Record-Breaking Auto Sales in 2023 Fuel Growth for Indian Tyre Companies: Apollo Tyres Benefits from Surge in Demand, Elevating Margins Across Sector. A Comprehensive Analysis of Technical and Fundamental Outlook for the Tyre Major in This Stock Check.
Apollo Tyres Surges Over 58% in Last 1 Year, Up Nearly 15% YTD in 2024: February Dip Ends 4-Month Rally of 46%. January Saw 19% Jump, Followed by December’s 6.2%, November’s 12%, and October’s 3.4% Gains.
Apollo Tyres Hits Record High at ₹559.85 on February 8, 2023, Up Over 71% from 52-Week Low of ₹303.35 on March 14, 2023. Long-Term Returns: 165% in 3 Years and 155% in 5 Years, Making it a Multibagger.
Apollo Tyres: A Key Player in the Tyre Industry, Supplying to Asia Pacific, Middle East, and Europe. Sales Emphasize Replacement Markets with Additional OEMs and Exports.
Apollo Tyres Reports Impressive Q3 FY23-24 Results: Consolidated Net Profit Surges 78% to ₹497 Crore, Driven by Enhanced Product Mix Across Geographies. Revenue from Operations Increases by 3% to ₹6,595 Crore, Compared to ₹6,423 Crore in the Year-Ago Period. EBITDA Jumps 32.2% to ₹1,208.1 Crore, Yielding a Margin of 18.3% Compared to 14.2% in the Previous Fiscal’s Corresponding Period.
Technical Analysis by Apurva Sheth, SAMCO Securities: Apollo Tyres, currently trading at Rs. 518, has exhibited a robust uptrend, recently reaching an all-time high of Rs. 557.90. Following a measured retracement to the previous swing low on lower volumes, the stock has resiliently maintained around Rs. 500, supported by the steadfast 20-day Exponential Moving Average (EMA), affirming the bullish trend. The stochastic daily indicator indicates a bullish trend with a favorable crossover, reinforcing positive market sentiment. Additionally, the ascending Relative Strength Index (RSI) not only confirms strength but also suggests ample room for an extended rally.
Based on the technical structure outlined above, a long position can be initiated at the current market price (CMP) of Rs. 518, with a target price of Rs. 570. The stop-loss level can be set at Rs. 490 to manage downside risk.
Technical Analysis by Rohan Shah, Religare Broking Ltd: Apollo Tyres has maintained a steady uptrend for over one and a half years, characterized by a series of higher highs and lows accompanied by increasing volumes. However, after this sustained outperformance, we anticipate the stock to undergo profit-taking. Analysis of higher time frame charts reveals the formation of a bearish candlestick pattern and the emergence of bearish divergence in the momentum indicator (RSI). Additionally, on the daily chart, the stock has slipped below its key short-term moving average after a prolonged period of stability. Consequently, we recommend traders to refrain from initiating fresh positions at present and consider entering on pullbacks towards the 480-470 zone. On the upside, the 520-525 zone now represents an intermediate hurdle for the stock.
Technical Analysis by Rajesh Palviya, SVP – Technical and Derivatives Research, Axis Securities: Apollo Tyres maintains its bullish long-term trend with consistent higher tops and bottoms across all time frames.
Although the stock recently breached the 20-day Simple Moving Average (SMA) at 517 on a closing basis, indicating potential short-term profit booking or a corrective move towards the 480 levels, such minor corrections present buying opportunities for traders and investors. Importantly, the stock remains strongly above its 50-day, 100-day, and 200-day SMAs, all of which are trending upwards alongside rising prices, reaffirming the bullish sentiment.
Anticipating further bullish momentum, we expect Apollo Tyres to target levels of 600-650 in the coming months. The monthly and quarterly Relative Strength Index (RSI) indicators are in positive terrain, underscoring strength in the long-term outlook.
