20 March 2019 India | Auto Ancillaries | Sector Report

Auto Ancillaries
Tyre industry: the road is smooth, time to cruise

After facing multiple demand and margin headwinds in CY18, the Indian tyre industry is at Vaikam Kumar S
vaikam.kumar@jmfl.com | Tel: (91 22) 66303018
the cusp of an upswing. Sustained investment in R&D has improved industry dynamics with Vivek Kumar
technology leaders benefiting from better pricing discipline. On the other hand, uptick in CV vivek.kumar@jmfl.com | Tel: (91 22) 66303019
replacement cycle and increased adoption of radial tyres remain key growth triggers. With a Jayesh Chandra Gupta
jayesh.gupta@jmfl.com | Tel.(91 22) 66303054
downward trend in the capex cycle of major players, we expect an improving return and FCF
profile over FY19-21. Over the next 12M, we prefer Apollo Tyres (APTY) with its leadership in
the fast growing TBR segment and ramp-up in European operations. Consequently, we
expect revenue/earnings CAGR of 13%22% over FY18-21. We assign a target multiple of
12x to arrive at our Mar’20 TP of INR275. While earnings expectation has moderated for
CEAT, there is still some upside potential after c.33% correction in CY18. We maintain BUY
with Mar’20 TP of INR1,350 (14x forward earnings).
 Changing landscape of the Indian tyre industry: With heightened competition and entry
of global players, the Indian tyre industry has witnessed a definitive shift from a play on
‘cost’ to that of ‘technology’ and ‘quality’. The average spend on R&D by the big Indian
companies has increased from 0.6% to 1.4% of sales over FY14-18 and approaching the
global benchmark. It has manifested in increased adoption of the premium radial
technology especially in the MHCV segment where the ratio of bias to radial has moved
from 65:35 in Dec’16 to 55:45 at the end of FY18. On the other hand, Indian companies
have maintained their critical cost advantage over global peers with higher return on
employee spends (sales-to-labour cost for APTY (14.5x) was nearly 4x that of Michelin
(3.7x) in FY18). With an inherent structural advantage and improving technological edge,
the industry is gradually weeding out volatility in margin.
 CV replacement and stable OE sales to drive volume growth: After a strong start in
1HFY19, weak auto OE sales since Aug’18 slowed down the growth momentum for tyre
companies in 3QFY19. Despite near-term challenges, long-term demand outlook remains
robust. Persistence of economic activity is expected to aid OE and replacement tyre
(c.70% of the market) demand for CVs. Demand for 2W/PV tyres is expected to be stable,
at close to the historical rate (c.10%/8%), over the next two years with revival in OE sales.
Factoring in the current parc, our growth expectations for auto sales and the replacement
market, we estimate combined tyre volumes (units) in the major segments of CV, PV, 2W
and 3W to register a CAGR of c.10% over FY19-21.
 RM tailwinds are likely to boost profitability: Historically, the cost of key RM - crude oil
derivatives (c.50% of RM cost) and rubber - has strongly influenced the overall
profitability of the tyre industry. After the steep rise in 1HFY19, crude oil price has
moderated since Dec’18, the benefit of which will begin to flow from 4QFY19 onwards.
Domestic and international rubber prices have remained rangebound despite cost
concerns following the Kerala floods in Aug’18. Temporary disruptions notwithstanding,
we do not foresee sustained cost pressures over the long-term. With an expected revival
in volume growth and resultant positive operating leverage, we estimate margins to
expand by c.130bps/140bps for APTY/CEAT over FY19-21.
 FCF generation to rise as capex cycle peaks out: Robust demand across segments
improved utilisation and led to investment in capacity expansion over the last couple of
years. Capex/EBITDA for the industry is estimated to have doubled from c.50% in FY15 to
over 100% in FY18. As the newer plants begin to come on-stream over FY20-21, the
ratio is expected to gradually decline back to 50% by FY21 thereby improving FCF JM Financial Research is also available on:
Bloomberg - JMFR <GO>,
conversion. APTY’s Chennai TBR and AP greenfield are expected to be comminsioned by
Thomson Publisher & Reuters
FY20 while CEAT’s will gradually ramp-up over FY20-21.
S&P Capital IQ and FactSet
 Recent correction resets valuation to LTA: Tyre stocks have corrected in the range of
15%-30% FYTD and are trading near their 6yr average NTM P/E. As the cycle begins to Please see Appendix I at the end of this
move up, improving growth and return profile could warrant a re-rating. We estimate report for Important Disclosures and
revenue/earnings CAGR of 13%/22% and 10%/13%for APTY and CEAT over FY18-21 Disclaimers and Research Analyst
Certification.
driven by robust replacement demand, revival in OEM sales and stable RM costs.
JM Financial Institutional Securities Limited
Auto Ancillaries 20 March 2019

Focus charts
Exhibit 1. Closing the R&D gap: R&D expenditure as a % of sales Exhibit 2. Definitive shift towards radial tyres in the MHCV segment
APTY CEAT MRF Bridgestone Continental Goodyear Michelin Radial Bias (RHS)
50% 70%
3.5% 3.3%
3.2%
46%
2.9% 2.9% 65%
3.0% 65%
2.6% 45% 65%
2.5%
2.0%
2.0% 40% 60%
1.7%
1.5%
1.5%
1.1% 1.1% 2.6%
2.1% 35% 55%
1.0% 35%
35%
54%
0.5% 0.4%
0.3%
30% 50%

Jan-16

Jul-16

Jan-17

Jul-17

Jan-18
May-15
Jul-15

May-16

May-17
Sep-15
Nov-15

Sep-16
Nov-16

Sep-17
Nov-17
Mar-15

Mar-16

Mar-17

Mar-18
0.0%
FY14 FY18

Source: JM Financial Source: JM Financial

Exhibit 3. Tyre volume growth projections (segment-wise) Exhibit 4. Price of crude oil and natural rubber drives gross margin
Domestic NR (INR per kg) Crude ($ per barrel)
MHCV LCV PV Motor cycle Scooter 3W
375 APTY (RM % of sales, RHS) CEAT (RM % of sales, RHS) 72%
16%
14%
14% 13% 13%
67%
300
12%
12% 11% 11%
10% 11%
10% 62%
10%
10% 9% 9% 225
8% 8% 57%
8% 7%
6%
6% 150
52%
4%
4%
3%
75 47%
2%
Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18
Jun-12

Jun-13
Sep-12

Sep-13

Jun-14
Sep-14

Jun-15
Sep-15

Jun-16
Sep-16

Jun-17
Sep-17

Jun-18
Sep-18
Mar-15
Mar-13

Mar-14

Mar-16

Mar-17

Mar-18
2018-19e 2019-20e 2020-21e

Source: JM Financial Source: JM Financial

Exhibit 5. Avg. price of domestic NR <INR130 per kg since FY15 Exhibit 6. Limited volatility in international NR price in recent years
Domestic natural rubber price (INR per kg) International-Bangkok ($ per kg)
170 80%
YoY growth % (RHS) 3.0 YoY growth % (RHS) 140%
160 2.8 120%
60%
2.6 100%
150
40% 2.4 80%
140
2.2 60%
130 20% 2.0 40%

120 1.8 20%

0%
1.6 0%
110
1.4 -20%
-20%
100 1.2 -40%
90 -40% 1.0 -60%
Aug-14

Apr-16

Feb-17

Oct-18
Feb-14
Apr-14

Oct-14
Dec-14
Feb-15
Apr-15

Aug-15
Oct-15
Dec-15
Feb-16

Aug-16
Oct-16
Dec-16

Apr-17

Aug-17
Oct-17
Dec-17
Feb-18
Apr-18

Aug-18

Dec-18
Feb-19
Jun-14

Jun-15

Jun-16

Jun-17

Jun-18
Apr-14

Aug-18
Feb-14

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

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

Aug-16
Oct-16
Dec-16
Feb-17
Apr-17

Aug-17
Oct-17
Dec-17
Feb-18
Apr-18

Oct-18
Dec-18
Feb-19
Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Source: JM Financial Source: JM Financial

JM Financial Institutional Securities Limited Page 2

Auto Ancillaries 20 March 2019

Exhibit 7. Price of carbon black has risen sharply since 4QFY17 Exhibit 8. Tyre industry capex/EBITDA is likely to decline in FY21
Carbon black price index YoY growth % (RHS) Capex-to-EBITDA FY11-18 average EBITDAM
300 80% 1.2 20%
280 1.1
60% 18%
260
1.0
240
40%
220 0.9 16%
200 20%
0.8
180 14%
0% 0.7
160
140 0.6 12%
-20%
120
0.5
100 -40% 10%
Q1 2011-12

Q3 2011-12

Q1 2012-13

Q3 2012-13

Q1 2013-14

Q3 2013-14

Q1 2014-15

Q3 2014-15

Q1 2015-16

Q3 2015-16

Q1 2016-17

Q3 2016-17

Q1 2017-18

Q3 2017-18

Q1 2018-19

Q3 2018-19
0.4

0.3 8%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19e FY20e FY21e
Source: JM Financial Source: JM Financial

