Apollo Tyres

Share of imports from China have increased considerably in FY16


Page 8


Adverse policy actions – lifting of anti-dumping duty combined with yuan devaluation gave an impetus to Chinese imports

China70%

Spain13%

Japan9%

Thailand2%

Others6%

China90%

Spain2%

Japan3%

Thailand3%

Others2%

FY15 FY16

The Yuan devaluation in Aug 2015 has given a further boost to Chinese

imports


Chinese tyre companies looking for outlets especially given the low growth

exhibited by their truck industry


2,501 2,561

3,407

4,368 3,934 3,748

4,032 3,803

3,424

-15%-10%-5%0%5%10%15%20%25%30%35%40%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

CY

07

CY

08

CY

09

CY

10

CY

11

CY

12

CY

13

CY

14

CY

15

Chinese CV production (000s) YoY growth (%)

0.1520

0.1540

0.1560

0.1580

0.1600

0.1620

0.1640

0.1660

1Q

FY

14

2Q

FY

14

3Q

FY

14

4Q

FY

14

1Q

FY

15

2Q

FY

15

3Q

FY

15

4Q

FY

15

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

54

56

58

60

62

64

66

68

70

INR/USD CNY/USD

Apollo Tyres

Page 9


• The tyre industry suffers from an inverted duty structure, whereby the duty on the import of raw materials (rubber) at ~20% is higher than

the import duty on tyre radials, thus impacting domestic production.

• Chinese TBRs are replacing the TBB segment as they are of a comparable cost as the latter and at least 30% cheaper than domestic TBRs.

• We understand that the capacity utilisation levels in China Tyre companies are currently around 50%. Hence, given the imposition of the

anti-dumping duty by the USA coupled with the lifting of the same in India, the spectre of cheap Chinese tyres would continue to loom

large

Duty Structure on Tyres 2016 (in %)

HSN

ClassificationCategory

Customs

Duty

(Basic)

Asia Pacific

Trade

Agreement

India-Singapore

ECA

India- South

Korea CEPAIndia -ASEAN

India - Malaysia

Trade

Agreement

40112010 Truck/Bus (Radial) 10 8.6 10 1.56 5 5

Adverse policy actions – lifting of anti-dumping duty combined with yuan devaluation gave an impetus to Chinese imports

Apollo Tyres

Efforts being made by the Industry to get the anti-dumping duty reinstated being met with protests by dealer associations

Page 10

ATMA estimates that investments in

domestic capacity for TBR tyres have

aggregated ~Rs 250 bn in the last 3-4 years.

However, given the steep increase in

Chinese TBR imports, the utilisation of the

facilities has come down to ~60-65 percent.

According to an ATMA official, over the past

two years, the Indian tyre prices have come

down anywhere between 10 and 15 per cent

and is still climbing down. On the other hand,

Chinese tyres are still around 30 per cent

cheaper.

Additionally, in the past, competition was

limited between three and four tyre

manufacturing companies. However, the

scene has changed entirely now with the

entry of several foreign players like Michelin,

Yokohama and Continental Tyres, thus

inhibiting any accusations of limited

competition/cartelisation.

Quoting Mr. SP Singh Convenor, All India Tyre Dealers Association: ”Quality and price of truck tyres, has direct bearing on viability and livelihood of

vehicle owners. After, mandatory quality certification of these tyres by BIS for domestic and imported radials, the quality issue has been settled. Domestic

tyres are overpriced. AITDF further argues that the ATMA now have 11 domestic tyre makers but incidentally the new TBR tyre makers i.e. Michelin and

Bridgestone in India have not joined the ATMA to seek tariff and non tariff barrier, while these new global players are totally dependent on radial

technology and their tyre prices are 10-15 percent higher than existing companies like CEAT, J.K. and Apollo tyres”

Highlighting the impact of the Chinese

imports on the domestic market, Mr. Satish

Sharma, President, APMEA, Apollo Tyres

indicated that the TBR industry is around four

lakh tyres a month. Apollo Tyres sells about

one lakh tyres. Whereas, it is 1.50 lakh units

a month in case of Chinese tyres.

Significant capacity additions by domestic

tyre manufacturers in the recent past in

serious trouble

Steep decline in the prices of domestic TBR

tyres in the recent past still unable to

bridge the yawning price gap with Chinese

TBR

Anti-dumping plea accepted by

Government in May 2016

In the light of the above, the anti-dumping plea of the Industry has been accepted by Government in May 2016


However, tyre dealers present a contrarian view accusing the large tyre manufacturers of collusion and impacting the livelihood of dealers

and fleet operators

Apollo Tyres

Post wise share in imports of Tyres


Page 11

Takeaways from interactions with fleet operators and Chinese tyre dealers based in Mumbai/Gujarat/Namakkal/Chennai

South India a bigger market for radials in general

Usage of radials depends on the loads carried and the quality of the roads plied on. In states down South, there is relatively greater discipline exercised

in terms of loads accrued while the quality of the roads too is relatively better.

However, with converse trucking conditions particularly in the North, the usage of TBRs is inhibited.

Tyre dealer and Fleet Operator Interactions :T&B Segment

Relative brand recall and preference amongst domestic tyre brands

APTY was the top-of-the-mind brand for T&B tyres in the South, with fleet operators acclaiming its superior quality.

However, in other parts of the country, the brand preference was stated to be towards the dealer (irrespective of brand) who gives more credit.

