Bull vs Bear: What's the outlook on Apollo Tyres?

Apollo Tyres reported dismal fourth quarter performance with a decline both in the net profit and net sales. The consolidated net profit for Q4 came in at Rs 245.16 crore, hit by import of Chinese tyres compared to net profit of Rs 307.48 crore for the January-March period of the year ago fiscal. Net sales of the company also declined to Rs 2,966.11 crore for the fourth quarter, as compared to Rs 3,133.93 crore during the same period of previous fiscal, Apollo Tyres said in a statement. However, Mayur Milak, Research Analyst - Institutional Equity, Anand Rathi is still upbeat on the stock and has a buy on it, while market analyst Prakash Diwan is bearish on the company. Diwan said he would would wait for things to pan out the way management talked about in the concall before taking a call. According to him there are much better opportunities available in the likes of Balkrishna Industries Ltd, TVS Srichakra

Below is the verbatim transcript of Mayur Milak and Prakash Diwan’s interview with CNBC-TV18's Anuj Singhal and Ekta Batra. Ekta: Wanted your thoughts in terms of what stood out in the conference call which might have resulted in the stock recovering at this point and anything more spoken about the short term loans and advances which have risen substantially this quarter maybe a clarification which the street liked? Milak: The fact that they started on a positive note saying that they expect a good strong volume growth going forward in FY17 both for India operations as well as Europe. For Europe they of course very clearly mentioned it had nothing to do with the industry downfall as such and it was a completely internal issue due to the SAP implementation which now seems to have been taken care of. So, they are expecting a good, strong, double digit volume growth both in Europe and in India. That is a positive sign looking at the topline growth. Again to support that while we have also been witnessing the Chinese imports seem to have been stabilised. So, you are not seeing a significant 60 percent kind of growth which we have been witnessing in the last two years should add to the volume advantage and also that the recent news of this probe into these Chinese imports will also have its positive impact on the stock price. Anuj: Since you are a bear let me ask you the question that how would you counter the arguments that Mayur just made and considering that it has been such a ranked underperformer everything is good at a price why you are still bearish on the stock even at current levels? Diwan: Very clearly, this whole assurance of the volume growth not being there, more from an internal cause and not just a shrinkage in market share and market size is something that doesn't really bring confidence once. Second, the aftermarket segment in which - original equipment manufacturer (OEM) is fine, they can still clock some decent growth as per industry standards but their aftermarket penetration has really not been very up to the mark. In fact they have lost a lot of grounds in fact as we understand on channel checks that we did and this is on the cost of a lot of other marginal players. So, we have seen that happen to Apollo and that is one of the reasons why it has always struggled on volume growth. The second thing is that I feel rubber prices are likely to continue being firm. The trajectory is not just a temporary up move but that is going to be because of supply constraints. The crop failure in some of the key markets. So, that is not going to change dramatically. The entire last year soft input prices that benefits being priced in, they have taken advantage, everything is done. The third thing which I feel this whole anti-dumping thing is not something which is an assurance. So, if that happens I would wait to see what kind of changes the government is likely to make, what percent matter in terms of increased market share or pricing power back to these companies. And that is where it is kind of missing. Lastly Apollo is such an overleveraged company they are talking about another Rs 1,000 crore of NCD raising plans. I don't think that is the way to go because capacity utilisation haven't reached such peak levels that you would need to start investing into it and setting up brown field expansion into tyre companies is not really a very time consuming thing. So, I would wait for really things to pan out the way the conference call talked about and only then buy it. So, my expectation is it could probably struggle vis-à-vis some of the other players and there are much better opportunities. That is the last thing. There are much better alternatives available to Apollo at this price specially the likes of Balkrishna Industries Limited (BKT) and now you are seeing TVS Srichakra, beautiful numbers and that has come more from the agri side, exports doing well, off-road consumption and stuff like that. Ekta: Just wanted to bring up that point about over-leverage of Apollo Tyres. Are you comfortable with the balance sheet especially with the fact that the gross debt has risen to around Rs 1,460 crore this quarter? Milak: I wouldn't stand comfortable in that sense if you ask me because yes, even while we pick CEAT and MRF over Apollo, the fact that that does not deter me to have a buy on Apollo. One key factor that I always want to look is that while in the concall he has mentioned that the Indian operations have moved up, capacity utilisation from roughly lower 70s to upper 70s and the fact that they are doing 100 percent capacity utilisation in TBR replacement, the radial tyres clearly puts a case that unless they don't really add onto capacity they will clearly struggle with topline growth. So, the direction looks good. The fact that having a single plant in Europe and then having another low cost plant in Hungary should definitely add up to margins in Europe. So, yes, it will all take time but they are putting their foot in the right direction.