Exhibit 9. Stock returns have been historically better during capex.. Exhibit 10. ..down cycle with APTY being favourably placed currently
APTY CEAT
Cap-to-dep LTA Annual return Cap-to-dep LTA CEAT
8.0 100% 8.0 450%
7.2 90% 7.2
400%
6.4 6.4
80% 350%
5.6 5.6
4.8 70% 4.8 300%
4.0 60% 4.0
250%
3.2 50% 3.2
2.4 2.4 200%
1.6 40% 1.6
150%
0.8 30% 0.8
0.0 0.0 100%
20%
-0.8 -0.8 50%
10%
-1.6 -1.6
0% 0%
-2.4 -2.4
-3.2 -10% -3.2 -50%
FY11
FY13

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21
FY11

FY12

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

Source: JM Financial Source: JM Financial

Exhibit 11. Apollo tyres - NTM PE: 11x, 1yr fwd EPS growth exp: 14% Exhibit 12. CEAT - NTM PE: 14x, 1yr fwd EPS growth exp: 17%
22 NTM PE `+1SD LTA P/E `-1SD EPS growth after 1yr (RHS) 60% NTM PE `+1SD LTA P/E `-1SD EPS growth after 1yr (RHS) 40%
30
20 50% 30%
18 40% 25 20%
16
30%
10%
14 20
20%
12 0%
10%
10 15
-10%
0%
8
-20%
-10% 10
6
-30%
4 -20%
5
-30% -40%
2

0 -40% 0 -50%
Jan-15

Jan-16

Jan-17

Jan-18

Jan-19
Jul-14

Nov-14

Mar-15

Jul-15

Mar-16

Jul-16

Jul-17
Nov-15

Nov-16

Mar-17

Nov-17

Mar-18

Jul-18

Nov-18

Mar-19
May-14

Sep-14

May-15

Sep-15

May-16

Sep-16

May-17

Sep-17

May-18

Sep-18
Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19
Jul-12

Nov-12

Mar-13

Jul-13

Nov-13

Mar-14

Jul-14

Nov-14

Mar-15

Jul-15

Nov-15

Mar-16

Jul-16

Nov-16

Mar-17

Jul-17

Nov-17

Mar-18

Jul-18

Nov-18

Mar-19
May-12

Sep-12

May-13

Sep-13

May-14

Sep-14

May-15

Sep-15

May-16

Sep-16

May-17

Sep-17

May-18

Sep-18

Source: JM Financial Source: JM Financial

JM Financial Institutional Securities Limited Page 3

Auto Ancillaries 20 March 2019

Changing landscape of the Indian tyre industry

The Indian tyre industry has, for long, been simplistically viewed as a commodity trade. With
the increasingly strong presence of global players, domestic tyre manufacturers have had to
reinvent themselves in order to retain / gain market share. Customer impetus on
performance, longevity and lower cost of ownership has translated into increased spending
on technology. As illustrated in exhibit 13, the annual expenditure on research and
development (R&D) by the Indian tyre sector has witnessed a sharp jump. For the big Indian
companies, the average spend as a % of sales has increased from 0.6% in FY14 to 1.4% in
FY18 thereby narrowing the gap with the global players.

Exhibit 13. R&D expenditure as a % of sales

APTY CEAT MRF Bridgestone Continental Goodyear Michelin
3.4% 3.5% 3.4%
3.5% 3.2% 3.3% 3.3%
2.9% 3.0% 3.0% 2.9%
3.0% 2.6%
2.6%
2.3% 2.4%
2.5% 2.2%
2.0% 2.0% 2.0%
2.0% 1.7%
1.5% 1.5%
1.5% 1.1% 1.2%
1.0% 2.4% 1.1% 2.6%
2.1% 2.2% 2.4%
1.0%
0.4% 0.4% 0.3%
0.5% 0.3% 0.3%
0.0%
FY14 FY15 FY16 FY17 FY18
Source: Company, JM Financial

One of the key areas of R&D spending has been towards the development of radial
technology. Compared to bias tyres, radial tyres are better suited for highway use and long
trips, effective prevention of heat build-up, towing at high speed, smoother ride and longer
life. The primary difference lies in the construction of the tyre (exhibit 14 & 15) with body
cords running across the tire radially — directly from bead to bead – in the case of radial tyres

Exhibit 14. Construction of bias tyres Exhibit 15. Construction of radial tyres

Source: JM Financial Source: JM Financial

Since CY17, there has been a hastened shift towards radial tyres. The ratio of the number of
bias-to-radial produced moved from 65:35 in Dec’16 to 55:45 at the end of Mar’18 (exhibit
16). It has been driven by increasing realisation of the benefits provided by radial tyres in
lowering the total cost of ownership for fleet owners. We expect the trend to continue with
improving road conditions, increased awareness and investment in radial technology.

JM Financial Institutional Securities Limited Page 4

Auto Ancillaries 20 March 2019

Exhibit 16. Shift towards radial tyres in the MHCV segment

Radial Bias

50% 70%

46%
65%
65%
45% 65%

40% 60%

35% 55%
35% 35%
54%

30% 50%
May-15

Jan-16

May-16

Jan-17

May-17

Jan-18
Jul-15

Jul-16

Jul-17
Sep-15
Nov-15

Sep-16

Sep-17
Nov-16

Nov-17
Mar-15

Mar-16

Mar-17

Mar-18
Source: ATMA, JM Financial

Demand outlook
In tonnage terms, MHCV is the largest segment constituting c.55% of overall production in
the Indian tyre industry. The largely cyclical nature of OEM demand (exhibit 17) is offset by a
substantial replacement market. In volume (unit) terms, the segment registered a 10yr CAGR
of 3%.

Exhibit 17. MHCV vs tyre production growth YoY

MHCV OEM production YoY growth MHCV Tyre Production YoY growth
10yr average tyre production growth
50%
38%
40% 34%
29% 30%
27%
30%
21%
20% 15%
11% 11%
8%
10% 4%
6% 6%
3% 4%
2% 2% 3%
0% 0% 0%
0%
0% -2%
-2% -3%
-10%

-20%
-21%
-30% -27%

-40% -35%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Source: SIAM, ATMA, JM Financial

The passenger segments are less volatile by nature. The PV segment is the second largest
contributor with a tonnage share of c.18% and is closely linked to OE demand. Since FY08,
the PV tyre segment has registered a volume CAGR of 9.3% with corresponding OE
production CAGR of 8.5% (exhibit 18). Similarly, the 2W & 3W tyre segment witnessed a
10yr CAGR of 9.7%, in line with OE production CAGR of 11% (exhibit 19). It is also the
largest volume contributor with a share of c.55%.

JM Financial Institutional Securities Limited Page 5

Auto Ancillaries 20 March 2019

Exhibit 18. PV vs tyre production growth YoY Exhibit 19. 2W&3W vs tyre production growth YoY
PV OEM production YoY growth PV Tyre production YoY growth 2W&3W OEM production YoY growth 2W&3W tyre production YoY growth

10yr average tyre production growth 10yr average tyre production growth
29% 29%
30% 28% 30% 27%
27% 25%
25%
25% 22% 20% 20%
20% 16% 17% 17%
19% 15% 15%
20% 18%
17% 14%
17% 15% 12%
15% 11% 10% 10%
15% 13% 10% 8% 8%
12% 12% 6% 7%7%
11% 5%4% 5% 5%
10%
10% 8% 9%
8%8%
5% 2% 2%
5% 5%
4% 4% 0%
5% 3% 3%
1% -5%
0% -5%
-10%
-1%
-5% -15% -12%
-4% -4%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Source: ATMA, JM Financial Source: ATMA, JM Financial

On the basis of historical trends, the current parc and segment-wise growth expectation, we
arrive at our projections for tyre demand (exhibit 20). Robustness in replacement tyre demand
and BS6 pre-buy are likely to aid MHCV tyre demand in FY20 before slowing down in FY21.
The increased need for last-mile connectivity following the emergence of hub-and-spoke
model is expected to sustain LCV demand. PV tyre demand is estimated to register a stable
CAGR of c.7.5% over FY19-21, c.180bps lower than the long-term historical average.
Aggressive price competition in the entry level 2W segment has helped bringing in the
volumes. Continued strong demand from rural and easing of 3W permits are expected to
further drive double-digit growth in the 2W and 3W segment.

Exhibit 20. Tyre volume growth projections (segment-wise)

MHCV LCV PV Motor cycle Scooter 3W

16%
14%
14% 13% 13%

12%
12% 11% 11%
10% 10% 11%
10%
10% 9% 9%
8% 8%
8% 7%
6%
6%
4%
4%
3%

2%
2018-19e 2019-20e 2020-21e
Source: CRISIL, JM Financial

JM Financial Institutional Securities Limited Page 6

Auto Ancillaries 20 March 2019

Margin outlook
As highlighted earlier, profitability of Indian tyre companies is strongly correlated to the cost
of raw material specifically that of rubber and crude (exhibit 21). Rubber (natural and
synthetic combined) typically constitutes c.50% of the total raw material expenditure in the
manufacture of tyres. The proportion of natural and synthetic is dependent on the type of
tyre being manufactured. The next biggest contribution comes from carbon black and fabric
with a combined share of c.25%. While rubber has been quite benign this year, the other
main raw materials have witnessed upward cost pressures.

