Analysts see over 70% upside in Apollo Tyres! Right time to get in the driver's seat?

Shares of Apollo Tyres have fallen more than 30 per cent from its recent October 2021 highs putting the stock firmly in bear grip.

ICICI Securities in its recent report maintained a 'Buy' rating on the stock with an unchanged target price of Rs 305, signaling a potential upside of over 70 per cent in the counter, from its previous close of Rs 175.9 on Friday.

The brokerage house said that the company is using artificial intelligence (AI) and machine learning (ML) to enhance productivity and debottleneck its capacity to grow without depending on incremental capacity addition. EU is currently operating at 85 per cent utilisation levels and is expected to improve production with Hungary plant debottlenecking exercise.

"With consecutive two years of positive free cash flow (FCF) in FY21-FY22, despite raw material inflationary pressures, and no major plans for further growth capex, FCF is likely to improve substantially, thus further reducing the financial leverage," it added.

Motilal Oswal also believes that Apollo Tyres is well placed, with a strong competitive positioning as well as ready capacities to benefit from a strong recovery in truck/bus radial tyre) TBR and passenger car radial (PCR) in the original equipment manufacturer (OEM) and replacement segment.

"Apollo Tyres is geared for the next leg of growth, with sufficient capacity to cater to demand from India and Europe. With capex for Phase II of the AP plant concluding in FY22, an increase in capacity utilisation will generate higher cash flows and further deleverage its balance sheet. As compared to its peers, Apollo Tyres offers the best blend of earnings growth and cheap valuations," it said.

It further added that the India business has several levers to support margin, diluting the impact of raw material cost inflation. These include operating leverage, increasing share of the most efficient AP plant (not factored in), and likely benefit from PCR exports to the EU, with PLI benefits (not factored in).

While it expects a 200 basis points decline in FY24 EBITDA margin (to 13.5 per cent) over FY21 levels, due to high raw material cost, operating leverage and balance sheet deleveraging will drive 21 per cent profit after tax (PAT) CAGR.

Ambit, however, has maintained a 'sell' call with a target price of Rs 192 (vs Rs 211 earlier). It believes that the company’s consolidated revenue target of USD 5 billion is aggressive and would require investments in growth capex, given more than 80 per cent capacity utilisation across plants currently. This will likely hit the return on capital employed and FCF generation and push up net debt.

"Also, delivering an EBITDA margin of more than 15 per cent would hinge on how input commodities like crude and natural rubber are trending then as 25-30 per cent swings in prices of crude is not unusual and would result in a significant impact on profitability," it added.

Kotak also believes that the gross margins of domestic tire companies will continue to remain under pressure given multiple headwinds. It has downgraded Apollo Tyres to 'reduce from 'add', with a revised target price of Rs 175, down from Rs 225 earlier.

"The company’s EU operations performance over the past 1-2 years has seen sharp improvement led by cost-cutting initiatives, a richer product mix and optimisation of EU plants by the company. However, we expect profitability to remain under pressure in EU operations owing to a sharp increase in crude prices and elevated energy cost in the EU, which will further put pressure on operating costs," it said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)