HDFC Securities has an 'add' call on Apollo Tyres with a target price of ₹229, citing that the company's margins are likely to remain under pressure in the near term, it is expected to recover faster than peers once input costs stabilize.
"We factor in Apollo to post 37 percent earnings CAGR over FY22-24E. Given that it is nearing the end of the capex cycle and with management’s focus on sweating existing assets, we expect Apollo’s leverage to reduce over FY22-24E, which would help shore up returns," said the brokerage firm.
The brokerage firm underscored that Apollo has invested in R&D, brand building, and expanding its distribution network over the last few years. This has led to market share improvement in both India and Europe.
"In India, while its share in TBR improved to 31 percent from 27 percent in FY18, its PCR share improved to 21 percent from 17 percent in FY18. It has also increased its share in TBR and OHT segments in Europe in FY22. It has recently restructured its European business, leading to a sharp increase in EBITDA margin from 8 percent in FY20 to 18 percent in FY22," said the brokerage firm.
HDFC Securities expects Apollo to emerge as a significant beneficiary of the favourable industry dynamics in India and continue to outperform Europe, given its lean cost structure.
"In the last couple of years, management earmarked a massive restructuring in Europe, which included: (1) shifting tyre production from Netherlands to a new plant in Hungary and the balance to India; (2) converting the Netherlands plant into a specialty plant for producing high-end tyres; (3) right-sizing the Netherlands plant by giving VRS to two-third of the employees. Thus, Apollo has transformed Europe into a much more profitable unit (margin at 18 percent for FY22, from just 8 percent in FY20), which is giving respectable returns," said HDFC Securities.
Disclaimer: The views and recommendations made above are those of the broking company and not of MintGenie.
