Apollo Tyres

Investors with a two-year perspective can consider buying the stock of Apollo Tyres. At its current price of Rs 55.75, the stock discounts its trailing 12-month earnings by 8 times. Sustained growth in tyre demand from the original equipment makers (OEMs) and a pick-up in the replacement market from the first quarter of the current fiscal are major positives for the company.

Demand in the commercial vehicles segment is beginning to pick up and is expected to further improve in the months to come. The company's broad-based customer profile and imminent ramp-up in capacity position it well to capture this demand.

Operations at its greenfield plant in Chennai, which has the capacity to produce radial tyres for both passenger cars and commercial vehicles, are set to commence by the first quarter of FY 11. This is likely to increase its market share in the OEM segment. At present, sales to OEMs account for just 14 per cent to the total sales.

The replacement market, which offers better margins and superior pricing power, is now Apollo Tyres' key source of revenue, accounting for 74 per cent of sales. The company has a strong brand recall and healthy market presence in this segment with over 4,000 network partners and 2,000 exclusive dealers. Due to muted economic activity, buyers, especially in the trucks and buses segment, deferred replacement decisions for most of 2008. However, a revival in the economy by the first quarter of 2009 and pent-up demand have helped tyre-makers stage a strong comeback.

From April to November 2009, the replacement market grew 11.7 per cent. While the truck and bus segment grew 15 per cent year-on-year, the passenger vehicles segment grew by just about 1 per cent. Apollo Tyres' strong presence in the replacement market made it one of the early beneficiaries of the revival.

The nine months ended December 2009 saw the company's sales expand by 26 per cent, while operating profits almost doubled. Net profits swelled from Rs 61.93 crore to Rs 298.81 crore. On the back of a healthy demand growth, the company is well-positioned to sustain the profit growth in the months ahead.

Raw material costs, mainly natural rubber, which account for 60 per cent of the total cost, have started spiralling once again and are up by over 30 per cent from their 2009 lows. However, market leadership allows Apollo Tyres the pricing power to pass on this burden to its customers; tyre prices have been hiked by 5-10 per cent across markets. This may partially help the company retain its current operating profit margins of 15 per cent. About 11 per cent of Apollo Tyres' revenue is generated through exports. The export market mainly caters to passenger cars, whose sales are showing signs of revival across the globe.

via BL