Buy This Auto Ancillary Stock, It Has The Potential To Jump 30%

The stock of Apollo Tyres, a leading player in the tyre business, has a buy call by Sharekhan, which sees the potential of 30% upside on the stock from current levels.

Automobile demand to be better

Sharekhan expects the domestic tyre industry to benefit from a recovery in automobile sales in rural and semi-urban markets, driven by pent-up demand, preference for personal mobility amid COVID-19, and faster-than-expected recovery in infrastructure, mining, and other economic activities. "The tyre industry is well positioned to gain momentum going forward backed by higher OEM offtake and the ripple effect of OEM demand is likely to result in steady growth for the replacement demand," the firm has said.

Trying to gain market share in premium tyres

Apollo Tyres is focusing on increasing its share of premium tyres, i.e. UHP/UUHP segments, in Europe and US markets. The Vredestein brand is an established premium tyre brand in Europe. The company aims to increase its share of premium UHP and UUHP tyres to more than 45% revenue contribution over the next five years by FY2026, through new launches, brand building, and focus on increasing its presence in southwest Europe, while adding on to its healthy presence in western and central Europe

Management remains committed to achieving long-term goals

According to Sharekhan, the management remains committed to long-term targets to achieve revenue of US$5 billion by FY2026, EBITDA margin profile to reach at least 15%, ROCE of 12-15%, and net debt to EBITDA of less than 2x. "In addition, the company targets to be carbon neutral by 2050, for which it has ramped its ESG activities. ATL has approached the end of a major capex cycle with a continued focus on brand building, marketing, and distribution network. The company is operating at an 80-85% capacity utilization. The company's growth will be achieved through minimal capex, which would be spent on debottlenecking and technology in the medium term," the brokerage has said.

Price target of Rs. 222 on the stock

Sharekhan sees tyre demand has improved significantly in both domestic as well as European operations. "Apollo Tyres is well-positioned to gain market share in India and Europe, given its strong brand, R&D, technology, and distribution network. We expect the company to benefit from its strategy by deleveraging its balance sheet, improving capacity utilisation, and focusing on firm capital allocation and cash management in the medium term. Strong growth coupled with a leadership position in key markets and segments is likely to re-rate valuation multiples. The stock trades at attractive valuations at P/E multiple of 7.9x and EV/EBITDA multiple of 4.1x its FY2024E estimates. We retain our Buy rating on the stock with a revised price target of Rs. 222," the brokerage has said.