This mid-cap tyre maker has rocketed 40% in two months. Here's why

resr 5paisa Research Team 13th December 2022 - 06:10 pm
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Apollo Tyres, the second-largest tyremaker in the country behind MRF, has been facing margin pressures as the raw material cost for the industry shot up over the last two years.

But things are looking better.

Demand has been on an upward trajectory and the margin pressure is expected to wane partly due to softening raw material prices as also due to the company being able to pass on some of the cost push to the consumer.

Not surprisingly, investors are flocking again to the stock. Although the stock skid nearly 4% on Monday in sync with bearish sentiments in the market, it has risen over 40% in the last two months, beating the 10-15% rise of the benchmark indices. And Dalal Street analysts have price targets that may provide another 15-20% return potential.

What’s changed?

Apollo Tyres beat analyst expectations for the quarter ended June 30, with consolidated net revenue rising nearly 30% to Rs 5,942 crore. 

This was powered by 21% volume growth in domestic business as also a 32% rise in revenue from European operations. The European business was partly boosted due to the impact of the war on supply of Russian-made tyres in the continent.

Consolidated EBITDA margin at 11.6% improved sequentially due to higher operating leverage and cost-control measures. The company absorbed commodity cost inflation with an 8% price hike last quarter in the domestic market followed by another 3% hike last month.

At the same time, the commodity cost pressure is expected to weaken hereon, which will help in margins from the third quarter.

Brokerage houses have projected the company to post a net profit of Rs 1,200-1,400 crore for the year ending March 31, 2024. This means the stock is trading at around 11-12x FY24 earnings, making it an attractive valuation in the market.

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