MRF was indicated as being a strong player in the TBB segment, more – or – less across the country.

Low quality perceptions hurting brand image claim Chinese dealers

Dealers indicated that not all Chinese brands are poor in quality. A few brands including

Triangle Tyres, Ling Long Tyres amongst others have obtained BIS certification and are of a

quality close to that of branded tyres.

Dealers indicated that some degree of brand awareness creation would go a long way in

changing the perception in the minds of consumers, however, literally ruled out the

possibility of the same happening.

High transportation cost of tyres possibly inhibits penetration, which results in sales

being concentrated geographically,

With the Nhava Sheva Port accounting for the largest share of Tyre imports, while the share of

Kolkata and Chennai are lower.

Nhava Sheva75%

Chennai3%

Kolkata3%

Tughlakabad ICD20%

Low cost TBR tyres introduced by tyre majors

In 2016, Bridgestone and Michelin launched launched low-cost TBRs. These tyres, like the Chinese tyres are sold without warranty.

Our feedback on the same was mixed, with some fleet operators indicating the same as worth replacements for Chinese tyres, while others not

enthused with their quality.

We understand that the other major tyre companies in the segment including Apollo and JK have not launched tyres with similar features.

Apollo Tyres

Significant TBR capacities have come –onstream in the recent past; more on the anvil particularly Apollo’s and Michelin’s

Source: Spark Capital Research

Page 12

Significant investments made in the TBR segment by the domestic Industry

Company Current Capacity Location Commissioned in Capacity expansion plans LocationExpected date of

commissioning

Michelin0.3 mn tyres p.a./

1000 tyres per day

Tiruvallur,

ChennaiCommissioned in 1QFY14

1.7 mn tyres p.a./

5700 tyres per day

Tiruvallur

Chennai

To be commissioned in

phases through FY20

JK 3.5 mn tyres p.a.

~equally spread

across Chennai

and Laskar

Chennai to take full effect

in FY17

Laskar capacities taken

over from CIL in FY16

NA NA NA

Apollo 6000 tyres per day Chennai NA 6000 tyres per day Chennai

In phases through FY18,

first phase to be

operational in Oct 2016

Ceat 80 TPD NA NA NA NA NA

Bridgestone 3000 tyres/dayChakan and

Indore2013

The capacity utilisation as

at Dec 15 was stated at

1000 TBR/day. This

translates into further ramp

up potential by 2000

tyres/day

NA NA

T&B Segment

ATMA estimates that domestic capacity set up with an investment of Rs 25,000 crore in the last 3-4 years

Note: MRF announced a capacity expansion in Apr15, however details of the same are not available.

Apollo Tyres

The Big – 4 see a heavy concentration of revenue from the T&B segment


Differing views on who leads the market – with leadership being claimed by

both JK and Apollo in their respective communication

Source: JK Tyres Investor Presentation – June 2016, Spark Capital Research

Page 13

ATMA estimates that the capacity utilization of TBR capacity has declined ;

the same is also reflective of significant capacities having come on-stream


80-85%

60-65%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

FY15 FY16

Domestic TBR capacity utilisation

TBR imports now account for ~25% of the replacement market


10%

25%

0%

5%

10%

15%

20%

25%

30%

FY15 FY16

TBR Imports as % of replacement market

67%

48% 48%

38%

0%

10%

20%

30%

40%

50%

60%

70%

80%

JK APTY MRF CEAT

JK Tyre, 28%

Apollo Tyres, 24%

MRF, 13%

Birla, 5%

CEAT, 5%

Others/Imports, 26%

Domestic T&B Radial market share - FY16

T&B Segment

Impact on the Indian industry on the back of the sustained Chinese import of tyres

Apollo Tyres

Composition of raw material basket for a typical tyre manufacturer


Crude oil prices have trended downwards , softening prices of synthetic

rubber and carbon black


Gross margins of major tyre manufacturers have trended in line with the reduction in rubber prices


Page 14

0

20

40

60

80

100

120

Ap

r/14

Jun

/14

Au

g/1

4

Oct/14

Dec/1

4

Fe

b/1

5

Ap

r/15

Jun

/15

Au

g/1

5

Oct/15

Dec/1

5

Fe

b/1

6

Ap

r/16

Jun

/16

Au

g/1

6

Crude Oil ($/bbl)

Raw-Mat

Natural Rubber, 35%

Synthetic Rubber, 14%

Carbon Black, 13%

Tyre Cord Fabric, 11%

Steel Cord Fabric, 7%

Others, 20%

0

200

400

600

800

1000

1200

1400

1600

30%

32%

34%

36%

38%

40%

42%

44%

46%

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17

Average RSS 4 prices (Rs/100kg) Apollo CEAT JK Tyres MRF

Raw material prices to trend structurally downward over the near-medium term

Apollo Tyres

Extraneous, government led actions led to a spike in raw material prices from March – June 2016


Page 15

0

200

400

600

800

1000

1200

1400

1600

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16

TSR20 ($/kg) SGP/MYS ($/kg) RSS - 4 (Rs/MT)

Domestic Rubber prices hit

record lows in Feb’16

Centre bans duty-free import of natural rubber

under the Advance Authorisation Scheme, till 31

March

State government also intervened in the

market to prop up prices ahead of

elections held in May.