Exhibit 21. Tyre margin is strongly correlated with price of natural rubber and crude oil
Domestic NR (INR per kg) Crude ($ per barrel) APTY (RM % of sales, RHS) CEAT (RM % of sales, RHS)
375 72%

67%
300

62%

225

57%

150
52%

75 47%
Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18
Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18
Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18
Mar-16
Mar-13

Mar-14

Mar-15

Mar-17

Mar-18

Source: JM Financial

Natural rubber
Despite concerns of price increase following Kerala floods, domestic natural rubber prices
have been flat FYTD (exhibit 22). This was primarily because of seasonal increase in import
contribution during Indian monsoon. International rubber price declined by c.7% during the
same period but the benefit was partly offset by adverse currency movement. The outlook for
natural rubber prices is stable with a range-bound movement. Reduced volatility will help in
stabilizing the margin profile of the industry.

Exhibit 22. Avg. price of domestic NR <INR130 per kg since FY15 Exhibit 23. Limited volatility in international NR price in recent years
Domestic natural rubber price (INR per kg) International-Bangkok ($ per kg)
170 80%
YoY growth % (RHS) 3.0 YoY growth % (RHS) 140%
160 2.8 120%
60%
2.6 100%
150
40% 2.4 80%
140
2.2 60%
130 20% 2.0 40%

120 1.8 20%

0%
1.6 0%
110
1.4 -20%
-20%
100 1.2 -40%
90 -40% 1.0 -60%
Aug-14

Apr-16

Feb-17

Oct-18
Feb-14
Apr-14

Oct-14
Dec-14
Feb-15
Apr-15

Aug-15
Oct-15
Dec-15
Feb-16

Aug-16
Oct-16
Dec-16

Apr-17

Aug-17
Oct-17
Dec-17
Feb-18
Apr-18

Aug-18

Dec-18
Feb-19
Jun-14

Jun-15

Jun-16

Jun-17

Jun-18
Apr-14

Aug-18
Feb-14

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

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

Aug-16
Oct-16
Dec-16
Feb-17
Apr-17

Aug-17
Oct-17
Dec-17
Feb-18
Apr-18

Oct-18
Dec-18
Feb-19
Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Source: Crisil, JM Financial Source: Crisil, JM Financial

Synthetic rubber
Styrene-butadiene rubber (SBR) and Poly-butadiene rubber (PBR) are the most widely used
form of synthetic rubber in the tyre industry. Being a crude derivative, the price of synthetic
rubber is closely linked to that of crude oil (exhibit 24, 25). Since the highs of CY14, crude oil
price has been fairly subdued barring sporadic rallies similar to the one witnessed in 1HFY19.

JM Financial Institutional Securities Limited Page 7

Auto Ancillaries 20 March 2019

Consequently, the prices of SBR and PBR have declined over 40% since Apr’18. Global oil
dynamics are expected to hinder any significant rise in crude oil price over the medium term
and the benefits of the recent decline are likely to accrue over the next few quarters.

Exhibit 24. Price of SBR has declined by c.44% since FY18 Exhibit 25. Price of PBR has declined by c.47% since FY18
Crude price YoY growth SBR landed cost YoY growth 210% Crude price YoY growth PBR landed cost YoY growth
150%
180%
120%
150%
90% 120%

60% 90%

60%
30%
30%
0%
0%
-30%
-30%

-60% -60%
Feb-15

Aug-15

Feb-16

Aug-16

Feb-17

Aug-17

Feb-18
Feb-14
May-14
Aug-14

May-15

May-16

May-17

May-18
Aug-18

Feb-19
Nov-14

Nov-15

Nov-16

Nov-17

Nov-18

Feb-15

Aug-16
Oct-16

Feb-18
Apr-18
Apr-15

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

Dec-16
Feb-17
Apr-17

Aug-17
Oct-17
Dec-17

Aug-18
Oct-18
Dec-18
Feb-19
Jun-15

Jun-16

Jun-17

Jun-18
Source: Crisil, JM Financial Source: Crisil, JM Financial

Carbon black (CB)

A combination of rising crude oil price and widening global demand-supply gap arising from
production restrictions in China pushed up the cost of CB by c.75% since the beginning of
1QFY18. With a contribution of 10%-15% of the RM basket, CB played an important role in
supressing the profitability of tyre manufacturers over the last few quarters. A global trend
towards capacity expansion (including captive capacity in some cases) and easing of crude
prices are expected to result in stable, manageable inflation in the price of CB.

Exhibit 26. Carbon black price up c.75% since end of FY17 Exhibit 27. Prices of carbon black and crude are strongly correlated
Carbon black price index YoY growth % (RHS) Carbon black price index Average quarterly crude oil price ($ per barrel, RHS)
300 80% 350 120
280 110
60%
260 300 100
240 90
40%
220 250 80
200 20% 70
180 200 60
0%
160 50
140 150 40
-20%
120 30
100 -40% 100 20
Q1 2011-12

Q3 2011-12

Q1 2012-13

Q3 2012-13

Q1 2013-14

Q3 2013-14

Q1 2014-15
Q3 2014-15

Q1 2015-16

Q3 2015-16

Q1 2016-17

Q3 2016-17

Q1 2017-18

Q3 2017-18

Q1 2018-19
Q3 2018-19

Q4 2012-13
Q1 2013-14
Q2 2013-14
Q3 2013-14
Q4 2013-14
Q1 2014-15
Q2 2014-15
Q3 2014-15
Q4 2014-15
Q1 2015-16
Q2 2015-16
Q3 2015-16
Q4 2015-16
Q1 2016-17
Q2 2016-17
Q3 2016-17
Q4 2016-17
Q1 2017-18
Q2 2017-18
Q3 2017-18
Q4 2017-18
Q1 2018-19
Q2 2018-19
Q3 2018-19
Q4 2018-19

Source: Crisil, JM Financial, index based to 100 as of 4QFY06 Source: Crisil, JM Financial

NTC Fabric
The other major raw material is NTC fabric, a type of automotive textile, constituting c.10%
of the RM basket. After rising by c.15% FYTD in Oct’18, the indicative price of NTC fabric has
fallen by c.19% since then resulting in a 6% decline FYTD in Jan’19. In the three years prior
to FY18, the price of NTC fabric witnessed a moderate CAGR of c.9%. We do not anticipate
any major surprises in the demand-supply situation of fabric.

It is important to note that OEM supplies work on near pass-through and is fairly insulated
from any long-term impact of sustained increase in RM cost. The replacement market,
especially in the CV segment, has witnessed a more co-ordinated pricing environment in
recent years thereby enabling effective pass-through of cost pressures. While the RM
environment remains vital for the overall profitability of the industry, persistence of robust
demand (in both OEM and replacement) is even more critical.
JM Financial Institutional Securities Limited Page 8
Auto Ancillaries 20 March 2019

Earnings outlook
Based on the demand and margin outlook for individual companies under our coverage, we
estimate revenue CAGR of 13%/10% for APTY / CEAT over FY18-21 (exhibit 28). This is
expected to be driven by a volume growth of 11% and 7% respectively. As a market leader
in TBR, APTY is likely to be a major beneficiary of the CV cycle uptick. Stable growth in the
passenger segment is likely to aid steady growth for CEAT. We expect margin pressures to
ease with moderation in commodity costs and positive operating leverage. Consequently,
margins are likely to expand by 170bps/130bps for APTY/CEAT thereby aiding earnings CAGR
of 22%/13% respectively over FY18-21.

Exhibit 28. Stable revenue growth and margin expansion are expected to aid strong earnings growth
(INR mn) Revenue EBITDAM (%) Adj. PAT
FY18-21 FY18-21 FY18-21
Company Name FY18 FY19 FY20 FY21 CAGR FY18 FY19 FY20 FY21 change FY18 FY19 FY20 FY21 CAGR
APOLLO TYRES LTD 148 179 201 216 13% 11.1% 11.5% 12.4% 12.9% 170bps 7 9 11 13 22%
CEAT LTD 64 70 79 86 10% 9.6% 9.5% 10.2% 10.9% 130bps 3 3 3 4 13%
BALKRISHNA INDS* 45 54 60 66 14% 24.7% 27.9% 28.8% 29.5% 480bps 7 8 10 11 13%
JK TYRE & IND LT* 82 103 115 129 17% 9.0% 11.4% 12.1% 11.6% 250bps 1 3 4 4 154%
MRF LTD* 150 163 180 192 9% 15.5% 15.1% 16.1% 16.2% 60bps 11 12 15 16 11%
Source: JM Financial, *- Bloomberg

Growth expectation for the industry remains strong with the Bloomberg consensus
estimating double-digit revenue CAGR over FY18-21 for the other major domestic players.
Margin improvement is expected to be most significant for Balkrishna industries and JK Tyre
due to expansion in high-margin specialty segment and low base respectively. Market leader,
MRF, is likely to have stable revenue/earnings CAGR of 9%/11% over FY18-21.

Capex
The aggregate capex-to-EBITDA for the five major Indian companies is expected to be c.75%
in FY20 (close to FY11-18 average) and then decline to c.50% in FY21. The steep fall is
supported by a YoY decline of c.24% in capex and 11% EBITDA growth. Slowing pace of
capex and improving profitability are expected to boost the favourability of the tyre sector
with likely improvement in return and FCF profile.

