For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

Kotak Institutional Equities Research kotak.research@kotak.com Mumbai: +91-22-4336-0000

Leverage levels in FY2014E will be lower for the industry as a whole versus FY2008-10

Our analysis of leverage (net debt/EBITDA) levels for the industry (top-4 Indian companies) suggests that leverage levels in FY2014E will be slightly lower versus FY2008-10. During both the time periods under consideration, leverage levels of the industry are low led by higher profitability on account of lower natural rubber prices. As per our calculations, net debt to EBITDA ratio for the industry, which fell to 1.5X in FY2010, will again fall to 1.1X in FY2014E.

With the exception of JK Tyres, most of the companies will be at similar/lower levels versus past

With the exception of JK Tyres, for which leverage ratio will likely move up in FY2014E from FY2008-10 levels, for all the other companies leverage will remain more or less similar (Apollo Tyres) or go down in FY2014. For example, net debt/EBITDA ratio for Apollo Tyres will be close to 0.8X in FY2014E versus 0.6X in FY2008. Net debt to EBITDA ratio for MRF will fall to 0.5X in FY2014E versus 1X in FY2009.

Despite similar leverage ratio, industry will be in a better shape going forward

In our view, despite roughly similar leverage ratios (FY2014E versus FY2008-10), industry will be in a much better shape going forward versus past even if rubber prices were to increase from here. Against near-full utilization levels in FY2008-10, the industry is operating at only 75-80% utilization as of now, which means that there is no pressing need for immediate capex in the near future. In FY2008-10, almost all the domestic companies embarked on large capex so as not to lose market share on account of potential unavailability of capacity. As a result, leverage ratios increased significantly in the subsequent years. However, this time around, given comfortable utilization levels, capex spend will be much more gradual. Also, EBITDA/cash flows of the industry have scaled up to an extent (even if rubber prices were to increase) that capex on typical size of a new plant (300-400 MT per day, which would cost US$350-450 mn) is a lower multiple of individual EBITDAs of various companies versus FY2008-10. For example, in FY2008, Apollo Tyres EBITDA was `6 bn and a new plant (Chennai with 450 MT per day capacity) cost them ~`23 bn, ~3.8X peak EBITDA. Now a similar plant would cost ~US$500 mn (`30 bn), which is less than 2X of the companys EBITDA in FY2014E. Hence, even if the companies were to expand capacities, leverage ratios will remain much more comfortable versus past levels.

Industry leverage will be more comfortable versus past; pricing discipline to be maintained

In our view, even as industry players will embark on capex, leverage ratios will remain much more comfortable versus past. Hence, given relatively comfortable balance sheets, we expect pricing discipline to be maintained going forward. Concomitant lower industry risk profile also means that earning multiples have a scope to move higher versus past levels.

Others Tires

Sitting comfortably. Our analysis of leverage (debt/EBITDA) levels in the tire sector suggests that industrys leverage levels in FY2014E will be slightly lower versus FY2008-10 (EBITDA margins are high in both the periods on low rubber prices). However, despite similar leverage levels, industry will be in a better shape going forward, as (1) none of the companies are embarking on large capex spends, which was the case in FY2008-10, as capacity utilization levels are comfortable (75-80%) now versus near-full utilization levels in FY2008-10 and (2) given substantially higher EBITDA/cash flows (even after assuming higher rubber prices), capex on new plants will not increase leverage levels as it did in FY2009-12. Hence, we expect more comfortable company balance sheets going forward. Pricing discipline should be maintained as a result.

MARCH 19, 2014

UPDATE

BSE-30: 21,833

Jasdeep Walia jasdeep.w@kotak.com Mumbai: +91-22-4336-0877

India Others

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 1: Industry-wide leverage (net debt to EBITDA) is at historical lows Net debt to EBITDA for top-4 domestic companies, March fiscal year-ends (X)

4.5

5.6

3.8

1.5

2.6

1.7

1.1

2.8

2.32.2

0

1

2

3

4

5

6

2004

2005

2006

2007

2009

2010

2011

2012

2013

2014

E

Source: Kotak Institutional Equities

Exhibit 2: Apollo Tyres leverage levels in FY2014E would be similar to the lows in FY2008 Trend in net debt to EBITDA ratio for Apollo Tyres, consolidated, March fiscal year-ends (Rs mn)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014ETotal shareholder funds 6,021 6,011 6,340 9,348 11,825 13,496 19,678 24,125 28,328 34,009 41,830 Total debt 4,215 5,439 7,500 8,232 6,461 8,907 17,072 24,802 28,720 26,507 24,450 Cash 1,505 1,320 2,315 1,935 2,847 3,621 3,490 1,909 1,730 3,348 9,647 Other income 181 938 291 337 262 314 1,174 509 326 1,113 Operating profit 1,845 1,881 2,529 4,332 6,235 4,537 13,026 10,232 11,788 15,777 EBITDA 1,664 943 2,238 3,996 5,973 4,223 11,852 9,723 11,461 14,664 17,540 Net debt 2,710 4,119 5,185 6,297 3,614 5,286 13,582 22,893 26,990 23,160 14,803 Net debt to EBITDA 1.6 4.4 2.3 1.6 0.6 1.3 1.1 2.4 2.4 1.6 0.8

