Apollo Tyres: Buy

Investors with a two-year perspective can buy the Apollo Tyres stock as the company is poised to witness better times. Faced with spiralling costs of natural rubber and strikes/ lock-outs in its plants, the company has had a forgettable 2010-11. The consolidated profits fell 32 per cent to Rs 440 crore. The stabilisation in rubber prices, and a good demand outlook for tyres coupled with the company's pricing power augur well for growth. At Rs 66, the stock trades at a PE of about 7.5 times its trailing twelve-month consolidated earnings. Two factors brighten the prospects of the India operations. First, the stabilisation of rubber prices at around Rs 230/kg in the last two-three months. While this price is still high, the status quo provides an opportunity to play catch up in terms of price increases, helping margins better. The company hiked prices in April and May both in India and abroad. Apollo's market leadership position in the truck segment here would also help. Second is the volume outlook. The company derives 66 per cent of its domestic revenues from the replacement markets. Even as moderation is expected in OEM sales, given the auto industry growth since 2009, replacement demand for trucks and cars would kick in shortly. The company expects 30 per cent volume growth in FY12. This would again aid margin expansion as tyre companies enjoy higher pricing power in the replacement markets. Support for margins can also be expected from the increased utilisation of the radial tyres plant at Chennai as well as higher CV radialisation.

While the European operations may not offer much scope for growth except in niche segments, the increased use of India's low cost base to manufacture Vredestein's high performance tyres, the access to their technology and the use of their network to penetrate the ‘Apollo' brand bode well for the company over the long-term.