Prices start correcting

once the aforesaid

props cease


Raw-Mat

Apollo Tyres

Page 16

Keeping in mind elections in Kerala, Centre had hiked the import duty on natural rubber. In January, the Centre had also

prohibited duty-free import of natural rubber under the Advance Authorisation Scheme, till 31 March.

We understand that the Kerala Govt also intervened in the market to prop up prices. However, post the elections, in the

absence of external props, the prices corrected.

Cessation of

government intervention

led to rubber price

softening post a brief

rally

The weakness in crude oil prices is also keeping the price of natural rubber in check, with synthetic rubber being a quasi

substitute to natural rubber.

Softness in crude prices

also keeping prices of

natural rubber under

check

Domestic natural rubber prices have corrected by about 11% over the last two months through Aug 16 and Sep 16, led

by increased tapping post monsoon leading to enhanced rubber production.

Given the increased tapping in the winter season, the rubber prices are likely to remain subdued.

Improved production led

by increased tapping

also contributed to

softening prices

The Central Government is also working on a National Rubber Policy, which aims to increase the domestic rubber

production in the long run in order to control surging imports. These factors are expected to reduce domestic rubber

prices under check in the medium to long term

National rubber policy

on the anvil; expected to

prevent significant

fluctuations in rubber

prices going forward

The global stock of natural and synthetic rubber has been surging on the back of continue weakness in Chinese demand

- the largest consumer of rubber. In the absence of a significant uptick in demand from that region, expect rubber prices

to continue to be soft.

Significant global stocks

of natural rubber


Raw-Mat


Apollo Tyres

Page 17

Global stocks of natural and synthetic rubber characterized by significant stock surpluses

('000 tonnes)2014 2015 2016

Year Q1 Q2 Q3 Q4 Year Q1

NATURAL RUBBER PRODUCTION

Asia-Pacific 11,236 2,610 2,411 3,106 3,219 11,345 2,599

EMEA 564 153 125 155 166 599 160

Americas 335 92 98 69 75 334 89

TOTAL 12,136 2,855 2,634 3,330 3,460 12,278 2,848

NATURAL RUBBER CONSUMPTION

Asia-Pacific 8,916 2,111 2,307 2,278 2,145 8,840 2,213

EMEA 1,553 392 399 431 376 1,597 415

Americas 1,712 430 468 427 384 1,709 413

TOTAL 12,181 2,932 3,174 3,135 2,905 12,146 3,042

WORLD NR SUPPLY-DEMAND SURPLUS/DEFICIT (45) (77) (540) 194 555 132 (194)

WORLD NR STOCKS 3,181 3,104 2,564 2,759 3,314 3,314 3,119

SYNTHETIC RUBBER PRODUCTION

Asia-Pacific 7,321 1,817 1,849 1,861 1,868 7,395 1,836

EMEA 3,887 1,005 1,056 940 985 3,985 1,050

Americas 2,970 750 784 759 786 3,079 742

TOTAL 14,179 3,572 3,690 3,560 3,639 14,460 3,628

SYNTHETIC RUBBER CONSUMPTION

Asia-Pacific 7,800 1,933 2,033 1,985 1,894 7,845 1,916

EMEA 3,537 906 945 883 914 3,648 906

Americas 2,930 734 775 765 795 3,068 756

TOTAL 14,267 3,572 3,754 3,633 3,602 14,561 3,579

WORLD SR SUPPLY-DEMAND SURPLUS/DEFICIT (88) - (64) (73) 37 (101) 50

WORLD SR STOCKS 3,535 3,535 3,471 3,397 3,434 3,434 3,484

% SR IN TOTAL RUBBER CONSUMPTION 54 55 54 54 55 55 54

Source: IRSG, Spark Capital

Raw-Mat


Apollo Tyres

Page 18

Michelin in its 1HCY16 investor presentation dated July 2016, has guided for a positive

tailwind from RM to the tune of Euro 100mn for 2HCY16

Per the 2QCY16 earnings call held in July 2015, Continental now expects positive raw

material tailwind of €150m in Rubber (vs. €100m prev).

Goodyear in its 2QCY16 earnings call held in July 2016, reiterated its guidance for a

Price/Mix-to-Raw Materials tailwind of +$75 mn this year, and expects commodity costs to

now actually be a greater source of tailwind than previously anticipated

Per the 2QCY16 earnings call the raw material tailwind for the year was guided at positive

Euro 15mn

Raw-Mat

Global Tyre majors have guided for significant RM tailwinds for FY16

Apollo Tyres

1Q

FY

16

Revenue de-grew 7% YoY, impacted equally by

lower volumes and price mix of 3.5% each. Mgmt

indicated that operations continued to be

impacted primarily by the decline in the TBB

market (Truck Bias), due to the influx of Chinese

imports.

Revenue grew 0.5% growth YoY driven

mainly by volume growth of 5.5% and price

and mix contributed to negative 5%.

Revenue de-grew ~5% YoY due to decline of

~1.5% & ~3% in volume and price growth

respectively in the domestic business

2Q

FY

16

Revenue was flat YoY, with 4% volume growth

was offset by the price reductions that were

offered as per the “industry dynamics”

Revenue de-grew 2% YoY driven by volume

growth of about 6% and price and mix

contributed to a negative growth of 8%.

Revenue declined 1.6% YoY, while volumes

grew ~2%, the decline was caused by price

and mix reasons.

3Q

FY

16

Sales for the grew 1% YoY, with 7% growth from

volumes offset by 6% decline on the pricing front.

