The ongoing market volatility has seen many stocks fall off the cliff. Apollo Tyres is one such, losing 23 per cent of its value so far this year.

However, the company’s prospects remain promising, with domestic commercial vehicle sales in a cyclical upturn and the outlook for the European business improving.

Investors with a long-term perspective can make use of the price correction to buy the stock.

At ₹171, the stock trades at a reasonable PE of 7.8 times its estimated earnings for 2015-16.

Strong prospects Apollo derives about two-thirds of its revenue from its India operations. A recovery in domestic truck and bus sales after the cyclical slowdown puts the company in a sweet spot for the next 2-3 years.

Higher new-vehicle sales will also have a trickle-down effect on replacement demand for tyres. Tyre-makers typically enjoy better margins in replacement sales, as they have a higher pricing power in this segment. Secondly, it will also benefit from the increasing preference for radial tyres for trucks and buses.

Radialisation stands at 35 per cent currently, up from 25 per cent 1-2 years ago. The company has a market share of 27 per cent in truck bus radials and plans to expand capacities for the same in its Chennai plant.

A richer product mix driven by a higher share of radial tyres will also help realisations and margins. Besides, Europe is also showing a recovery both in new-vehicle sales and in replacement markets, after a lull. Europe contributes about 25 per cent to the company’s consolidated revenue.

Rubber prices For the quarter ended March 2015, consolidated net sales dropped by 3.5 per cent to ₹3,098 crore over March 2014.

The negative effects of the euro’s depreciation, price cuts to pass on low raw-material costs and discounts to boost sales have pulled down top-line growth.

Multi-year lows in rubber prices though helped operating margins expand to 16.6 per cent from 14.2 per cent a year ago; this also supported the 15 per cent growth in consolidated net profit (adjusted) to ₹310 crore.

In the months to come, rubber prices are expected to inch up on improving demand across the globe and government support schemes for farmers in countries such as Thailand.

But with enough production forecast to meet demand, prices may not rise too sharply.

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