OEM recovery, robust replacement demand to boost Apollo Tyres revenues

Price hikes to offset some of the the surge in raw material costs

The cyclical recovery in commercial vehicles, strong demand in the replacement segment, and ramp-up of its Hungarian facility are expected to help improve the revenue growth trend for Apollo Tyres. A strong presence in the aftermarket segment should enable it to hike prices and maintain margins.

Analysts at Nirmal Bang Research expect the tyre industry to post healthy growth rates over FY21-FY23, led by 18-20 per cent growth in the original equipment manufacturer segment over this period. Within this, an incremental trigger for the Apollo Tyres stock is the revival in the medium and heavy commercial vehicle (M&HCV) segment, which accounts for 60 per cent of India sales. Lower sales to the M&HCV makers were weighing on volumes in previous quarters and growth is expected to come back to positive territory, led by higher demand for freight and rising rates. 

After imposing anti-dumping duty on truck and bus radial (TBR) imports from China, the government is considering similar action on TBR imports from Thailand, which currently accounts for a majority of imports.

The current trends in the replacement demand are also positive for the company, which exhibited volume growth of 18 per cent YoY in the TBR segment and 11 per cent in the passenger car radials (PCR) in the September quarter. Higher margins in the replacement segment, which accounts for three-fourths of revenues, will help offset part of the rise in raw material costs.

Analysts at JM Financial believe Apollo Tyres is best placed to take price hikes driven by superior brand positioning/quality, and a robust dealer network. Besides, long-term growth catalysts for the company are the ramp-up at its Hungary and Andhra Pradesh facilities and the improving TBR and PCR mix in the product portfolio.

Some of the expected gains are reflecting in the stock price, which is up 53 per cent over the past three months. The stock is trading at a 17 per cent premium to long-term average multiples. Given target prices upwards of Rs 225, there can be gains of about 15 per cent from the current levels.