Apollo Tyres: Indiainfoline Research Report

Indiainfoline (IIFL) are very bullish on Apollo Tyres and have recommended a BUY with the following investment rationale:

Strong OEM and replacement demand to drive volume growth

Automobile volumes in the domestic market jumped 29% YTD after a 26% jump in FY10. The momentum is expected to continue leading to strong demand for tyres from the OEM segment. Robust vehicle sales over the past 18 months would also translate into strong traction for replacement demand, especially for CVs (replacement cycle of 9-12 months). Apollo Tyres Ltd (ATL) with a market share of ~28% and 19% in CV and 4-W tyre segment respectively would be a key beneficiary of the surge in demand.

Expanding capacities to leverage on rising radialization in CVs

With distinct advantages of radial tyres over bias tyres, radialization has been on a rising trend in India. 98% of the 4-W tyres are already radials, while for CVs it has increased to 10% for M&HCV and 18% in LCVs in past few years. Apollo Tyres is setting up a Greenfield project in Chennai to expand its capacity from 850 MTPD to 1,300 MTPD in FY13. 380 MTPD of the incremental capacity would cater to radial tyres for the CV segment. The capacity for T&BR tyres will increase to 460 MTPD in FY13 from 20 MTPD currently.

Foreign subsidiaries to gain from global economic recovery

Apollo Tyres has diversified its international product profile as well as geographic presence through acquisition of Dunlop and Vredestein Banden BV. Dunlop caters to African market with a mix of products including truck tyres, 4-Ws radials and light truck tyres 23%. VBBV primarily is a supplier of high-end 4-W tyres in the European market. With global economic recovery gaining strength, performance of these subsidiaries could witness quantum improvement.

Margin scenario better than previous cycles

Q1 FY11 and some part of Q2 FY11 witnessed sharp jump in rubber prices exerting severe pressure on operating margins for tyre manufacturers. However, the scenario is much better vis-à-vis previous cycles of high raw material costs. This is on account of 1) better pricing power owing to tight operating rates for most manufacturers and 2) changing product mix in favor of higher end products such as radials. We expect Apollo Tyres to report a 27% yoy jump in PAT in FY12. We recommend a BUY of Apollo Tyres with a target price of Rs94.