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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