Buy Apollo Tyres; target Rs 74: Angel Broking

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Buy Apollo Tyres; target Rs 74: Angel Broking

Angel Broking is bullish on Apollo Tyres (APTY) and has recommended buy rating on the stock with a target price of Rs 74 in its November 11, 2011 research report.

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Angel Broking is bullish on Apollo Tyres (APTY) and has recommended buy rating on the stock with a target price of Rs 74 in its November 11, 2011 research report.

"Apollo Tyres (APTY) reported a mixed set of results for 2QFY2012. The company's standalone operating performance was subdued due to adverse product mix, sluggish demand and continued raw-material cost pressures, while its European operations posted strong performance led by robust demand for winter tyres ahead of the peak season. We broadly retain our revenue and earnings estimates for the company. Consolidated net sales posted 47.3% yoy (1.7% qoq) growth to Rs 2,871cr, driven by a 31.9% yoy (down 4% qoq) jump in volumes and 11.7% yoy (6% qoq) growth in net average realization. Europe and South Africa operations registered strong revenue growth of 42.8% and 14.8% yoy, respectively, during the quarter. The company's operating margin contracted by 148bp yoy (49bp qoq) to 8%, largely due to weak operating performance on the standalone front. However, net profit grew by 46% yoy (flat qoq) to Rs 78cr on account of a significant increase in other income."

"While standalone net sales grew strongly by 56.9% yoy to Rs 1,845cr, driven by 37% yoy volume growth on a low base of 2QFY2011 (lockout at Cochin plant), the company posted a 5.9% qoq decline in due to ~10% qoq dip in volumes led by weak replacement demand. OPM for the quarter declined considerably by 356bp yoy (122bp qoq) to 6.8% due to unfavorable product mix (OEM - 34% of sales in 2QFY2012 vs. 31% in 1QFY2012 and 25% in 2QFY2011) and continued pressures on the raw-material front - raw-material/sales ratio at 77.8% vs. 67.1% in 2QFY2011). Thus, net profit declined sharply by 40.9% yoy (50.3% qoq) to Rs 22cr. Lower tax rate arrested the further decline in net profit during 2QFY2012."

"We remain positive on the tyre industry in view of the structural shift that the industry is going through. We expect the company to deliver a strong revenue CAGR of 22.5% over FY2011-13E, as production ramp-up at the Chennai facility continues as per schedule. We expect the company's operating margin to improve in FY2013 on gradual softening of raw-material prices. At Rs 61, APTY is trading at attractive levels of 6.6x FY2013 earnings. We continue to maintain our Buy recommendation on the stock with a target price of Rs 74, valuing it at 8.0x FY2013E earnings," says Angel Broking research report.

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