Fundamental View by Markets Mojo: Markets Mojo expresses a bullish outlook on Apollo Tyres, underpinned by various factors contributing to its confidence. These factors include attractive valuations, improved performance metrics, and the company’s market leadership position within the industry. With a robust market presence and strategic initiatives in place, Apollo Tyres is poised to outperform its peers in the foreseeable future, according to Markets Mojo.
Key Reasons Driving Positive Outlook:
- Highest Ever Revenue and Profit: In FY23, Apollo Tyres recorded a remarkable revenue of ₹24,568 crore and a net profit of ₹1,105 crore, showcasing a substantial improvement compared to FY22. This growth was primarily fueled by increased volumes and a dedicated focus on enhancing profitability, cash flows, and return ratios. Notably, in the first nine months of FY24, the company has already achieved revenue of ₹19,120 crore and a net profit of ₹1,368 crore, surpassing the net profit reported for the entire FY23. This upward trend underscores Apollo Tyres’ ongoing commitment to bolstering profitability and indicates its trajectory towards achieving record-breaking top and bottom-line figures.
Growth Drivers:
- Diversified Revenue Stream: Apollo Tyres derives 78 percent of its revenue from the replacement market, aligning with industry standards. This diversified revenue stream mitigates risks associated with fluctuations in demand for new vehicles, as only 22 percent of its total revenue comes from supplying to Original Equipment Manufacturers (OEMs).
- Infrastructure Development and Changing Consumer Preferences: With governments prioritizing infrastructure development and a growing preference for road travel among the public, the replacement cycle for tyres is expected to decrease. This anticipated trend is likely to drive increased demand across the entire tyre industry.
- Market Share Expansion: Apollo Tyres has been consistently increasing its market share in Trucks & Buses, light trucks, and passenger vehicles, establishing itself as the market leader in these segments. As demand expands, the company is poised to benefit significantly from this growing market, as highlighted by the brokerage.
The brokerage highlighted several factors contributing to margin improvement for Apollo Tyres:
- Capital Expenditure for Capacity Enhancement: The company allocated ₹500 crore for capital expenditures in the first nine months of fiscal year 2024 to enhance its capacities for future growth. This strategic investment aims to support the company’s expansion plans and improve operational efficiencies.
- Impact of Falling Oil Prices: Despite geopolitical tensions such as the Israel-Hamas conflict and OPEC+ cutting production, oil prices have fallen since October. This trend has continued into February 2024, which is beneficial for tyre manufacturers like Apollo Tyres. Key raw materials such as carbon black, nylon tyre cords, and other chemicals used in tyre manufacturing are derivatives of crude oil. With crude oil prices declining, input costs for these raw materials decrease, contributing to margin expansion.
- EBITDA Margin Expansion: The brokerage highlighted that Apollo Tyres witnessed an expansion in its EBITDA margin to 18.3 percent in Q3FY24 from 14.2 percent in Q3FY23. This improvement in operational efficiency and profitability further supports the positive outlook for margin expansion.
These factors collectively contribute to the positive outlook for margin improvement and overall financial performance of Apollo Tyres.
Reducing Debt and Attractive Valuations:
Markets Mojo highlighted Apollo Tyres’ efforts to reduce debt through internally generated cash flows. In 9MFY24, the company generated a free cash flow of ₹1,600 crore, a significant increase from ₹600 crore in FY23. The company’s net debt has also decreased from ₹4,300 crore in March 2023 to ₹3,000 crore in December 2023. This reduction in debt is expected to improve the bottom line in the coming quarters, as the company focuses on profitability and enhancing profit ratios.
In terms of valuations, Apollo Tyres is trading attractively with a price-to-earnings (PE) ratio of 18x and a market capitalization-to-sales ratio of 1.3x, indicating undervaluation relative to the company’s margins. Additionally, the enterprise value-to-EBITDA (EV/EBITDA) ratio of 8.22 is considered undervalued, according to the brokerage. These factors collectively highlight the company’s strong fundamentals and potential for future growth.
Disclaimer: The views and recommendations presented above are the opinions of individual analysts or broking companies, and do not represent those of Bystox. Investors are advised to conduct their own research and consult certified financial experts before making any investment decisions.