Mgmt. indicated that there were price reductions

taken by various peers, and that they had to

follow suit on some of those.

Revenue de-grew 2% YoY growth largely

because of price drops that have taken place

over the last one year. In volume terms, the

growth was about 6%

Domestic volumes degrew by 2.5% YoY

during the quarter while the impact of price

and mix contributed 6.4% decline, with

overall revenue declining 8.9%

4Q

FY

16

Revenue saw a de-growth of 5% YoY, led by

negative price and mix, though volumes were

positive.

Revenue de-grew 2% YoY driven mainly by

volume growth of about 8% and price and

mix contributed to negative 10%

Standalone revenue declined 0.3% YoY with

volume growth of ~4% offset by pricing

decline

1Q

FY

17

Revenue saw a growth of 6% YoY led by a

volume growth of 13% and a negating impact of

7% from the price reductions of the previous

year.

APTY also took a small price cut in TBR in July16

of ~2%. In 4QFY16, APTY took a small price cut

in cars and then in truck bias of 1-2%.

Revenue registered a 4% revenue growth

YoY basis driven mainly by volume growth of

13%, price and mix resulted in a negative 9%

impact

Revenues declined 1.5% YoY with volume

growth of ~11% offset by ~13% decline

in price

Page 19

Snapshot of pricing action impacting revenue growth for major companies for the last 5 quarters through 1QFY17

Pricing action

Apollo Tyres

Page 20

1972

1991

1995

2006

2009

2010

2011

2013

20142015

2016

First Plant in

Perambara, Kerala

Second Plant in

Limda, Gujarat

Acquired plant in

Kalamassery, Kerala

Acquired Dunlop Tyres,

South Africa

Acquired Vredestein

Banden BV

Netherlands

Truck Radial Plant in Oragadam, Tamil Nadu

Sales & Marketing Office, Dubai

Sales & Marketing Office,

Thailand

R&D Center, EA in

Enschede, Netherlands

Global Marketing Office in

London, UK

Part divestment of South

Africa Business

R&D Center, APMEA in Oragadam, Tamil Nadu

Closure of SA manufacturing operations

Foundation stone laying – Hungary Greenfield plant

Global procurement office, Singapore

Acquired Reifencom –

German tyre

distribution company

Two wheeler tyre launch

in India

Sales & marketing

office, Malaysia

APTY

Apollo Tyres : A global player with presence across geographies and segments

Apollo Tyres

Pricing

SegmentBrand

Brand

Positioning

UHP &

Winter

Tyres

Passenger

vehicles

Tyres

Commercial

vehicles

Tyres

Farm

vehicle

tyres

Off highway

tyres

Two

wheeler

tyres

Bicycle ture

TOP

Global

Niche

Premium

MEDIUM Global

Others

Global

Challenger

Global

Challenger


Page 21

Brand positioning – Vredestien and Apollo vis a vis global peers

Management indicated that Vredestein is typically about a 15% plus lower than Michelin pricing. The Apollo brand sells at around 10% to

15% further discount.

Apollo Tyres

Revenue Segmentation - By product – India Operations


Revenue Segmentation - By Customer Segment - Consolidated


Revenue Segmentation - By product – Consolidated Operations


Revenue Segmentation - By geography


Page 22

T&B, 48%

PCLT, 34%

LCV, 7%

Farm and others, 11%

Replacement, 76%

OEM, 24%

India, 66%

Europe, 26%

Revenue Segmentation - By Geography

APTY

Apollo Tyres caters to a diversified market base across geographies

T&B, 65%PCR, 17%

LCV, 9%

Farm and others, 9%

Apollo Tyres

Revenue Break down - By Product Segment


APTY – Standalone revenue growth on firm footing


APTY is the market leader in the T&B segment and will capitalize on growing demand in this

segment


Page 23

T&B65%

PCR17%

LCV9%

Farm and others

9%

385

279

222

269

34111.7%

-27.6%

-20.5%

21.2%27.0%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

0

50

100

150

200

250

300

350

400

450


MHCV Production (000s) YoY Growth (%)

The T&B segment – APTY being the market le

OE demand in the T&B segment is expected to

continue to be strong in FY17, on the back of the

with pick up in economic activities projected to

lead growth, which would also translate into

higher replacement demand

Management commentary indicates that 1QFY17

in particular has also seen growing demand in the

TBB segment led by pick up in the mining and

OTR segment.

With additional TBR capacities expected to come

on-stream beginning Oct16, expect APTY to

further capitalise on its leadership position.

Poised to capitalize on strong domestic growth levels, particularly in the T&B market backed by its leadership position

APTY – INDIAN OPS.

55

82 85 87 89 87

9.0%

48.6%

4.3% 2.4% 2.6%-2.8%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0

10

20

30

40

50

60

70

80

90

100

FY11 FY12 FY13 FY14 FY15 FY16

Revenue Standalone (Rs. Bn) YoY growth (%)

Apollo Tyres

Significant TBR capacities have come –onstream in the recent past; more on the anvil particularly Apollo’s and Michelin’s


Page 24

Current Capacity Location Commissioned in Capacity expansion plans LocationExpected date of

commissioning

Michelin0.3 mn tyres p.a./

1000 tyres per day

Tiruvallur,

ChennaiCommissioned in 1QFY14

1.7 mn tyres p.a./

5700 tyres per day

Tiruvallur

Chennai

To be commissioned in

phases through FY20

JK 3.5 mn tyres p.a.

