According to reports, Apollo Tyres is contemplating to increase tyre prices in the wake of rising raw material prices.
Price of natural rubber, the key input for tyre manufacturers, has inched to around Rs102/kg at present from the low of around Rs70/kg in January 2009.
Also a recent rising trend in the prices of crude oil could impact the prices of other crude- based raw materials such as carbon black, synthetic rubber, nylon tyre cord fabric and rubber chemicals.
However we do not see any risk to our estimates, as we have factored in the average rubber price of Rs106/kg for FY2010 and that of Rs119/kg for FY2011.
The demand environment remains robust. The replacement market has been healthy due to fall in the import of cheap Chinese truck and bus radials, as the government of India has included them in the restricted import list.
The replacement demand has grown by more than 10% (year to date), which has offset the subdued demand from the truck and bus original equipment manufacturers (OEMs).
Going forward, we believe, healthy demand in replacement market and the lower base of last year’s volume for OEMs will drive the growth in the domestic market. The international operations are also likely to get support by the upturn in economy in its key markets.
At the current market price the stock is trading at 5.4x its FY2011 earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBITDA) of 2.5x. We maintain our BUY recommendation with price target of Rs53.