Exhibit 29. Tyre industry capex/EBITDA is likely to decline in FY21

Capex-to-EBITDA FY11-18 average EBITDAM

1.3 18%

1.2 17%

1.1 16%

1.0 15%

0.9 14%

0.8 13%

0.7 12%

0.6 11%

0.5 10%

0.4 9%

0.3 8%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19e FY20e FY21e
Source: Bloomberg, JM Financial

Historically, the capex cycle has been a key determinant of stock performance in the tyre
sector (exhibit 30, 31). Stock returns have been better during capex down cycle. Between
APTY and CEAT, APTY is better placed with a lower (than historical average) and declining
capex-to-depreciation ratio in FY21. We expect rising return profile and FCF generation for
APTY to aid stock performance over the NTM.
JM Financial Institutional Securities Limited Page 9
Auto Ancillaries 20 March 2019

Exhibit 30. Stock returns have been historically better during capex.. Exhibit 31. ..down cycle with APTY being favourably placed currently
APTY CEAT
Cap-to-dep LTA Annual return Cap-to-dep LTA CEAT
8.0 100% 8.0 450%
7.2 90% 7.2
400%
6.4 6.4
80% 350%
5.6 5.6
4.8 70% 4.8 300%
4.0 60% 4.0
250%
3.2 50% 3.2
2.4 2.4 200%
1.6 40% 1.6
150%
0.8 30% 0.8
0.0 0.0 100%
20%
-0.8 -0.8 50%
10%
-1.6 -1.6
0% 0%
-2.4 -2.4
-3.2 -10% -3.2 -50%

FY11
FY13

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21
FY11

FY12

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21
Source: Company, JM Financial Source: Company, JM Financial

Valuation
Rising crude oil price and cost uncertainty over domestic natural rubber following Kerala
floods have weighed on tyre stocks since 2QFY19 with APTY, BKI, JKI, and MRF correcting
15-30%. Growth concerns at the beginning of CY18 led to a steep correction in CEAT.
Consequently, the industry is trading near its long-term average P/E multiple. APTY is trading
at 11x NTM earnings while CEAT is trading at 14x.

Exhibit 32. Peer comparison

CMP (INR) ROE (%) FCF YIELD (%) P/E (x)
Company Name FY18 FY19 FY20 FY21 FY18 FY19 FY20 FY21 FY18 FY19 FY20 FY21
APOLLO TYRES LTD 221 8.5% 9.0% 10.5% 10.9% -14.1% -5.4% -10.8% 0.6% 17 14 11 10
CEAT LTD 1,151 10.8% 11.0% 11.2% 11.9% 8.4% -12.5% -13.9% 4.1% 17 16 14 12
BALKRISHNA INDS 919 19.3% 19.3% 19.2% 18.0% 1.8% 2.3% 1.8% 3.0% 24 21 18 17
JK TYRE & IND LT 93 3.4% 13.7% 17.3% 16.0% -25.6% 49.2% 43.2% 49.5% 32 6 4 5
MRF LTD 57,444 12.3% 11.0% 12.2% 11.6% 4.6% 4.8% 6.0% 6.4% 22 21 17 16
Source: Bloomberg, JM Financial

Risk factors
Significant slowdown in CV replacement demand
The MHCV segment remains the largest contributor to volume (tonnage) with c.55% share.
Nearly 70% of this demand arises from the replacement market. Sustained slowdown in
economic activity will have a direct negative impact on overall CV replacement demand. Also,
revocation of anti-dumping duty (ADD) on Chinese imports, which was imposed in FY18, will
adversely impact domestic tonnage growth.

Steep, sustained rise in raw material prices

Crude oil price and natural rubber remain key determinants of gross margin performance.
Despite the scope for pass through and price hike, sustained rise in RM prices from current
levels will warrant a downward revision to our margin assumptions.

Pricing pressure arising from heightened competition

Higher profitability of the 2W segment and robust CV demand till 1HFY19 have attracted
new entrants to these segments. Heightened competition and increased supply pose a threat
to pricing power of incumbents. While distribution network, brand value, and product quality
remain critical to the long term success, short term price disruptions will impact profitability.
Hence, it is important to monitor the changing competitive dynamics in the industry.

JM Financial Institutional Securities Limited Page 10

 4
6
8
10
12
14
16
18
20
22
24
26
28
30
32
0
2
4
6
8
10
12
14
16
18
20
22

4
6
8
10
12
14
16
18
20
22
24
26
28
30
32
May-12 May-12 May-12
Jul-12 Jul-12 Jul-12
Sep-12 Sep-12 Sep-12
Nov-12 Nov-12 Nov-12
Jan-13 Jan-13 Jan-13
Mar-13 Mar-13 Mar-13
May-13 May-13
Auto Ancillaries

May-13

NTM PE
NTM PE
NTM PE
Jul-13 Jul-13 Jul-13
Sep-13 Sep-13 Sep-13
Nov-13 Nov-13 Nov-13
Jan-14 Jan-14 Jan-14

Source: Bloomberg, Company

Mar-14 Mar-14 Mar-14

Source: Bloomberg, JM Financial

Source: Bloomberg, JM Financial

May-14 May-14 May-14
Jul-14 Jul-14

`+1SD
`+1SD

`+1SD
Jul-14
Sep-14 Sep-14 Sep-14
Nov-14 Nov-14 Nov-14
Jan-15 Jan-15 Jan-15
Mar-15 Mar-15 Mar-15
May-15 May-15 May-15
Jul-15 Jul-15 Jul-15
Sep-15 Sep-15

LTA P/E
LTA P/E

LTA P/E
Sep-15
Nov-15 Nov-15 Nov-15
Jan-16 Jan-16 Jan-16
Mar-16 Mar-16 Mar-16

JM Financial Institutional Securities Limited

May-16 May-16 May-16
Jul-16 Jul-16 Jul-16
Sep-16 Sep-16 Sep-16

`-1SD
`-1SD

`-1SD
Nov-16 Nov-16 Nov-16
Jan-17 Jan-17 Jan-17
Mar-17 Mar-17 Mar-17
May-17 May-17 May-17
Jul-17 Jul-17 Jul-17
Sep-17 Sep-17 Sep-17
Nov-17 Nov-17 Nov-17
Jan-18 Jan-18 Jan-18
Mar-18 Mar-18 Mar-18
May-18 May-18 May-18
Jul-18 Jul-18 Jul-18
Sep-18 Sep-18

Exhibit 37. MRF - NTM PE: 17x, 1yr fwd EPS growth exp: 15%
Sep-18
Nov-18 Nov-18 Nov-18
Jan-19 Jan-19 Jan-19

EPS growth after 1yr (RHS)

Mar-19 Mar-19 Mar-19
Exhibit 35. Balkrishna - NTM PE: 18x, 1yr fwd EPS growth exp: 10%
PE chart: Multiples moderate to historical mean

0%
0%

0%
5%

30%
40%
50%
EPS growth after 1yr (RHS) 60%
20%
30%
40%
50%
EPS growth after 1yr (RHS) 60%

10%
20%
10%

-30%
-20%
-10%
-40%
-30%
-20%
-10%
Exhibit 33. Apollo Tyres - NTM PE: 11x, 1yr fwd EPS growth exp: 14%

10%
20%
25%
30%

15%
5
10
15
20

0
2
4
6
25
30

8
10
12
14
16
18
20
22
24
26
28
30
32
34
36
38
40
42
44
46
48
50
0

0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
May-13 May-12 May-14
Jul-13 Jul-12 Jul-14
Sep-12
Sep-13 Sep-14
Nov-12
Nov-13 Jan-13 Nov-14
Jan-14 Mar-13
Mar-14 May-13 Jan-15
NTM PE

NTM PE
NTM PE

May-14 Jul-13 Mar-15

Jul-14 Sep-13
May-15
Nov-13
Sep-14 Jan-14 Jul-15

Source: Bloomberg, Company

Nov-14 Mar-14 Sep-15

Source: Bloomberg, JM Financial

Source: Bloomberg, JM Financial

Jan-15 May-14
Mar-15 Jul-14 Nov-15
`+1SD

`+1SD
`+1SD

May-15 Sep-14 Jan-16

Nov-14
Jul-15 Jan-15 Mar-16
Sep-15 Mar-15 May-16
Nov-15 May-15
Jul-16
Jan-16 Jul-15
Mar-16 Sep-15 Sep-16
LTA P/E

LTA P/E
LTA P/E

May-16 Nov-15 Nov-16

Jan-16
Jul-16 Mar-16 Jan-17
Sep-16 May-16 Mar-17
Nov-16 Jul-16
Sep-16 May-17
Jan-17
`-1SD

`-1SD
`-1SD

Mar-17 Nov-16 Jul-17

Jan-17 Sep-17
May-17 Mar-17
Jul-17 May-17 Nov-17
Sep-17 Jul-17 Jan-18
Nov-17 Sep-17
Nov-17 Mar-18
Jan-18
Jan-18 May-18
Mar-18 Mar-18
May-18 May-18 Jul-18
Jul-18 Jul-18 Sep-18
Sep-18 Sep-18 Nov-18
Exhibit 34. Ceat - NTM PE: 14x, 1yr fwd EPS growth exp: 17%

Nov-18 Nov-18
Jan-19 Jan-19
Exhibit 36. JK Tyre - NTM PE: 4x, 1yr fwd EPS growth exp: -11%

Jan-19
Mar-19 Mar-19
Mar-19
Exhibit 38. TVS Srichakra - NTM PE: 12x, 1yr fwd EPSe growth: 16%
0%