~equally spread

across Chennai

and Laskar

Chennai to take full effect

in FY17

Laskar capacities taken

over from CIL in FY16

NA NA NA

Apollo 6000 tyres per day Chennai NA 6000 tyres per day Chennai

In phases through FY18,

first phase to be

operational in Oct 2016

Ceat 80 TPD NA NA NA NA NA

Bridgestone 3000 tyres/dayChakan and

Indore2013

The capacity utilisation as

at Dec 15 was stated at

1000 TBR/day. This

translates into further ramp

up potential by 2000

tyres/day

NA NA

ATMA estimates that domestic capacity set up with an investment of Rs 25,000 crore in the last 3-4 years

Significant TBR capacities expected to come on-stream for Apollo beginning Oct16, existing capacity being used flat out


Apollo Tyres

Domestic T&B Radial market share - FY16

Source: JK Tyres Investor Presentation – June 2016, Spark Capital Research

PVs and LCVs too expected to register a strong growth in FY17 led by new launches and improvement in private fila consumption expenditure


Page 25

3,146 3,234

3,088

3,220

3,414

5.3%

2.8%

-4.5%

4.3%

6.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2,900

3,000

3,100

3,200

3,300

3,400

3,500


PV Production (000s) YoY Growth (%)

Market leader in the T&B segment

The year saw Apollo Tyres maintaining its leadership position in the

Truck and Bus (TB) segment. Even as the Indian market was flooded

with low cost TB imports, the Company’s robust and quality product

portfolio ensured that it led the market with over 25% market share.

Customers acknowledge the Company’s TBR tyres as the best in the

market on both counts quality and value.

Major OEMs including Tata, Eicher and Bharat Benz continue to use

Apollo tyres as OEM fitments.

Note: Differing views on who leads the market – with leadership being

claimed by both JK and Apollo in their respective communications

544 553

477 430 442

33.4%

1.6%

-13.7%-10.0%

2.8%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

-

100

200

300

400

500

600


LCV Production (000s) YoY Growth (%)

JK Tyre, 28%

Apollo Tyres, 24%

MRF, 13%

Birla, 5%

CEAT, 5%

Others/Imports, 26%

Given the expected uptick in the PV/LCV volumes on the back of improvement in rural income in addition to continued urban demand led by favourable

sentiment, the OE demand from these segments is expected to be positive.

Also, given the typical replacement cycles for PVs/LCVs at ~2.5-3.5 years, the strong volumes reported in FY12-FY13 would hold the replacement

demand in good stead

Poised to capitalize on strong domestic growth levels driven by strong OE and replacement growth across major segments


Apollo Tyres

Tractors to be a strong growth driver for FY17


Page 26

708

613 586

22.3%

-13.4%

-4.4%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

-

100

200

300

400

500

600

700

800

FY14 FY15 FY16

Tractor Production (000s) YoY Growth (%)

4,300

4,900

4,000

-

1,000

2,000

3,000

4,000

5,000

6,000

CEAT Apollo JK

Farm sector to be a strong growth driver with the favourable monsoons; strong distribution network to drive AM sales

APTY derives ~9% of its revenue from the farm and ORT segment.

With tractor volumes reporting a strong uptick in 1QFY17, with major

OEMs guiding for a strong YoY growth, the demand prognosis for this

segment is extremely strong.

Growth in the demand from the farm segment and the mining

segment was highlighted as a key driver of growth by APTY for

1QFY17

Comparison of distribution networks across major tyre companies


6-8 months

3-4 years

1-2 years

1-3 years

2-3 years

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

MHCVs PVs LCVs Tractors 2W

Comparison of replacement cycles across segments



Apollo Tyres

Page 27

Apollo Tyres announced its entry into the two wheeler tyre segment in India with the launch of all new Apollo Acti series for bikes and scooters.

Apollo Tyres, which is already manufacturing four wheeler and commercial vehicle tyres, will initially be outsourcing the manufacturing to a third party

based in South India. The company said that, with the growth in volumes, they will decide on manufacturing at a later stage.

In first phase, company will be present in the mass segment of below 250cc with only cross-ply tyres. The initial capacity will be around 1,20,000 units a

month which is expected to touch 5,00,000 units a month in next two years.

In the second phase, Apollo will get into radial tyres as well for high performance motorcycles.

“We continue to make good inroads. Our volumes today vis-à-vis the entire market size is not significant. Even in just the replacement market here we

operate today our market share would be low single digits. But we do have plans and ambition to be a decent player in that overall segment.

we will not pursue two-wheeler volumes at the cost of profitability. We have in fact had a fairly significant launch expense coming in when we started in

previous quarter and that was factored into the overall costs and we still maintained profitability. And yes, there are typically higher expenses in the

initial stages of entry into any segment but we are not looking at subsidizing this segment as just a strategic segment and sacrificing profitability.

The penetration of two-wheeler tyres is particularly more significant in the rural markets. Earlier given the fact that we did not have two-wheeler tyres

there were certain tyre distribution people who would have an inclination to go with some of our peers because we did not have this particular segment

in our arsenal. And that sometimes was the limitation in some cases. Four months back when we got into this segment and the fact that we have been

able to establish a certain product quality we see this as an added arsenal with us to try and now add distribution network particularly in the rural

segment.

