Buy this Tyre Stock For Strong 57% Gains, Recommended By Motilal Oswal, Targets 12-15% in RoCE by FY26

Stock Overview

Today, the stocks of the company opened at Rs 176.50, currently trading at Rs 169.55/share. The previous close was Rs 175.55/share. The recorded 52-week low is Rs 165.25/share, while the 52-week high recorded is Rs 250/share. PE ratio is 16.86. The P/B ratio is 0.92. ROE is 5.43%.

The stock has fallen almost 23.645 in 1 year. It has not given positive returns in the last 5 years. It slid nearly 12.2% in 3 years, and 31.33% in 5 years. The previous week it fall 12.4%. Stock generated a negative 10.14% return as compared to Nifty Auto which gave investors a 39.35% return over 3 year time period. (as of last trading session)

Potential Gains - The shares of the company could jump nearly 57% in 12 months, considering the Target price of Rs 265/share and CMP of Rs 169.55/share.

Targets a RoCE of 12-15% by FY26 (v/s 5.5% in FY22)

A large part of the targeted improvement needs to accrue from India, led by demand revival, margin recovery and full utilization of capacity. A large part of its greenfield AP capacity was being commissioned in FY22 and didn't contribute to P&L in FY22. Europe operations will contribute via an increase in capacity utilization and mix improvement, as margins are at reasonable levels (except for transitory impact of RM prices). Unlike in the past, it now with three channels to sweat its assets (OEM, replacement, and exports).

No immediate growth capex; future capex to be considerate of FCFF

Apollo Tyres has currently assigned capex only for completion of AP capacity, debottlenecking and maintenance activities. Considering uncertain macro-environment, it is not planning any growth capex. Debottlenecking can enhance its current capacity by 5-8%. Its annual maintenance capex, including sustainability and digitalization initiatives, would be at Rs 4b/EUR30-35m in India/EU. Growth capex strategy would avoid bunching of large capex to ensure consistent free cash flow to the firm. The first expansion may be required in PCR, but not in the foreseeable future. Capacity utilization in India stands at 80% (lower in TBR, but higher in PCR; this includes only part of the AP capacity) and at mid-80% in the EU. Light truck steel radials (1,700 tyre/day) at its Chennai plant have been near full utilization over the last few months. It can debottleneck capacity to meet growth for next 1.5 years.

Leading the price hikes in the industry to pass on RM cost inflation

RM cost inflation, which was seen as transitory, has turned into structural pressures due to exogenous factors. However, it is now seeing a peaking of commodity prices including crude prices. Price leadership in the Indian market: Apollo Tyres has been the front-runner in raising prices, in terms of both quantum and frequency, during the current commodity inflation cycle. From Dec'20 onwards, it raised prices by 3% every 45 days (v/s 2% every quarter earlier). It is now raising prices by 4%. 18 June 2022 Update | Sector: Automobile Apollo Tyres Motilal Oswal values your support in the Asiamoney Brokers Poll 2022 for India Research, Sales, Corporate Access and Trading team. We request your ballot.

India demand to remain modest in the near term; strong EU recovery

India demand has seen a modest recovery, driven by OEMs. Replacement demand is holding up. While all macro parameters are pointing towards a modest recovery from 4QFY22 onwards, the management is bullish on the long-term India growth story. Bus tyres, in a normal scenario, account for 15% of CV tyres. Demand had crashed in the last two years, but is now returning back. Europe demand has seen a strong recovery after two-to-three years as PCR grew 15%, TBR clocked double-digit growth, and OHT grew 3%. Apollo Tyres's market share in PCR has been stabilizing, while gaining market share in UHP tyres. In all-season tyres, its biggest market was traditionally Germany (10-12m p.a), but France and Italy are now growing. The current order wallet is the highest ever for winter tyre during this season.

Buy for target price of Rs 265/share

Apollo Tyres is all geared for the next leg of growth, with sufficient capacity to cater to demand from India and Europe. With capex for Phase II of the AP plant concluding in FY23, increase in capacity utilization will generate higher cash flows and further deleverage its Balance Sheet. As compared to its peers, Apollo Tyres offers the best blend of earnings growth and cheap valuations. The stock trades at 13.6x/8.7x FY23E/FY24E consolidated EPS. We value the stock at 12x Jun'24E EPS (v/s a five/10 year average P/E multiple of ~16x/12x). We maintain our Buy rating with a Target Price of Rs 265/share.

Company Overview- Apollo Tyres Ltd

Incorporated on September 28 1972, Apollo Tyres Ltd with a market capitalisation of Rs 11,149.20 Crore is the leading tyre manufacturing company in India. The company is engaged in the manufacturing of automobile tyres and rubber tubes. Apollo Tyres are the first Indian tyre company to launch exclusive branded outlets for truck tyres and also the first Indian company to introduce radial tyres for the farm category. Apollo Tyres currently has four manufacturing facilities in India - two, including a leased facility in the rubber-producing state of Kerala and one each in Tamil Nadu and Gujarat. The company has two manufacturing facilities each in Hungary & The Netherlands.