We initiate coverage on Apollo Tyres with an ‘overweight’ rating and a December 2015 price target of R260 per share. We value the stock at a 9.5x forward P/E based on March 2016e EPS. Stock price performance from here on will be driven by a multi-year recovery in the Indian CV cycle, in our view, which should benefit Apollo’s T&B radial sales.
The company is expanding capacity by 50% over FY16-17 to cater to the rising demand. We expect revenues to grow double-digits over FY16-17 (versus low-single-digit growth in recent years).
While benign commodity prices have supported margins, we believe improving revenue growth should drive the stock price from here on.
The CV cycle is seeing early signs of a revival, with industry sales growing 20% y-o-y in Q3 off a low base. Replacement tyre demand should accelerate as economic reforms are rolled out over FY16-17, and M/HCV sales are expected to grow in healthy double digits; Apollo derives about two-thirds of its revenues from this segment in India. Further, as Apollo has a dominant position in the T&B radial segment (market share ~28%), it is well positioned for a shift toward this segment.
Apollo is increasing its T&B radial capacity in the Chennai plant by 50%, to 9,000 tyres per day. In Europe, it is setting up greenfield capacity in Hungary; the new plant will have a capacity of 16,000 car tyres and 3,000 truck tyres per day (~5.5 million units per annum) and will produce Vredestein and Apollo branded tyres (the facility is expected to come on-stream in CY16/17). The company has shareholder approval to raise debt by R500 crore and to raise up to $200 million of equity for the proposed expansion. We model in the debt estimates accordingly, but the timing of the possible equity raising is uncertain.
JPMorgan