We started with the replacement market but already some of the OEMs have reached out to us and we have begun a dialogue. But like for any product

category the OEM approval goes through a certain process. So we are unlikely to have any OEM volumes in the current year”

Foray into 2W segment to enhance the range of offerings

Quotes from the management

APTY has forayed into the 2W segment; making good inroads into the AM segment


Apollo Tyres

Page 28

Capacity utilization levels continue to be healthy; TBR capacities utilization sustained at close to 100%

Approximate capacity utilization levels across domestic facilities

Source: Company Earnings calls, Spark Capital Research


78%

80%

78%

85%

74%

76%

78%

80%

82%

84%

86%

4QFY15 3QFY16 4QFY16 1QFY17

India utilisation %

Utilisation levels and capex

APTY has a capacity of 6,000 plus tyres per day for TBR, truck bias capacity of about 10,000 tyres per day and passenger car capacity of 32,000

tyres per day.

Management indicated that in 1QFY17, the utilisation levels of the TBR capacity was close to 100% (as was the case in the preceding few

quarters as well).

The overall capacity utilisation levels in 1QFY17 improved to ~85% led by increased demand in the farm segment as also the OTR segment (led

by pick up in mining activities) which improved utilisation levels of the TBB capacity as well.

The company is undertaking a capex to enhance the TBR and PCR capacity at the Chennai plant by 6000 tyres per day and 8000 tyres per day

respectively. These facilities are expected to come on-stream in phases beginning October 2016.

Apollo Tyres

Page 29

APTY – Subsidiaries: Revenue and EBITDA margin for FY16 were stymied by one-off and possibly non-recurring factors


INR/EURO – Revenue was also impacted by adverse FX movement


65.00

70.00

75.00

80.00

85.00

90.00

1QFY14 3QFY14 1QFY15 3QFY15 1QFY16 3QFY16

INR/EURO

Several, mostly non-recurring factors, contributed to revenue

degrowth in FY16

FY16: Revenue registered a 19% YoY degrowth, on the back of the

depreciation of the Rupee vis a vis the Euro and also the exclusion of

South African operations.

Refer next slide for a quarter by quarter break down of items impacting

revenue growth in the European operations in FY16

Revenue growth for FY16 was impacted by several one-offs; see multi-pronged growth levers going forward

APTY – EUROPE

34

40 43

47

38

31

9.5%

18.3%

7.3%9.6%

-18.1% -19.6%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

5

10

15

20

25

30

35

40

45

50


Revenue Subsidiaries (Rs. Bn) YoY growth (%)

4 5 6

8

6

4

13.2%12.5% 13.0%

16.5% 16.0%

13.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0

1

2

3

4

5

6

7

8

9


EBITDA (Rs. Bn) EBITDA %

Apollo Tyres

Page 30

Sales for the quarter were at Rs 7.4 billion declined 13% YoY on the back of the exchange rate impact. In Euro terms, revenue grew

by 2% YoY led by volume growth of 8%. The car tyre industry grew by 3% YoY. The EBITDA margins at 13.5%, declined YoY given the

price and mix pressures.1QFY16

Sales for the quarter at Rs 7.7 billion degrew 21% YoY, led by 9% volume decline, 2% due to price & mix and the balance 9% due to

adverse exchange rate impact.

Weak winters in the last 2 years impacted the pre winter sales of tyres in August and September.

Improvement in label values which is a regulatory up-gradation in technology, impacted the available production capacity.

Lastly, maintenance related breakdowns too impacted volumes. Drop in volumes impacted the EBITDA margin for the quarter came

down to 11.2% compared to 17.1% YoY.

2QFY16

Sales for the quarter were Rs. 8.2 billion, a 6% degrowth YoY primarily due to currency impact, though in EU terms there was a

growth. This was in light of a fairly tough quarter for European operations given the very mild winter, led to lower winter tyre sales which

resulted and showed up in the operating margin. The EBITDA margin for the quarter was down from just below 20% last year to 15.3%

during this year.

Secondly, the cost incurred in preparation of OEM business including working on a large number of new SKU introductions

and thirdly, a decline in one particular product category; Space Master - the spare tyre sold to OEMs (only Volkswagen till that

quarter) and sales to them were declining sharply added to further pressure on the margins

3QFY16

Sales for the quarter were Rs.7.4 billion, a degrowth of 17% over same period last year, all of it essentially coming through volumes.

Teething troubles with the SAP introduction which went live at the beginning of January. This resulted into lower sales which

led to margin decline given the share of fixed cost in Europe. EBITDA for the quarter was Rs. 0.8 billion at 11.1% compared to

14.7% margin for the same period last year.

We also had Reifencom operations with us for the first quarter, which performed in line with their last year figures even though the sales

prices were lower. The Reifencom operations had revenue of Euro 23 million, which are reported together with the European operation

results. On a year on year comparison the revenues were flat as the lost sales were made up by the revenues from Reifencom which

were reported in the European operations.

4QFY16

APTY – EUROPE

Revenue growth for FY16 was impacted by several one-offs; see multi-pronged growth levers going forward

Apollo Tyres

Test results in 2015 across segments for APTY were encouraging with number one position for Quatrac 5 in All-Season test, test

winner Sportrac 5 in the summer segment, Ultrac Satin in the premium segment and highly recommended rating for Ultrac Vorti.

These results will help in building a stronger position in the market.

