ICICI Direct is bullish on Apollo Tyres has recommended buy rating on the stock with a target price of Rs 225 in its research report dated February 06, 2019.
ICICI Direct's research report on Apollo Tyres
Apollo Tyres (ATL) posted a disappointing set of Q3FY19 numbers• Consolidated revenues came in at Rs 4,718 crore (up 16.5% YoY)• Consolidated EBITDA increased 6.2% YoY to Rs 527 crore. EBITDA margins came in at 11.2% (up 20 bps QoQ). Margins came in lower on account of significantly higher raw material cost, partly mitigated by lower employee as well as other expenses • Consolidated PAT declined 19.3% YoY to Rs 197.9 crore • ATL has made a provision to the tune of Rs 60 crore during the quarter with respect to default on unsecured inter corporate deposits of IL&FS Financial Services. Total provisions made till date on this account is to the tune of Rs 100 crore with exposure at Rs 200 crore • ATL has maintained its capex plans of ~Rs 5500 crore in FY18-21E, with ~Rs 1500 crore capex spend in FY19E & ~Rs 2000 crore capex spend in FY20E. The new capacity is largely in the TBR & PCR space.
The auto ancillary segment is largely bearing the brunt of a slowdown in auto OEM sales with share prices of all major auto ancillaries moving southwards. However, there is a distinction between auto ancillary totally dependent of auto OEM for their product sales & auto ancillary possessing healthy replacement demand, which can potentially outpace OEM growth. Tyres companies form the latter part of the pie wherein their product act as a consumable and have a steady replacement market that is almost 2x+ the auto OEM market. Thus, steady replacement demand prospects coupled with a drop in key raw material prices make us relatively positive on the tyre space. Going forward, on a consolidated basis, we expect sales and PAT to grow at a CAGR of 14% and 33%, respectively, in FY18-20E. We value Apollo at Rs 225 i.e. 10x P/E on FY20E EPS of Rs 22.5 with a BUY rating on the stock.
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