0%
150%
450%
750%

Page 11
20 March 2019

20%
30%
40%
50%
EPS growth after 1yr (RHS) 60%
10%
20%

10%
30%
EPS growth after 1yr (RHS) 40%

-150%

-40%
-30%
-20%
-10%
1050%
1350%
EPS growth after 1yr (RHS) 1650%
-30%
-20%
-10%

-50%
-40%
 20 March 2019 India | Auto Ancillaries | Sector Report
Auto Ancillaries 20 March 2019

Apollo Tyres | BUY

Domestic TBR and ramp-up in Euro ops. to drive earnings growth
Vaikam Kumar S
Margin concerns had dragged Apollo Tyres (APTY) in 9MFY19 despite registering c.25% YoY vaikam.kumar@jmfl.com | Tel: (91 22) 66303018
rveneue growth. With continued market leadership in the fast-growing, higher tonnage Vivek Kumar
Indian TBR segment and volume ramp-up in the European business, revenue growth is likely vivek.kumar@jmfl.com | Tel: (91 22) 66303019
to stable (FY19-21 JMFe revenue CAGR of 10%). On the profitability front, benefits of easing Jayesh Chandra Gupta
RM cost pressures following the steep correction in crude price is expected to flow in from jayesh.gupta@jmfl.com | Tel.(91 22) 66303054

4QFY19 onwards (FY19-21 JMFe margin expansion of c.130bps). With majority of the capex
plan ending in FY20, FCF generation and return ratios (FY21 ROICe of 8.1% vs 6.9% in
FY18) will begin to gradually improve. Maintain BUY with Mar’20 TP of INR275 (target P/E
multiple of 12x, in-line current and 5yr average). Sustained slowdown in CV cycle and
European PV sales remain key risks to our call. TBR segment. Recommendation and Price Target
Current Reco. BUY
 Technological leadership aids market share gains and pricing power: APTY has emerged
Previous Reco. BUY
as a technological leader among Indian tyre companies with increased R&D spending Current Price Target (12M) 275
(c.2% of sales). Lower cost of ownership, arising from better product quality, has enabled Upside/(Downside) 24.4%
APTY to gain market share (over 25%) in the fast-growing domestic TBR segment. Previous Price Target 275
Change 0.0%
Despite short term disruptions, structural growth drivers for the CV industry remain intact
along with the additional benefit of BS6 pre-buy in 2HFY20. As market leader, both in Key Data – APTY IN
terms of volume and pricing, APTY is well placed to outpace industry growth. Current Market Price INR221
Market cap (bn) INR126.4/US$1.8
 Ramp-up in European operations: APTY continues to make inroads in Europe with its Free Float 81%
‘Vredestein’ brand gaining traction in the replacement market. It currently enjoys a Shares in issue (mn) 572.0
market share of c.3%. Vredestein’s Sportrac 5 was one of just two compact car tyres to Diluted share (mn) 572.0
be ‘highly recommended’ in German professional body ADAC’s summer tyre test in 3-mon avg daily val (mn) INR573.9/US$8.3
52-week range 307/192
Feb’19. Significant focus on OE entry has fructified in new orders including the supply to Sensex/Nifty 38,363/11,532
VW Touareg. Current capacity of 8,000 tyres per day (tpd) at the low cost Hungary plant INR/US$ 69.0
is expected to reach 12,000 tpd by the end of FY19. Increased utilisation at Hungary will
aid APTY in achieving its intended margin range of 13%-14% for European Price Performance
% 1M 6M 12M
manufacturing operations by FY21.
Absolute 9.2 -7.9 -15.4
 Earnings expectation: In the domestic business, we estimate tonnage CAGR of 11% over Relative* 0.6 -10.8 -27.4
* To the BSE Sensex
FY18-21, primarily driven by BS6 pre-buy and robust replacement demand in the CV
segment. Revenue from Vredestein is expected to register 9% CAGR over FY18-21 aided
by volume CAGR of 6%. We estimate consolidated earnings CAGR of 22% over FY18-21
to be driven by revenue growth of 13% and margin expansion of 175bps. It is important
to note that the expected rise in profitability is largely on account of positive operating
leverage and has a potential upside with favourable RM price movement. Three year
consolidated capex of INR65bn will majorly occur in FY20 aiding improvement in FCF
generation and return profile from FY21 onwards.

 Maintain BUY: The stock is currently trading at 12x NTM JMFe earnings, after c.17% price
correction FYTD, close to its 5yr average. Considering strong earnings momentum and
improving return/FCF profile, we conservatively the target multiple at 12x to arrive at our
Mar’20 TP of INR275 (upside of c.24% from CMP)

Financial Summary (INR mn)

Y/E March FY17A FY18A FY19E FY20E FY21E
Net Sales 1,31,800 1,48,405 1,78,862 2,01,335 2,16,214
Sales Growth 11.2% 12.6% 20.5% 12.6% 7.4%
EBITDA 18,487 16,513 20,637 24,879 27,771
EBITDA Margin 14.0% 11.1% 11.5% 12.4% 12.8% JM Financial Research is also available on:
Adjusted Net Profit 10,993 7,239 9,221 11,529 13,072
Diluted EPS (INR) 21.6 12.7 16.1 20.2 22.9
Bloomberg - JMFR <GO>,
Diluted EPS Growth 1.9% -41.4% 27.4% 25.0% 13.4% Thomson Publisher & Reuters
ROIC 12.6% 6.9% 7.4% 8.1% 8.1% S&P Capital IQ and FactSet
ROE 15.8% 8.5% 9.1% 10.5% 10.9%
P/E (x) 10.2 17.5 13.7 11.0 9.7
Please see Appendix I at the end of this
P/B (x) 1.5 1.3 1.2 1.1 1.0
EV/EBITDA (x) 8.4 10.0 8.1 7.5 6.6 report for Important Disclosures and
Dividend Yield 1.4% 1.4% 1.4% 1.4% 1.4% Disclaimers and Research Analyst
Source: Company data, JM Financial. Note: Valuations as of 19/Mar/2019 Certification.

JM Financial Institutional Securities Limited

JM Financial Institutional Securities Limited Page 12
Auto Ancillaries 20 March 2019

Exhibit 39. Quarterly sales trend (standalone) Exhibit 40. Quarterly sales trend (consolidated)
Standalone Sales (INR mn) YoY Growth (%) 40% Consol. Sales (INR mn) YoY Growth
50,000 35%

30,000 30% 25%

45,000

27,000 20% 15%

40,000
10% 5%
24,000
35,000
0% -5%

21,000 30,000
-10% -15%

18,000 -20% 25,000 -25%

Q3FY15

Q1FY19
Q1FY13

Q3FY13

Q1FY14

Q3FY14

Q1FY15

Q1FY16

Q3FY16

Q1FY17

Q3FY17

Q1FY18

Q3FY18

Q3FY19

Q3FY13

Q1FY18
Q1FY13

Q1FY14

Q3FY14

Q1FY15

Q3FY15

Q1FY16

Q3FY16

Q1FY17

Q3FY17

Q3FY18

Q1FY19

Q3FY19
Source: Company, JM Financial Source: Company, JM Financial

Exhibit 41. Quarterly margin trend (standalone) Exhibit 42. Quarterly margin trend (consolidated)
Standalone RM/Sales (%, LHS) Standalone EBITDA Margin (%, RHS) Consolidated RM/Sales (%, LHS) Consol. EBITDA Margin (%, RHS)
70% 21%
80% 21%

75% 65% 18%

18%

70%
15% 60% 15%

65%
12% 55% 12%
60%

9% 50% 9%
55%

50% 6% 45% 6%
Q2FY13

Q3FY14

Q4FY15

Q1FY17

Q2FY18
Q1FY13

Q3FY13
Q4FY13
Q1FY14
Q2FY14

Q4FY14
Q1FY15
Q2FY15
Q3FY15

Q1FY16
Q2FY16
Q3FY16
Q4FY16

Q2FY17
Q3FY17
Q4FY17
Q1FY18

Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY13

Q1FY16

Q1FY17

Q2FY19
Q1FY13
Q2FY13
Q3FY13

Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15

Q2FY16
Q3FY16
Q4FY16

Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19

Q3FY19

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 43. Quarterly profit trend (standalone) Exhibit 44. Quarterly profit trend (consolidated)
Standalone PAT (INR mn) YoY Growth Consolidated PAT (INR mn) YoY Growth
2,500 250% 3,500 200%

200% 3,000
2,000 150%

150% 2,500
100%
1,500
100% 2,000
50%
50% 1,500
1,000
0%
0% 1,000
500
500 -50%
-50%

- -100% - -100%
Q3FY13

Q1FY16

Q1FY19
Q1FY13

Q1FY14

Q3FY14

Q1FY15

Q3FY15

Q3FY16

Q1FY17

Q3FY17

Q1FY18

Q3FY18

Q3FY19
Q1FY15

Q1FY18
Q1FY13

Q3FY13

Q1FY14

Q3FY14

Q3FY15

Q1FY16

Q3FY16

Q1FY17

Q3FY17

Q3FY18

Q1FY19

Q3FY19

Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 13

 Auto Ancillaries 20 March 2019

Financial Tables (Consolidated)