Page 31

Multi-pronged growth levers in the European business

POSITIVE TYRE Test Results TO AID ACCEPTANCE AND VISIBILITY

This fiscal saw the introduction of the new brand positioning with the high decibel ‘Rock the Road’ digital campaign

in our key European markets. Later in the year, the European region launched the dealer partnership programme and plans to have

over 800 programme partners by 2020 throughout Europe.

Increased spends on building the corporate brand including Apollo Tyres’ association with is starting to make Apollo a

globally recognised brand

HIGH Decibel ADVERTISEMENT CAMPAIGNS INCLUDING THE SPONSORSHIP DEAL WITH MAN u

To further expand its reach in key European markets, APTY acquired the Germany-based (Reifencom GmbH) - one of

the leading tyre retail organisations in Germany with over 37 stores in the country.

The success of Reifencom GmbH is attributed to its highly efficient logistics system, which ensures there is a guarantee of a high

degree of availability of all kinds of tyres and rims, even during busy periods like spring and autumn.

While it is expected to give APTY brands increased visibility, its strong online presence in many countries including Austria,

Switzerland and France will not only support the growth of the retail network in Europe but is also expected to support APTY’s

endeavour to sell tyres online in other key markets outside Europe.

It will also help Apollo in selling additional volumes that will start coming out of its plant under construction in Hungary once it is

ready in early 2017.

Acquisition OF REIFENCOM – A SHOT IN THE ARM

APTY – EUROPE

Apollo Tyres

Vredestein Distribution Network: Ability To Deliver Within 90% Of Europe Within 24 Hours


Page 32

883

449

279

438

254211 235 217

285 296

168

0

100

200

300

400

500

600

700

800

900

1000

Germany Holland France Scandinavia Belgium Italy Switzerland Austria Eastern Europe England, Ireland Spain

APTY – Distribution reach and production capacities

Utilisation levels and capex

Apollo currently has a capacity of 7m tyres in its Netherlands facility, which is close to being fully utilised.

The company has embarked upon a greenfield expansion programme at Hungary with a capacity to produce 5.5 million passenger car and light

truck and 675,000 heavy commercial vehicle tyres at a cost of ~EURO 300mn

The facility will produce both Apollo and Vredestein brand of tyres and will complement Apollo Tyres' existing facility in the Netherlands

The facility is expected to come on-stream in 4QFY17.

APTY – EUROPE

Apollo Tyres

Page 33

Revenue (Rs. Mn) and margin estimates FY15 FY16 FY17E FY18E

Standalone

Revenue (Rs. Mn) 89,378 86,887 92,347 104,664

Growth (YoY %) 2.6% -2.8% 6.3% 13.3%

EBITDA (Rs. Mn) 13,155 15,594 15,892 17,688

EBITDA (%) 14.7% 17.9% 17.2% 16.9%

Subsidiaries

Revenue (Rs. Mn) 38,473 30,914 41,329 43,719

Growth (YoY %) -18% -19.6% 33.7% 5.8%

EBITDA (Rs. Mn) 6,150 4,079 5,694 6,121

EBITDA (%) 16.0% 13.2% 13.8% 14.0%

Consolidated

Revenue (Rs. Mn) 127,851 117,801 133,676 148,383

Growth (YoY %) -4.7% -7.9% 13.5% 11.0%

EBITDA (Rs. Mn) 19,305 19,673 21,586 23,809

EBITDA (%) 15.1% 16.7% 16.1% 16.0%

Region wise revenue and margin estimates

Apollo Tyres

Page 34

Financial summary

Consolidated Financial Statements Key metrics

Rs. mn FY15 FY16 FY17E FY18E FY15 FY16E FY17E FY18E

Profit & Loss Growth ratios

Revenues 127,851 117,801 133,676 148,383 Revenues -4.7% -7.9% 13.5% 11.0%

Manufacturing & Other Expenses 108,547 98,128 112,090 124,574 EBITDA 2.9% 1.9% 9.7% 10.3%

EBITDA 19,305 19,673 21,586 23,809 PAT 1.2% 13.7% 5.8% 3.4%

Depreciation 3,883 4,097 4,522 5,479 Margins

EBIT 15,422 15,576 17,063 18,330 EBITDA 15.1% 16.7% 16.1% 16.0%

Net Interest Exp / (inc) 1,827 949 1,137 1,654 EBIT 12.1% 13.2% 12.8% 12.4%

Profit Before Tax 13,308 15,728 16,558 17,391 PAT 7.6% 9.4% 8.8% 8.2%

Tax 3,532 4,612 4,803 5,236 Leverage & WC ratios

Adj Net Profit 9,776 11,116 11,755 12,155 Debt to equity (x) 0.2 0.2 0.4 0.4

Balance Sheet (Rs. mn) Current ratio (x) 2.0 1.6 1.7 1.7

Shareholders Equity 50,423 60,318 70,851 81,785 Debtor days (Sales) 28 34 31 28

Loan funds 11,135 13,497 29,418 33,001 Inventory days (COGS) 51 61 55 55

SOURCES OF FUNDS 66,470 79,370 105,825 120,342 Creditor Days (COGS) 25 48 35 30

Net block 42,685 51,008 78,355 91,369 Performance & turnover ratios

Investments 1,470 1,226 1,226 1,226 RoACE 17.2% 15.1% 13.1% 11.3%

Capital WIP 2,182 2,182 2,182 2,182 RoAE 20.3% 20.1% 17.9% 15.9%

Current assets, loans & advances 38,352 51,607 48,830 50,524 Total asset turnover (x) 1.1 1.0 0.9 0.9

Current liabilities & provisions 19,384 31,448 29,564 29,755 Fixed asset turnover (x) 1.4 1.2 1.1 1.0

Net Current Assets 18,968 20,160 19,267 20,770 Valuation metrics

APPLICATION OF FUNDS 66,470 79,370 105,825 120,342 Current price (Rs.)

