Despite an improvement in realizations and volume sales, Apollo Tyres’ (ATL) Q1FY09 results were below expectations on the margin front as the company was unable to entirely pass on the increase in input costs to customers.
PAT came in below our expectations as margins contracted and depreciation charges moved up. We have revised ATL’s earnings estimates downward to factor in the concerns related to the margin decline and increased debt.
Our revised DCF target price stands at Rs36 (earlier Rs40), which offers a limited upside from current levels. We believe the premium valuation that ATL enjoys over its peers will shrink as its heavy capex commitments weigh down earnings by raising interest and depreciation costs.
The gestation period for setting up a tyre plant is relatively high and we thus expect the company to fully utilize its capacities from greenfield projects only after FY11.
The stock is currently trading at a P/E of 6.7x, EV/EBITDA of 3.6x and P/BV of 0.9x on FY10E. We downgrade ATL from Buy to HOLD with a revised target price of Rs36.