Stock To Buy: ICICI Direct Bets On This Mid-Cap Tyre Stock For Potential 31% Gain

Leading brokerage firm ICICI Direct has given buy rating to the stock of Apollo Tyres Ltd (ATL) for a potential surge of 31%. ATL retained its targets in terms of revenue (US$5 billion).However, it reiterated that it will not chase revenues at the expense of capital efficiency. Therefore, it refrained from committing any fresh growth capex given the prevailing pressure on margins & return ratios.

1. Apollo Tyres Stock Outlook

Leading brokerage firm ICICI Direct has given buy rating to the stock of Apollo Tyres Ltd (ATL) for a potential surge of 31%. ATL retained its targets in terms of revenue (US$5 billion).However, it reiterated that it will not chase revenues at the expense of capital efficiency. Therefore, it refrained from committing any fresh growth capex given the prevailing pressure on margins & return ratios.

Current Market Price	Rs 176
52-week high	Rs 250
52-week low	165
Target price	230
Potential gain	31%
1 year return	-165%

2. Apollo Tyres Company Overview

Immediate aim is for sweating of assets, taking calibrated price hikes to augment margins & consequently improve return rations. ATL is taking industry leading price hikes (increase in quantum as well as more frequent) and is prepared for small market share loss for protecting profitability. Gross margin pressure is expected to continue until Q2FY23 vs. the initial guidance for Q1FY23, a key negative surprise from the meet.

Current domestic demand is driven by OEM segment with replacement segment demand holding steady. In Europe demand was driven by all season tyre segment with focus on OHT segment including agriculture. Maintenance capex across Indian & Europe operations is seen at Rs 400 crore and & €30-35 million.

3. Apollo Tyres Valuation

ATL's stock price has de-grown at approximately 7% CAGR from approximately Rs 247 levels in June 2017, underperforming the Nifty Auto Index in that time-frame. We retain our BUY rating on ATL amid retained focus on capital efficiency. According to Sharekhan "marginally revising our estimates, we now value ATL at a target price of Rs 230 i.e., 5x FY24E EV/EBITDA (previous target price: Rs 250)."

With demand drivers in place, topline is seen growing at a CAGR of 11.2% over FY22-24E. Margins in a similar timeframe are seen improving to 13.3% with consequent RoCE seen at 10%.

4. About Apollo Tyres

Apollo Tyres (ATL) is a leading tyre manufacturer with operations in India and Europe. APMEA (largely India), Europe comprise approximately 67%, approximately 31% of sales, respectively. The market capitalization of the stock is Rs 11,206 crore.

5 Disclaimer

The stock has been picked from the brokerage report of ICICI Direct. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decisions.