Cash Flows (Rs. mn) Shares outstanding (mn) 509 509 509 509

Cash flows from operations 14,016 11,067 13,231 15,442 Market capitalisation (Rs. mn) 109,963 109,963 109,963 109,963

Capex (6,269) (12,420) (31,870) (18,493) Enterprise value (Rs. mn) 115,152 117,573 137,434 141,707

Free cashflow 7,747 (1,353) (18,639) (3,051) Price-earnings multiple (x) 11.2 9.9 9.4 9.0

Cash flows from investments (7,396) (12,175) (31,870) (18,493) EV/EBIDTA (x) 6.0 6.0 6.4 6.0

Cash flows from financing (6,836) 1,132 14,699 2,362 Adj Per-share earnings (Rs.) 19.2 21.8 23.1 23.9

Cash and equivalents 5,946 5,887 1,947 1,258 Dividend yield (%) 0.9% 0.9% 0.9% 0.9%

216

Apollo Tyres – Crystal Ball Gazing

Expect trading

multiples to sustain

at similar levels

Margin expected to

settle at around 16%

levels, inhibited by

intense competition

CAGR of 11% in

consol revenue from

FY16 to FY20

Rs. Bn FY11 FY15 FY16 FY17E FY18E FY19E FY20E

Consol

Revenue89 128 118 130 148 160 169 ▲

Rs. BnFY11 FY15 FY16 FY17E FY18E FY19E FY20E

Consol

EBITDA10 19 20 22 24 26 27 ▲

EBITDA (%) 11.0% 15.1% 16.7% 16.1% 16.0% 16.1% 16.1% ▲

Entry =

Rs. 216

(9x FY18 EPS)

Cumulative Dividends of Rs. 8

Exit =

Rs. 280 at 11x FY20

EPS

TOTAL RETURN OF 50%

Over the medium term,

Apollo Tyres would

strongly benefit from the

expanded capacities

coming on-stream in the

form of its Brownfield

TBR plant in Chennai and

the Greenfield plant at

Hungary.

We believe that these will

enable APTY address

important product

segments meaningfully,

and thereby propel

revenue growth over the

medium term

Nevertheless, significant

margin improvement is

expected to be inhibited

by the intense

competition in the

industry, coupled with

the significant Chinese

imports.

P/E Multiple FY20 EPSTarget price

12x Rs.26Rs.320

Dividend (FY17-20) Rs. 8

Revenue

growth to

be aided by

capacity

expansions

Margins

improvement

to be inhibited

by the intense

competition

Trading History – % of times stock traded

PE

range

<9x 9-11x 11-13x 13-15x 15-17x >17x

37% 13% 11% 13% 13% 12%

FY11-16 CAGR %

Revenue EBITDA PAT Price

5.8% 15.0% 26.9% 20.3%

Expect

multiples to

sustain at

existing

levels

Page 35

Apollo Tyres

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investment banking, investment advisory and institutional equities and infrastructure advisory

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from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of

registration been cancelled by SEBI at any point of time.

Absolute Rating Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon

ADD Stock expected to provide positive returns of >5% – <15% over a 1-year horizon

REDUCE Stock expected to provide returns of <5% – -10% over a 1-year horizon

SELL Stock expected to fall >10% over a 1-year horizon

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0

50

100

150

200

250

300

Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16

Rs.

Price Target

Apollo Tyres – 3 Year Price and Rating History Report Date Price Target Reco.

11/Aug/16 172 195 Buy

13/May/16 155 180 Buy

11/Feb/16 150 180 Buy

03/Nov/15 170 155 Sell

13/Aug/15 187 200 Add

13/May/15 169 193 Add

15/Apr/15 188 217 Buy

09/Feb/15 212 206 Reduce

12/Nov/14 232 207 Reduce

07/Aug/14 168 200 Buy

19/May/14 172 200 Buy

13/Feb/14 118 138 Buy

Report Date Price Target Reco.

31/Dec/13 101 120 Buy

13/Nov/13 70 61 Reduce

Apollo Tyres

Disclaimer (Cont’d)

This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark Capital. While we would

endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory, compliance or

other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representatives shall be

responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions or actions taken in

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Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has

incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Disclosure of Interest Statement APTY

Analyst financial interest in the company No

Group/directors ownership of the subject company covered No

Investment banking relationship with the company covered No

Spark Capital’s ownership/any other financial interest in the company covered No

Associates of Spark Capital’s ownership more than 1% in the company covered No

Any other material conflict of interest at the time of publishing the research report No

Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:

Managing/co-managing public offering of securities

Investment banking/merchant banking/brokerage services

Products or services other than those above

In connection with research report

No

Whether Research Analyst has served as an officer, director or employee of the subject company covered No

Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s

compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.

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This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under the Securities

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Documents

Apollo Tyres CMP Target Rating Rs. 216 Rs. 250 BUYmailers.sparkcapital.in/uploads/Mukesh/Apollo Tyres.pdfChinese Tyre usage is geographically concentrated: ~95% of Chinese tyre imports