Income Statement (INR mn) Balance Sheet (INR mn)
Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E
Net Sales 1,31,800 1,48,405 1,78,862 2,01,335 2,16,214 Shareholders’ Fund 72,900 97,767 1,04,918 1,14,378 1,25,381
Sales Growth 11.2% 12.6% 20.5% 12.6% 7.4% Share Capital 509 572 572 572 572
Other Operating Income 0 0 0 0 0 Reserves & Surplus 72,391 97,195 1,04,346 1,13,806 1,24,809
Total Revenue 1,31,800 1,48,405 1,78,862 2,01,335 2,16,214 Preference Share Capital 0 0 0 0 0
Cost of Goods Sold/Op. Exp 68,901 83,955 1,02,355 1,15,020 1,23,284 Minority Interest 0 0 0 0 0
Personnel Cost 19,270 21,566 25,329 27,355 29,047 Total Loans 32,445 44,457 48,257 64,257 60,257
Other Expenses 25,143 26,371 30,541 34,081 36,111 Def. Tax Liab. / Assets (-) 8,509 9,458 9,711 10,027 10,385
EBITDA 18,487 16,513 20,637 24,879 27,771 Total - Equity & Liab. 1,13,854 1,51,682 1,62,886 1,88,661 1,96,022
EBITDA Margin 14.0% 11.1% 11.5% 12.4% 12.8% Net Fixed Assets 96,066 1,27,071 1,36,190 1,57,223 1,66,712
EBITDA Growth -7.4% -10.7% 25.0% 20.6% 11.6% Gross Fixed Assets 1,24,509 1,72,196 1,96,036 2,13,219 2,46,938
Depn. & Amort. 4,618 5,926 7,365 8,185 8,858 Intangible Assets 1,774 2,061 2,061 2,061 2,061
EBIT 13,869 10,587 13,273 16,694 18,913 Less: Depn. & Amort. 59,368 70,226 77,590 85,775 94,634
Other Income 1,518 1,165 1,305 1,462 1,608 Capital WIP 29,151 23,041 15,683 27,719 12,347
Finance Cost 1,029 1,629 1,947 2,363 2,615 Investments 3,962 13,425 6,925 9,925 6,425
PBT before Excep. & Forex 14,359 10,123 12,631 15,793 17,907 Current Assets 52,933 61,036 73,743 79,188 83,196
Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 26,455 29,454 35,282 39,715 42,650
PBT 14,359 10,123 12,631 15,793 17,907 Sundry Debtors 11,275 14,350 17,151 19,306 20,733
Taxes 3,365 2,884 3,410 4,264 4,835 Cash & Bank Balances 3,369 5,992 7,633 4,962 3,272
Extraordinary Inc./Loss(-) 0 0 0 0 0 Loans & Advances 6,105 4,498 6,260 7,047 7,567
Assoc. Profit/Min. Int.(-) 3 0 0 0 0 Other Current Assets 5,728 6,742 7,416 8,158 8,974
Reported Net Profit 10,990 7,239 9,221 11,529 13,072 Current Liab. & Prov. 39,107 49,851 53,972 57,674 60,311
Adjusted Net Profit 10,993 7,239 9,221 11,529 13,072 Current Liabilities 17,318 24,471 28,177 31,424 33,558
Net Margin 8.3% 4.9% 5.2% 5.7% 6.0% Provisions & Others 21,790 25,380 25,795 26,251 26,752
Diluted Share Cap. (mn) 509.0 572.0 572.0 572.0 572.0 Net Current Assets 13,826 11,185 19,771 21,513 22,885
Diluted EPS (INR) 21.6 12.7 16.1 20.2 22.9 Total – Assets 1,13,854 1,51,682 1,62,886 1,88,661 1,96,022
Diluted EPS Growth 1.9% -41.4% 27.4% 25.0% 13.4% Source: Company, JM Financial
Total Dividend + Tax 1,841 2,069 2,069 2,069 2,069
Dividend Per Share (INR) 3.0 3.0 3.0 3.0 3.0
Source: Company, JM Financial

Cash Flow Statement (INR mn) Dupont Analysis

Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E
Profit before Tax 14,359 10,123 12,631 15,793 17,907 Net Margin 8.3% 4.9% 5.2% 5.7% 6.0%
Depn. & Amort. 4,618 5,926 7,365 8,185 8,858 Asset Turnover (x) 1.0 0.9 0.9 0.9 0.9
Net Interest Exp. / Inc. (-) -489 464 642 901 1,007
Leverage Factor (x) 1.8 2.0 2.0 2.0 2.0
Inc (-) / Dec in WCap. -494 5,504 -7,360 -4,869 -3,564
RoE 15.8% 8.5% 9.1% 10.5% 10.9%
Others -3 0 0 0 0
Taxes Paid -3,365 -2,884 -3,410 -4,264 -4,835 Key Ratios
Y/E March FY17A FY18A FY19E FY20E FY21E
Operating Cash Flow 14,625 19,132 9,867 15,745 19,373
Capex -32,467 -36,931 -16,483 -29,219 -18,347 BV/Share (INR) 143.2 170.9 183.4 199.9 219.2

Free Cash Flow -17,842 -17,799 -6,616 -13,473 1,026 ROIC 12.6% 6.9% 7.4% 8.1% 8.1%

Inc (-) / Dec in Investments 1,098 -9,463 6,500 -3,000 3,500 ROE 15.8% 8.5% 9.1% 10.5% 10.9%

Others 1,518 1,165 1,305 1,462 1,608 Net Debt/Equity (x) 0.4 0.4 0.4 0.5 0.5

Investing Cash Flow -29,851 -45,229 -8,678 -30,757 -13,239 P/E (x) 10.2 17.5 13.7 11.0 9.7

Inc / Dec (-) in Capital 0 63 0 0 0 P/B (x) 1.5 1.3 1.2 1.1 1.0

Dividend + Tax thereon -1,841 -2,069 -2,069 -2,069 -2,069 EV/EBITDA (x) 8.4 10.0 8.1 7.5 6.6

Inc / Dec (-) in Loans 16,457 12,011 3,800 16,000 -4,000 EV/Sales (x) 1.2 1.1 0.9 0.9 0.8

Others -1,963 18,714 -1,280 -1,591 -1,755 Debtor days 31 35 35 35 35

Financing Cash Flow 12,653 28,719 451 12,340 -7,824 Inventory days 73 72 72 72 72

Inc / Dec (-) in Cash -2,573 2,623 1,641 -2,671 -1,690 Creditor days 56 68 65 65 65

Opening Cash Balance 5,942 3,369 5,992 7,633 4,962 Source: Company, JM Financial

Closing Cash Balance 3,369 5,992 7,633 4,962 3,272

Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 14

 20 March 2019 India | Auto Ancillaries | Sector Report
Auto Ancillaries 20 March 2019

Ceat Ltd | BUY

All eyes on demand revival; capex cycle to remain a drag
Vaikam Kumar S
Over the LTM, CEAT witnessed demand and profitability headwinds with slowdown in its vaikam.kumar@jmfl.com | Tel: (91 22) 66303018
focus segments adversely impacting volume growth. As a result, the stock corrected c.33% Vivek Kumar
in CY18 and is trading close to its 6yr average NTM P/E of 13x. With expectation of a vivek.kumar@jmfl.com | Tel: (91 22) 66303019
moderate revival in demand for passenger segments in 2HFY20 and commissioning of the Jayesh Chandra Gupta
new Halol TBR plant in Dec’18 , we estimate volume CAGR of 7% over FY19-21. Margin jayesh.gupta@jmfl.com | Tel.(91 22) 66303054

expansion of 140bps due to favourable mix, increased focus on OHT exports, and positive
operating leverage are expected to drive earnings CAGR of 14% over FY19-21. However,
capex of c.INR40bn (predominantly for Chennai PCR and Halol TBR ramp-up) is likely to
impede improvement in FCF generation and return ratios in the medium term. We maintain
BUY with Mar’20 TP of INR1,350 (14x forward earnings). Sustained slowdown in PV/2W Recommendation and Price Target
demand and sharp rise in crude oil prices remain key risks to our call. Current Reco. BUY
Previous Reco. BUY
 Growth vs profitability: CEAT’s focus on profitable growth had paid rich dividends with Current Price Target (12M) 1,350
an improved return profile since FY13. The strategic focus areas include the passenger Upside/(Downside) 17.3%
segment, specialty exports and emerging markets with the share of OE sales at c.27% in Previous Price Target 1,350
Change 0.0%
FY18. Share of the replacement market dominated CV segment had reduced from 46%
in FY14 to 32% in FY18. Consequently, weak demand in domestic 2W/PV segment and Key Data – CEAT IN
slowdown in Indonesia adversely impacted volume growth in FY19. With expectations of Current Market Price INR1,151
stable growth in 2W/PV tyre volume over FY19-21, CEAT is poised to witness a pick-up in Market cap (bn) INR46.5/US$0.7
demand. Hence, we are estimating volume CAGR of c.7% over FY19-21. Free Float 48%
Shares in issue (mn) 40.5
 Earnings expectation: Realisation CAGR of c.3% is expected to offset inflationary RM cost Diluted share (mn) 40.5
pressures and result in gross margin expansion of 50bps over FY19-21. However, 3-mon avg daily val (mn) INR660.3/US$9.6
52-week range 1,666/984
increasing competitive intensity in CEAT’s major segment of 2W tyres has reduced the Sensex/Nifty 38,363/11,532
profitability of the segment. The Company is confident about retaining its market share INR/US$ 69.0
with 20-50% share of business with major 2W OEMs in the country. The current
outsourced model will continue even as in-house capacity is being built to cater to Price Performance
% 1M 6M 12M
additional demand for 2W tyres. The new TBR plant is expected to start supply in 4QFY19
Absolute 9.4 -14.1 -25.2
and become margin accretive in FY20. Increased focus on OHT exports through the Relative* 0.8 -16.9 -35.8
wholly owned subsidiary ‘CEAT Speciality’ is likely to further enhance profitability. Overall, * To the BSE Sensex
consolidated EBITDA margin is expected to expand by 140bps over FY19-21. PCR capacity
expansion from 0.5mn to 0.7mn tyres p.m. is expected to be completed by Jul‘19. CEAT
intends to evenly distribute its INR 40bn capex plan over FY19-21. The net debt-to-equity
ratio is likely to peak at 0.7x in FY20.

