Buy Apollo Tyres; target of Rs 619: Sharekhan

Sharekhan's research report on Apollo Tyres

We reiterate our BUY on Apollo Tyres (ATL) on (1) Its continuous focus on premiumisation (2) Its priority to operating performance in place of plain-vanilla volume growth (3) Judicious capex plans and (4) Disciplined capital allocation plan. ATL continues to sustain its operating profitability via improving product mix focusing, given it has been reporting EBITDA margins above 18% for last two quarters. Given that the ATL is prioritising operating performance over volume growth we expect its bottom-line performance would beat its topline performance in medium term, subjected to sustenance of operating excellence. So far, tyre players have been demonstrating a pricing discipline in the domestic market, however recently tyre players have undertaken a slight price correction in the TBR segment. Following the industry trends, ATL has also rationalised prices by 1.5% in 2 SKUs in TBR segment.

Outlook

We remain optimistic on ATL’s growth prospects and expect it to benefit from its strategy of deleveraging its balance sheet, improving operating leverage, and focusing on firm capital allocation and cash management in the future. While management is hoping for volume recovery in the domestic market, it continues to aspire for a market share gain in the European PCT market. Along with that, it continues to focus on operating profitability. While ATL has been continuously focusing on premium products and an improvement in the product mix, steady raw-material cost trend along with its own cost-control initiatives are likely to support it in sustaining its high EBITDA margins. Given the firm’s dominating position in the domestic TBR market, the fact that Vision 2026 is on track, emphasis on premiumization, and the preference for profitability over simple volume growth, we continue to remain positive on ATL’s growth prospects. We retain our Buy rating on the stock with an unchanged price target (PT) of Rs. 619 on its continued focus on operating profitability via focus on premiumization, market share strategy in the European market and a judicious capex programme.

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