 "Apollo Tyres")
While most sectors are trying to cope with demand slowdown brought on by demonetisation, for the tyre space, this is being viewed as a positive event. This is because Chinese imports, which accounted for 35 per cent of the tyre and bus radial (TBR) sales in the country, have fallen significantly after demonetisation as most importers are small and unorganised, dealing mostly in cash. This, coupled with sales tax raids on import community, has meant that traders have stopped 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 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 per cent in the original equipment manufacturer segment and 27 per cent in the replacement segment. About half of Apollo Tyres' revenues come 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 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 it will not stretch its leverage significantly as it is already in the midst of significant capital expenditure in India and Europe. With debt increasing from Rs 1,500 crore in March to Rs 2,700 crore in September, a sharp increase in leverage could be an issue.
Apollo Tyres
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 itself from competition on technology. Progress on this, too, will have a bearing on the stock.
At the current price, the stock is trading at 8.1 times its FY18 net profit estimate. While there is a 15 per cent potential from these levels, await better entry points as any reversal in rubber prices or weak European demand could lead to share price corrections.