 Maintain BUY: With growth and profitability concerns affecting earnings expectation, the
stock price of CEAT witnessed c.33% correction in CY18. The stock is currently trading at
14x NTM earnings (c.12% premium to 6yr average). Strengthening of its product
franchise with the new TBR and PCR facilities should aid volume growth while
prominence in the profitable 2W segment supports margins. We estimate
revenue/earnings CAGR of 11%/14% over FY19-21. Maintain BUY with Mar’20 TP of
INR1,350 (14x forward earnings, c.17% upside from CMP).

Financial Summary (INR mn)

Y/E March FY17A FY18A FY19E FY20E FY21E
Net Sales 57,665 62,308 69,577 78,519 85,581
Sales Growth (%) 5.2 8.1 11.7 12.9 9.0
EBITDA 6,568 6,148 6,613 8,031 9,361
EBITDA Margin (%) 11.4 9.9 9.5 10.2 10.9 JM Financial Research is also available on:
Adjusted Net Profit 3,745 2,719 2,983 3,323 3,907
Diluted EPS (INR) 92.6 67.2 73.7 82.2 96.6
Bloomberg - JMFR <GO>,
Diluted EPS Growth (%) -16.6 -27.4 9.7 11.4 17.6 Thomson Publisher & Reuters
ROIC (%) 14.1 9.5 9.2 8.8 8.9 S&P Capital IQ and FactSet
ROE (%) 16.8 10.8 11.0 11.2 11.9
P/E (x) 12.4 17.1 15.6 14.0 11.9
Please see Appendix I at the end of this
P/B (x) 1.9 1.8 1.6 1.5 1.4
EV/EBITDA (x) 8.4 8.4 9.1 8.5 7.3 report for Important Disclosures and
Dividend Yield (%) 0.0 1.0 1.0 1.0 1.0 Disclaimers and Research Analyst
Source: Company data, JM Financial. Note: Valuations as of 19/Mar/2019 Certification.

JM Financial Institutional Securities Limited

JM Financial Institutional Securities Limited Page 15
 10,000
11,000
13,000
14,000
15,000
16,000
17,000
18,000

12,000
1QFY13
2QFY13
3QFY13
Auto Ancillaries

4QFY13
1QFY14
2QFY14

Source: Company, JM Financial

3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
StA. Sales (INR mn)

4QFY15
1QFY16
2QFY16
3QFY16

JM Financial Institutional Securities Limited

4QFY16
1QFY17
2QFY17
3QFY17
Exhibit 45. Quarterly trend – revenue and margin

4QFY17
1QFY18
EBITDA Margin (%, RHS)

2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
0
2
4
6
8
10
12
14
16
18

50
60
70
80
90
100

1QFY13 70.6 15.7

2QFY13 70.9 16.8
4.8 5.6

3QFY13 68.8 17.0

5.7

4QFY13 66.7 17.2

5.8

1QFY14 64.9 18.5

5.2

2QFY14 63.1 18.1

5.9

Source: Company, JM Financial

3QFY14 65.3 18.3

4QFY14 65.6 18.4
Total R/M cost as % of sales

1QFY15 65.6 19.6

5.7 4.9 5.7

2QFY15 61.7 20.5

6.0

3QFY15 59.7 21.3

4QFY15 58.7 22.0
6.6 6.8

1QFY16 57.6 20.2

Exhibit 46. Quarterly trend – cost mix

2QFY16 56.3 22.7

6.5 7.2

3QFY16 55.7 22.4

4QFY16 56.8 23.0
1QFY17 57.3 23.8
7.0 6.3 6.2
Employee cost as % of sales

2QFY17 57.7 22.4

6.7

3QFY17 58.8 23.0

7.2

4QFY17 62.9 20.8

6.8

1QFY18 66.5 23.1

6.6

2QFY18 60.8 20.2

7.0

3QFY18 58.7 22.1

6.8

4QFY18 61.2 20.3

Other cost as % of sales

1QFY19 61.4 21.6

2QFY19 61.6 21.7

Page 16
20 March 2019

6.4 6.6 7.77.9

3QFY19 59.9 24.0

 Auto Ancillaries 20 March 2019

Financial Tables (Consolidated)

Income Statement (INR mn) Balance Sheet (INR mn)
Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E
Net Sales 57,665 62,308 69,577 78,519 85,581 Shareholders’ Fund 24,150 26,061 28,356 31,111 34,430
Sales Growth 5.2% 8.1% 11.7% 12.9% 9.0% Share Capital 405 405 405 405 405
Other Operating Income 0 0 0 0 0 Reserves & Surplus 23,745 25,656 27,951 30,706 34,025
Total Revenue 57,665 62,308 69,577 78,519 85,581 Preference Share Capital 0 0 0 0 0
Cost of Goods Sold/Op. Exp 33,998 38,100 41,587 46,916 50,790 Minority Interest 292 234 234 234 234
Personnel Cost 4,063 4,383 5,430 6,264 6,821 Total Loans 9,104 6,467 14,267 22,267 22,767
Other Expenses 13,037 13,677 15,947 17,309 18,608 Def. Tax Liab. / Assets (-) 1,675 2,203 2,103 2,003 1,903
EBITDA 6,568 6,148 6,613 8,031 9,361 Total - Equity & Liab. 35,221 34,965 44,959 55,615 59,334
EBITDA Margin 11.4% 9.9% 9.5% 10.2% 10.9% Net Fixed Assets 29,076 31,698 41,464 53,218 58,198
EBITDA Growth -15.1% -6.4% 7.6% 21.4% 16.6% Gross Fixed Assets 27,017 31,294 38,394 52,259 64,338
Depn. & Amort. 1,431 1,686 1,900 2,124 2,534 Intangible Assets 1,288 1,360 1,160 960 760
EBIT 5,137 4,462 4,713 5,906 6,827 Less: Depn. & Amort. 2,492 4,056 5,956 8,080 10,614
Other Income 186 295 403 621 814 Capital WIP 3,263 3,100 7,866 8,079 3,714
Finance Cost 817 974 1,016 1,740 2,121 Investments 2,316 2,135 2,735 1,935 1,435
PBT before Excep. & Forex 4,506 3,783 4,099 4,788 5,519 Current Assets 17,778 17,777 17,492 18,758 19,757
Excep. & Forex Inc./Loss(-) 0 0 0 0 0 Inventories 9,435 7,846 8,233 8,954 9,320
PBT 4,506 3,783 4,099 4,788 5,519 Sundry Debtors 6,138 7,472 7,431 8,275 8,915
Taxes 1,064 1,340 1,317 1,544 1,712 Cash & Bank Balances 359 863 532 533 826
Extraordinary Inc./Loss(-) -133 -340 0 0 0 Loans & Advances 1,846 1,596 1,296 996 696
Assoc. Profit/Min. Int.(-) -303 -277 -200 -80 -100 Other Current Assets 0 0 0 0 0
Reported Net Profit 3,612 2,380 2,983 3,323 3,907 Current Liab. & Prov. 13,949 16,645 16,731 18,297 20,056
Adjusted Net Profit 3,745 2,719 2,983 3,323 3,907 Current Liabilities 7,582 8,705 8,331 9,323 10,370
Net Margin 6.5% 4.4% 4.3% 4.2% 4.6% Provisions & Others 6,367 7,940 8,401 8,974 9,687
Diluted Share Cap. (mn) 40.5 40.5 40.5 40.5 40.5 Net Current Assets 3,829 1,132 760 461 -300
Diluted EPS (INR) 92.6 67.2 73.7 82.2 96.6 Total – Assets 35,221 34,965 44,959 55,615 59,334
Diluted EPS Growth -16.6% -27.4% 9.7% 11.4% 17.6% Source: Company, JM Financial
Total Dividend + Tax 0 520 520 520 520
Dividend Per Share (INR) 0.0 11.5 11.5 11.5 11.5
Source: Company, JM Financial

