Buy Apollo Tyres; target of Rs 92: Microsec

“We rate Apollo Tyres Limited a BUY. Apollo Tyres Limited Manufactures tyres and tubes for cars, trucks, farm equipment and light commercial vehicles. The company also manufactures automobile flaps and retreading material. Apollo Tyres is a leading tyre manufacturer of India with subsidiaries in South Africa and Europe. Major brands are Apollo, Dunlop, Kaizen, Maloya, Regal and Vredestein. The company is expected to benefit from a structural shift to radialisation and growth in the automobile industry.”

“Amidst all the gloom and doom in the auto industry, tyre companies have something to cheer in the form of fall in rubber prices. Despite the falling rupee and sluggish demand, the correction in rubber prices may result in margin improvement for tyre companies in the coming quarters offering much needed margin relief. Domestic prices have come down from Rs.240/ kg to around Rs 185/kg i.e around 23% from its peak. Apollo Tyres plans to invest around 400 million euro (over Rs 2,700 crore) to set up two new facilities in East Europe and Brazil in the next 3-4 years as it aims to expand its global footprint. The company already has a tyre manufacturing facility in South Africa in the city of Durban. The company expects production from Durban facility to move from 1,000 tyres to 1,200 tyres per day while, the company is planning increase the tyre production from Ladysmith facility to 13000 tyres from 10,000 tyres per day. Indian tyre industry lags far behind other developed countries when it comes to Radialization in Trucks and Bus Segment (T&B). The Indian markets are slowly converging towards radial tyres in CV segment. Tyre Companies are now continuously investing in radial capacity which is likely to improve turnover and margin performance due to change in the sales mix.”

“With rubber prices expected to remain weak in the near future, we maintain our positive outlook on Apollo Tyres. At the CMP of INR81.75, the stock is trading at 6.97x its FY13E EPS of INR11.47. We assign a multiple of 8x to its FY13E EPS to arrive at a Target price of INR92,” says Microsec research report.

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