Source: Capitaline, Kotak Institutional Equities

Exhibit 3: CEATs leverage levels in FY2014E will be much lower versus FY2010 Trend in net debt to EBITDA ratio for CEAT, March fiscal year-ends (Rs mn)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014ETotal shareholder funds 6,148 6,138 3,490 3,786 5,133 4,884 6,301 6,537 6,778 7,855 10,350 Total debt 4,727 4,548 5,213 4,923 4,776 6,451 6,930 10,111 13,113 10,377 9,290 Cash 391 313 396 406 416 2,015 1,604 489 397 1,121 648 Other income 1,061 447 226 244 1,025 494 411 227 223 177 Operating profit 1,217 860 999 1,622 2,968 726 3,451 1,799 2,928 4,447 EBITDA 156 413 773 1,378 1,943 232 3,040 1,572 2,705 4,270 6,800 Net debt 4,336 4,235 4,817 4,517 4,360 4,436 5,327 9,622 12,716 9,256 8,642 Net debt to EBITDA 27.9 10.3 6.2 3.3 2.2 19.2 1.8 6.1 4.7 2.2 1.3

Source: Capitaline, Kotak Institutional Equities

Others India

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Exhibit 4: MRFs leverage levels in FY2014E will be much lower versus FY2009 Trend in net debt to EBITDA ratio for MRF, September fiscal year-ends (Rs mn)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014ETotal shareholder funds 7,234 7,546 8,243 9,835 11,170 13,557 16,884 22,941 28,611 36,554 Total debt 5,604 7,099 7,288 8,349 12,494 6,719 13,543 15,995 17,078 15,990 14,060 Cash 367 461 536 736 1,025 601 465 572 648 3,370 4,530 Other income 547 488 634 294 406 342 289 4,292 319 251 Operating profit 1,669 2,063 2,944 4,628 4,467 7,156 8,627 12,391 13,039 18,051 EBITDA 1,122 1,575 2,310 4,334 4,061 6,815 8,339 8,099 12,720 17,801 18,710 Net debt 5,236 6,637 6,751 7,614 11,468 6,118 13,079 15,423 16,430 12,620 9,530 Net debt to EBITDA 4.7 4.2 2.9 1.8 2.8 0.9 1.6 1.9 1.3 0.7 0.5

Source: Capitaline, Kotak Institutional Equities

Exhibit 5: JK Tyres is the only tire company whose leverage ratios will be higher than FY2008-10 Trend in net debt to EBITDA ratio for JK Tyres, March (September till 2007) fiscal year-ends (Rs mn)

2004 2005 2006 2007 2009 (15 M 2010 2011 2012 2013 2014ETotal shareholder funds 8,818 8,137 5,994 5,441 6,916 8,500 8,583 7,553 9,065 Total debt 7,582 8,313 9,439 9,150 13,824 11,589 16,108 21,405 27,034 26,350 Cash 397 375 402 300 513 910 1,146 1,049 1,401 2,000 Other income 284 209 205 126 538 301 137 802 387 Operating profit 1,640 1,354 1,717 2,673 2,186 5,320 3,377 2,856 6,299 EBITDA 1,355 1,146 1,512 2,547 1,649 5,020 3,241 2,054 5,912 8,060 Net debt 7,185 7,938 9,037 8,849 13,311 10,679 14,961 20,356 25,633 24,350 Net debt to EBITDA 5.3 6.9 6.0 3.5 8.1 2.1 4.6 9.9 4.3 3.0

Source: Capitaline, Kotak Institutional Equities

Exhibit 6: Previously industry was running at full utilization levels, which necessitated immediate capex; hence, leverage levels increased significantly. However, its not the case this time Trend in capacity utilization in the domestic tire industry, March fiscal year-ends (%)

89.3

98.0

95.594.8

84

86

88

90

92

94

96

98

100

2007 2008 2009 2010

Source: ATMA, Kotak Institutional Equities

Disclosures

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

"I, Jasdeep Walia, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report." Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of December 31, 2013

Percentage of companies covered by Kotak Institutional Equities, within the specified category.

Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment banking services within the previous 12 months.

* The above categories are defined as follows: Buy = We expect this stock to deliver more than 15% returns over the next 12 months; Add = We expect this stock to deliver 5-15% returns over the next 12 months; Reduce = We expect this stock to deliver -5-+5% returns over the next 12 months; Sell = We expect this stock to deliver less than -5% returns over the next 12 months. Our target prices are also on a 12-month horizon basis. These ratings are used illustratively to comply with applicable regulations. As of 31/12/2013 Kotak Institutional Equities Investment Research had investment ratings on 162 equity securities.

14.2%

27.2%

39.5%

19.1%

4.3% 4.9%

0.0%1.9%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver

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