Cash Flow Statement (INR mn) Dupont Analysis

Y/E March FY17A FY18A FY19E FY20E FY21E Y/E March FY17A FY18A FY19E FY20E FY21E
Profit before Tax 4,506 3,783 4,099 4,788 5,519 Net Margin 6.5% 4.4% 4.3% 4.2% 4.6%
Depn. & Amort. 1,431 1,686 1,900 2,124 2,534 Asset Turnover (x) 1.8 1.8 1.8 1.6 1.5
Net Interest Exp. / Inc. (-) 817 974 1,016 1,740 2,121
Leverage Factor (x) 1.4 1.4 1.4 1.7 1.7
Inc (-) / Dec in WCap. -1,333 3,255 -52 201 854
RoE 16.8% 10.8% 11.0% 11.2% 11.9%
Others 139 -120 200 80 100
Taxes Paid -1,064 -1,340 -1,317 -1,544 -1,712 Key Ratios
Y/E March FY17A FY18A FY19E FY20E FY21E
Operating Cash Flow 4,496 8,236 5,847 7,388 9,416
Capex -6,628 -4,308 -11,666 -13,879 -7,514 BV/Share (INR) 597.0 644.3 701.0 769.1 851.2

Free Cash Flow -2,132 3,928 -5,819 -6,491 1,902 ROIC 14.1% 9.5% 9.2% 8.8% 8.9%

Inc (-) / Dec in Investments -361 181 -600 800 500 ROE 16.8% 10.8% 11.0% 11.2% 11.9%

Others -817 -974 -1,016 -1,740 -2,121 Net Debt/Equity (x) 0.4 0.2 0.5 0.7 0.6

Investing Cash Flow -7,807 -5,101 -13,282 -14,819 -9,135 P/E (x) 12.4 17.1 15.6 14.0 11.9

Inc / Dec (-) in Capital 0 0 0 0 0 P/B (x) 1.9 1.8 1.6 1.5 1.4

Dividend + Tax thereon 0 -520 -520 -520 -520 EV/EBITDA (x) 8.4 8.4 9.1 8.5 7.3

Inc / Dec (-) in Loans 2,472 -2,637 7,800 8,000 500 EV/Sales (x) 1.0 0.8 0.9 0.9 0.8

Others 568 525 -176 -47 33 Debtor days 39 44 39 38 38

Financing Cash Flow 3,040 -2,632 7,104 7,432 12 Inventory days 60 46 43 42 40

Inc / Dec (-) in Cash -270 503 -331 1 293 Creditor days 54 57 48 48 50

Opening Cash Balance 629 359 863 532 533 Source: Company, JM Financial

Closing Cash Balance 359 863 532 533 826

Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 17

Auto Ancillaries 20 March 2019

APPENDIX I

JM Financial Inst itut ional Secur ities Lim ited

(formerly known as JM Financial Securities Limited)
Corporate Identity Number: U67100MH2017PLC296081
Member of BSE Ltd., National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.
SEBI Registration Nos.: Stock Broker - INZ000163434, Research Analyst – INH000000610
Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.
Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: jmfinancial.research@jmfl.com | www.jmfl.com
Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: sunny.shah@jmfl.com

Definition of ratings
Rating Meaning
Buy Total expected returns of more than 15%. Total expected return includes dividend yields.
Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.
Sell Price expected to move downwards by more than 10%

Research Analyst(s) Certification

The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that:

All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and

No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research
report.

Important Disclosures

This research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securities) to provide information about the
company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the purpose of information of the select
recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written
consent of JM Financial Institutional Securities. This report has been prepared independent of the companies covered herein.

JM Financial Institutional Securities is registered with the Securities and Exchange Board of India (SEBI) as a Research Analyst and a Stock Broker having trading
memberships of the BSE Ltd. (BSE), National Stock Exchange of India Ltd. (NSE) and Metropolitan Stock Exchange of India Ltd. (MSEI). No material disciplinary
action has been taken by SEBI against JM Financial Institutional Securities in the past two financial years which may impact the investment decision making of the
investor.

JM Financial Institutional Securities renders stock broking services primarily to institutional investors and provides the research services to its institutional
clients/investors. JM Financial Institutional Securities and its associates are part of a multi-service, integrated investment banking, investment management,
brokerage and financing group. JM Financial Institutional Securities and/or its associates might have provided or may provide services in respect of managing
offerings of securities, corporate finance, investment banking, mergers & acquisitions, broking, financing or any other advisory services to the company(ies)
covered herein. JM Financial Institutional Securities and/or its associates might have received during the past twelve months or may receive compensation from
the company(ies) mentioned in this report for rendering any of the above services.

JM Financial Institutional Securities and/or its associates, their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell
the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other
compensation or act as a market maker in the financial instruments of the company(ies) covered under this report or (c) act as an advisor or lender/borrower to,
or may have any financial interest in, such company(ies) or (d) considering the nature of business/activities that JM Financial Institutional Securities is engaged in,
it may have potential conflict of interest at the time of publication of this report on the subject company(ies).

Neither JM Financial Institutional Securities nor its associates or the Research Analyst(s) named in this report or his/her relatives individually own one per cent or
more securities of the company(ies) covered under this report, at the relevant date as specified in the SEBI (Research Analysts) Regulations, 2014.

The Research Analyst(s) principally responsible for the preparation of this research report and members of their household are prohibited from buying or selling
debt or equity securities, including but not limited to any option, right, warrant, future, long or short position issued by company(ies) covered under this report.
The Research Analyst(s) principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts) Regulations,
2014); (a) do not have any financial interest in the company(ies) covered under this report or (b) did not receive any compensation from the company(ies) covered
under this report, or from any third party, in connection with this report or (c) do not have any other material conflict of interest at the time of publication of this
report. Research Analyst(s) are not serving as an officer, director or employee of the company(ies) covered under this report.

While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or
developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities may
not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This
report is provided for information only and is not an investment advice and must not alone be taken as the basis for an investment decision.

JM Financial Institutional Securities Limited Page 18

Auto Ancillaries 20 March 2019

The investment discussed or views expressed or recommendations/opinions given herein may not be suitable for all investors. The user assumes the entire risk of
any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities reserves the right to
make modifications and alterations to this statement as they may deem fit from time to time.

This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any transaction.

This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or
other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial Institutional
Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be
eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of
and to observe such restrictions.

Persons who receive this report from JM Financial Singapore Pte Ltd may contact Mr. Ruchir Jhunjhunwala (ruchir.jhunjhunwala@jmfl.com) on +65 6422 1888 in
respect of any matters arising from, or in connection with, this report.

Additional disclosure only for U.S. persons: JM Financial Institutional Securities has entered into an agreement with JM Financial Securities, Inc. ("JM Financial
Securities"), a U.S. registered broker-dealer and member of the Financial Industry Regulatory Authority ("FINRA") in order to conduct certain business in the
United States in reliance on the exemption from U.S. broker-dealer registration provided by Rule 15a-6, promulgated under the U.S. Securities Exchange Act of
1934 (the "Exchange Act"), as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission ("SEC") (together "Rule 15a-6").

This research report is distributed in the United States by JM Financial Securities in compliance with Rule 15a-6, and as a "third party research report" for
purposes of FINRA Rule 2241. In compliance with Rule 15a-6(a)(3) this research report is distributed only to "major U.S. institutional investors" as defined in Rule
15a-6 and is not intended for use by any person or entity that is not a major U.S. institutional investor. If you have received a copy of this research report and are
not a major U.S. institutional investor, you are instructed not to read, rely on, or reproduce the contents hereof, and to destroy this research or return it to JM
Financial Institutional Securities or to JM Financial Securities.

This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) solely responsible for its content. The
research analyst(s) preparing this research report is/are resident outside the United States and are not associated persons or employees of any U.S. registered
broker-dealer. Therefore, the analyst(s) are not subject to supervision by a U.S. broker-dealer, or otherwise required to satisfy the regulatory licensing
requirements of FINRA and may not be subject to the Rule 2241 restrictions on communications with a subject company, public appearances and trading
securities held by a research analyst account.

JM Financial Institutional Securities only accepts orders from major U.S. institutional investors. Pursuant to its agreement with JM Financial Institutional Securities,
JM Financial Securities effects the transactions for major U.S. institutional investors. Major U.S. institutional investors may place orders with JM Financial
Institutional Securities directly, or through JM Financial Securities, in the securities discussed in this research report.

Additional disclosure only for U.K. persons: Neither JM Financial Institutional Securities nor any of its affiliates is authorised in the United Kingdom (U.K.) by the
Financial Conduct Authority. As a result, this report is for distribution only to persons who (i) have professional experience in matters relating to investments
falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the "Financial Promotion Order"), (ii)
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the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial
Services and Markets Act 2000) in connection with the matters to which this report relates may otherwise lawfully be communicated or caused to be
communicated (all such persons together being referred to as "relevant persons"). This report is directed only at relevant persons and must not be acted on or
relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will
be engaged in only with relevant persons.

Additional disclosure only for Canadian persons: This report is not, and under no circumstances is to be construed as, an advertisement or a public offering of the
securities described herein in Canada or any province or territory thereof. Under no circumstances is this report to be construed as an offer to sell securities or as
a solicitation of an offer to buy securities in any jurisdiction of Canada. Any offer or sale of the securities described herein in Canada will be made only under an
exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable
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representation that you are an “accredited investor” as such term is defined in National Instrument 45-106 Prospectus Exemptions and a “permitted client” as
such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Under no circumstances is the
information contained herein to be construed as investment advice in any province or territory of Canada nor should it be construed as being tailored to the
needs of the recipient. Canadian recipients are advised that JM Financial Securities, Inc., JM Financial Institutional Securities Limited, their affiliates and authorized
agents are not responsible for, nor do they accept, any liability whatsoever for any direct or consequential loss arising from any use of this research report or the
information contained herein.

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