Lower competition, robust sales positive for Apollo Tyres

The company is the leader in the Indian TBR space with a market share of 35% in the OEM segment

While most sectors are trying to cope up with demand slowdown brought on by demonetisation, for the tyre space, however, this is being viewed as a positive event. This is because Chinese imports, which accounted for 35% of the tyre and bus radial (TBR) sales in the country, have fallen significantly post demonetisation as a majority of the importers are small and unorganised dealing mostly in cash. 

This coupled with sales tax raids on the import community has stopped traders from placing import orders, according to analysts at Phillip Capital. 

Tyre stocks have therefore seen some gains recently. If the trend continues, it will be very positive for TBR players like Apollo Tyres, say Kotak Securities' analysts as a sharp increase in Chinese TBRs was a concern for the company given significant upcoming capacity in the segment.

The company is the leader in the Indian TBR space with a market share of 35% in the OEM (original equipment manufacturer) segment and 27% in the replacement segment. About half of Apollo Tyres' revenues comes from the TBR segment. With the doubling of capacity at the Chennai TBR plant, Apollo is looking at consolidating its lead in this segment. 

The other trigger for the stock and the sector could be the imposition of an anti-dumping order or safeguard duty on imports. This will make imports costlier helping Apollo maintain its premium over other TBRs in the market.

Going ahead, what could also influence the stock is any update on its initial bid for South Korean tyre maker Kumho Tire. Apollo's interest in buying the tyre maker is part of its plans to become a global tyre manufacturer by 2020. While the deal is expected to cost the buyer about $900 million, the Apollo management has indicated that it will not stretch its leverage significantly as it is already in the midst of significant capex in India and Europe. With debt increasing from Rs 1,500 crore in March 2016 to Rs 2,700 crore in September 2016, a sharp increase in leverage could be an issue.

The another area to watch is domestic tyre demand. Given that orders from automakers have been strong in November, especially for farm and commercial vehicle tyres, this could continue going ahead if there is further improvement in mining and infra activity.

Over the medium term, the company is looking to be the top player in India by expanding its presence across the tyre range and differentiating vis-a-vis competition on technology. Progress on this, too, will have a bearing on the stock.

At the current price, the stock is trading at a price to earnings ratio of 8.1 times its FY18 estimates. While there is a 15% upside from these levels, await better entry points as any reversal in rubber prices or weak European demand could lead to share price corrections.