Q1. What are the key investment highlights?

1. Industry Outlook: Over the last 10 years, tyre industry in India has grown at a
CAGR of 12.4%, which eventually signals a good position for the firms constituting
the industry, in normal conditions.
2. The company has a diversified product portfolio in passenger vehicles, Truck/Bus,
off highway and others.
3. The geographic mix of the firm has also evolved: India 67% of net sales, Europe:
23% of net sales and Africa: 10% of net sales
4. Past performance of the company: Sales grew at CAGR of 27% in 2008-2012,
which is higher than industry growth rate. It ranks among top 5 companies.
Capacity increased by CAGR 15%
5. Qualitative Factors: The firm focuses on quality, internal efficiencies, resource
optimization and customer centricity.
They also focused on service and delivery and launched Apollo Direct and Apollo
Super Zone.
6. It is a derived demand, and depends on automobile purchase. With the economic
revival, demand for automobiles is expected to increase
7. The GDP of the economy is expected to grow, which will lead to higher increased
demand for trucks/Buses than increase in passenger vehicles. Apollos 48% of
revenue comes from this segment.
8. Future Outlook:
a. Increasing rural purchase of both commercial and passenger vehicles
b. Increasing presence in different parts of Europe.
Q2 : What are the key investment concerns?
1. Market Risks: An investor can face huge losses if the market as a whole
does not perform well, for example a stock market crash. Santanu may not be
able to reap benefits if the tire industry as a whole suffers a huge setback or
the economy fails to pick up (since the demand for tyres has a strong
correlation with traffic growth which in turn depends on GDP growth).
2. Inflation risk: It is also called purchasing power risk which means the cash
flowing from an investment may not be worth as much in the future due to
inflation. It should be kept in mind while investing that real returns are kept in
mind instead of nominal returns to get the inflation protected returns.

3. Liquidity Risk: If the stock cannot be sold or bought readily, it gives rise to
liquidity risk. This risk can be minimized by diversifying or investing in index
instruments.
4. Legislative Risk: If the government imposes high taxes or duties on the raw
materials being used, it can hamper the performance of the stock. Also,
legislation in Europe or Africa that favour local players through tax benefits or
otherwise can dent the sales growth in these regions.
5. Detection Risk: This risk can arise due to poor due diligence wherein the
information available in public is not true or improperly stated. The fault when
detected can cause damage that may be difficult to repair.Santanu should
carefully assess the financials of Apollo tyres before investing.
6.

Commodity Risk: The risk that lies due to the risks pertaining to the
commodities going inside the process. In Apollo tyres, the volatility associated
with natural rubber prices gives rise to this risk. Also, there is too much
dependency on natural rubber as a raw material.

7. Apart from the above mentioned risks, currency fluctuations and competition
from cheaper imports will affect the performance of Apollo and hence
Santanus investment. Both the OEM and replacement markets are highly
price sensitive. Emergence of low price players or price wars in the industry
will force Apollo to lower their prices, which can affect the topline.
Q3: Fair Price Determination
Key Assumptions

Net Sales growing @ 23% CAGR (same as last 5 yr period); COGS grows at
the same value
Other Expenses growth is at the 2011-2012 rate
Debt/EBITDA constant at 2012 level = 2.44
Interest Rate @ 10 yr Gsec + 146 basis points = 9.99%
Sales/Assets @ last 5 yr average = 1.38
Depreciation based on Dep/Gross Block for last 5 yr average = 4.52%
Turnover Ratios constant @ 2012 levels
Change in Long Term Operating Capital = Change in Gross Block
Since growth rate based on ROIC*Retention Rate = 10% (above real GDP
growth), g assumed to be 4%
Market Value of Debt is same as the book value
Tax Rate at 28% ( last 5 yr average of Tax/PBT)
Cost of Capital = WACC = D/(D+E)*Kd*(1-tax rate)+E/(D+E)*ke
Terminal Value ( Cash Flows after 2017) =FCFF 2017 *(1+g)/(wacc-g)

Capex and Working Capital Changes

FY
Inventory Turnover
Inventory
Receivables Turnover
Accounts receivable
Payables Turnover
Accounts Payable
Loans and advances
Total assets
Total current assets
Net operating working capital
Change in Working Capital
Change in Long Term Fixed
Assets

2012

2013

2014

2015

2016

2017

4.8
1995.
0
11.6
1146.
0
8.7
1075.
0

4.8
2305.
6
11.6
1290.
3
8.7
1270.
6

4.8
2835.
9
11.6
1587.
0
8.7
1562.
8

4.8
3488.
2
11.6
1952.
0
8.7
1922.
3

4.8
4290.
5
11.6
2401.
0
8.7
2364.
4

349.0
7986.
0
3663.
0
2066.
0

485.1
11100
.8
4293.
8
2325.
3
259.3

596.7
13654
.0
5281.
4
2860.
1
534.8

733.9
16794
.4
6496.
1
3518.
0
657.8

902.7
20657
.2
7990.
2
4327.
1
809.1

4.8
5277.
3
11.6
2953.
3
8.7
2908.
2
1110.
4
25408
.3
9828.
0
5322.
3
995.2

653.5
912.8

705.7
1240.
6

762.2
1420.
0

823.2
1632.
3

889.0
1884.
2

8821.
6
399.3

9527.
4
431.3

10289
.5
465.8

11112
.7
503.1

12001
.7
543.3

Net Change in Op Capital

Gross block
Depreciation

Income Statement Projected

8168.
2
326.0

WACC Determination

Free Cash Flow Determination

The fair price arrived at using DCF method shows a strong upside of 71%.
Therefore, we believe the stock is undervalued and recommend a BUY.