Apollo Tyres: In a sweet spot; Buy for an upside 20% | Apollo Tyres | Buy | IndiaNotes.com

Apollo Tyres (Apollo)  figures among the top three tyre producers in India and yet underperformed the tyre sector primarily due to ambitious aspirations which led to divergence  in  management  time.  Post  Vredestein  acquisition  in  The  Netherlands,  now the management is focused on Hungary expansion along with the ramp up at its Chennai facility to overcome issues of capacity constraints.

In sync with this, we believe Apollo is very well poised to fetch the advantage out of the  following  tailwinds  –  1).  Rapid  recovery  in  the  automobile  market  post demonetization,  BS  IV  transition  and  GST  implementation  2).  Steadily  increasing demand  in  the  Passenger  Car  market  on  the  back  of  constant  inflow  of  new launches  3).  Fast  ramp-up  of  Chennai  and  Hungary  plants  to  cut  out  the  current capacity  constraints  at  the  PV  tyre  business,  primarily  in  Europe.  4).  Higher emphasis  on  the  infrastructure  and  rural  markets  which  are  the  GOI’s  main objectives,  may  result  into  improved  CV  demand,  thus  improving  product  mix  of Apollo  who  is  among  the  top  two  players  in  the  CV  tyres  space.   5).  Reifencom acquisition and recovery in European markets post a market share loss in FY17. 6). Stable  rubber prices and muted outlook on rubber prices 7). Above all, increase in the  import  duties  and  possible  ban  on  Chinese  tyres  may  significantly  boost volumes along with offering a good pricing power and better margins to Apollo.

We continue to remain sanguine on Apollo Tyres (Apollo) with an upgraded target of Rs 307 (Rs 275 earlier), now valuing the company at 12x FY 20E earnings.

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