Brokerage firm Nirmal Bang is positive on Apollo Tyres as the brokerage firm believes the stock is the best play on original equipment manufacturer (OEM) volume recovery, implying a 20% upside.
The brokerage firm has raised its margin estimates by nearly 90bps for FY24/FY25 each while it has upped volume estimates by 3% each for FY24/FY25.
"We have seen a nearly 20% correction over average prices of Q1FY23 in the TSR20 (a composite index of all the raw materials used in tyre making), nearly 15% correction in Indian Kottayam Rubber and nearly 35% correction in the Thai rubber index," said Nirmal Bang.
The brokerage firm added crude oil sustaining below US$90/bbl will lead to further correction in synthetic rubber prices, which have already declined by nearly 15% from Q1FY23 average prices.
Furthermore, Apollo Tyres’s market leadership in TBR (truck and bus radial) and PCR (passenger car radial) segments is leading to improving pricing power (8% price hike in Q1FY23 and 2-3% in Q2FY23 in PCR), which would further aid margins.
"Over the last eight quarters, we have seen the margin gap with MRF narrowing, which we believe is the testimony of the company’s improved brand positioning and better pricing power. We expect the margin benefits to fructify in the second half of FY23 onwards," said the brokerage firm.
Nirmal Bang sees Apollo Tyres outpacing industry volume growth on the volume front, led by the higher share of T&B (65%) and PCR tyres (21%) in the overall product mix.
The brokerage firm highlighted the company continues to gain share in the TBR and PCR segments, led by higher spends on R&D, expansion of distribution channels and brand building.
It expects Apollo Tyres to benefit from OEM recovery in CV (commercial vehicles) and PCR segments as it has a higher share in the OEM space. Also, being the market leader in TBR, increasing economic activities and the government’s thrust on infrastructure development should benefit Apollo Tyres.
Moreover, the outlook for the company’s European operations remains positive, as it has been gaining market share in UHHP tyres (17+ inch; 43% contribution), besides winning a few contracts from premium PV OEMs, the brokerage firm said.
It has also launched TBR tyres in the EU market and has gained good traction (2% market share).
Even on the margin front, the company is better placed to tackle the headwinds from elevated energy prices as it has hedged nearly 85% of energy costs for FY23.
"The EU business continues to surprise on the margin front post-restructuring, which we believe will continue going forward too. Moreover, we expect the capex intensity to be moderate going ahead. Capex done in the last three years will likely support growth in the medium term; no major capex is lined up for FY23 & FY24 even as current capacity utilization stands at ~80%/83% in India/EU," Nirmal Bang said.
The brokerage firm expects a debt reduction of nearly ₹1800 crore over the next two years. With moderation in capex and deleveraging of the balance sheet, we will see improvement in ROE/ROCE.
"We expect ROE (return on equity) and ROCE (return on capital employed) for FY25 to be about 11% and 13% respectively. We remain positive on Apollo Tyres and expect a consolidated revenue, EBITDA, and PAT CAGR of 10%, 17% and 39% respectively over FY22-25E. We have maintained our 'buy' rating on the stock with a revised target price of ₹340, valuing it at 14 times Sept’24E EPS (earnings per share)," said Nirmal Bang.
According to a MintGenie poll, an average of 26 analysts have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
