Stock Check: Apollo Tyres jump over 58% in 1 year; should you still buy?
In this stock check, we look at the technical and fundamental outlook for the tyre major Apollo Tyres. The stock has surged over 58 percent in the last 1 year and almost 15 percent in 2024 YTD.
In 2023, the auto sector witnessed record sales, driving up the sales volume for tyre companies in India. This surge in demand, particularly from Passenger Vehicles and Two & Three Wheelers, resulted in margin expansion for tyre companies across the sector, especially Apollo Tyres. In this stock check, we look at the technical and fundamental outlook for the tyre major.
Stock Price Trend
The stock has surged over 58 percent in the last 1 year and almost 15 percent in 2024 YTD. Just in February, the stock has shed around 4 percent, snapping 4 months of gains, when it rallied over 46 percent. Before February, it jumped 19 percent in January 2024, 6.2 percent in December 2023, 12 percent in November 2023 and 3.4 percent in October 2023.
Currently trading at around 520, the stock hit its record high of ₹559.85 last week, on February 8, 2023. Meanwhile, it has advanced over 71 percent from its 52-week low of ₹303.35, hit on March 14, 2023.
In the long term, the stock has given multibagger returns, soaring 165 percent in the last 3 years and 155 percent in the last 5 years.
Apollo Tyres is a leading manufacturer and supplier of tyres and supplies to Asia Pacific, Middle East, and Europe regions. The company's sales primarily focus on replacement markets, with additional sales to Original Equipment Manufacturers (OEMs) and exports.
Earnings
Apollo Tyres on Wednesday said its consolidated net profit increased by 78 percent to ₹497 crore for the third quarter of 2023-24 on account of improved product mix across geographies. The company reported a net profit of ₹279 crore in the October-December quarter of FY23. Its Revenue from operations rose by 3 percent to ₹6,595 crore in the period under review from ₹6,423 crore in the year-ago period.
At the operating level, EBITDA surged 32.2 percent to ₹1,208.1 crore in the third quarter against ₹913.4 crore in the corresponding period in the previous fiscal. Meanwhile, the EBITDA margin came at 18.3 percent in Q3 against 14.2 percent in the corresponding period in the previous fiscal.
Technical View
Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities
Apollo Tyre, positioned at Rs.518 exemplifies a formidable uptrend, recently attaining an all-time high of Rs.557.90. After a measured retracement to the preceding swing low on diminished volumes. The stock resiliently hangs around Rs.500 supported by the unwavering 20 EMA, affirming the persisting bullish trend. The stochastic daily indicator indicates a bullish trend with a favorable crossover accentuating the positive market sentiment. Concurrently, the ascending RSI not only corroborates strength but also suggests ample room for an extended rally.
Hence, based on the above technical structure, one can initiate a long position at CMP ₹518 for a target price of ₹570. The stop-loss can be kept at ₹490.
Rohan Shah - Technical Analyst, Religare Broking Ltd
Apollo Tyre has been in a steady uptrend for more than one and half years, forming a series of higher highs and lows with a gradual rise in volumes. However, after the consistent outperformance, now we believe the stock is likely to witness profit-taking. As on the higher time frame chart, it has formed a bearish candlestick pattern and has developed a bearish divergence in the momentum indicator (RSI). Also, on the daily chart it has slipped below its key short-term moving average after a good amount of time. Thus, traders should avoid building fresh positions as of now and look to enter on dips towards the 480-470 zone. On the flip side, now the 520-525 zone remains the intermediate hurdle for the stock.
Rajesh Palviya, SVP - Technical and Derivatives Research, Axis Securities
The overall long-term trend continues to be intact and bullish as the stock moves in higher tops and bottoms across all the time frames.
Recently, the stock has violated the 20-day SMA (517) on a closing basis, which signals short-term profit booking or price correction towards 480 levels. Hence, such minor corrections remain a buying opportunity for traders and investors. The stock is strongly sustaining above its 50, 100 and 200-day SMA, and these averages are also inching up along with rising prices, which reconfirms bullish sentiments. We expect this bullish sentiment to gear up towards 600-650 levels in the upcoming months. The monthly and quarterly strength indicator RSI is in positive terrain, which signals strength on the long-term charts.
Fundamental View
Brokerage house Markets Mojo has a bullish outlook on Apollo Tyres. This confidence stems from several factors, including attractive valuations, improved performance, and its market leadership position. With its strong market presence and strategic initiatives, Apollo Tyres is well-positioned to outperform its peers in the coming period, it said.
Here are some key reasons driving its positive outlook
Highest Ever Revenue and Profit: In FY23, Apollo Tyres reported revenue of ₹24,568 crore, accompanied by a net profit of ₹1,105 crore, marking a significant improvement from FY22. This improvement was driven by increased volumes and a steadfast commitment to enhancing profitability, generating cash flows, and improving return ratios, informed the brokerage. In the first nine months of FY24, the company has already achieved revenue of ₹19,120 crore and a net profit of ₹1,368 crore. These figures surpass the net profit reported for the entire FY23. This trend indicates that Apollo Tyres is on track to achieve its highest-ever topline and bottom-line figures, reflecting the company's persistent efforts to boost profitability, noted the brokerage.
Growth drivers: As per the brokerage, Apollo Tyres derives 78 percent of its revenue from the replacement market, a proportion in line with other manufacturers in the industry. This diversified revenue stream reduces the risk associated with fluctuations in demand for new vehicles, as supply to OEMs constitutes only 22 percent of its total revenue. As governments continue to prioritize infrastructure development, coupled with a growing preference for road travel among the public, the replacement cycle for tyres is expected to reduce. This anticipated trend will likely drive increased demand across the entire tyre industry and with Apollo Tyres which has continued to increase market share in the Trucks & Buses light trucks and passenger vehicles and has become the market leader in these segments, the company stands to benefit significantly from this expanding demand, explained the brokerage.
It further added that the company has allocated ₹500 crore for capital expenditures during the first nine months of the fiscal year 2024 to enhance its capacities for future growth.
Factors improving the margins: The brokerage noted that despite the Israel-Hamas conflict and OPEC+ cutting production, oil prices have fallen after surging in October. Crude oil prices have remained low even in February 2024 and this will play a key role in margin expansion as key raw materials such as Carbon black, Nylon tyre cords, and other chemicals that are used in the manufacturing of tyres make up 50 percent of the total cost of manufacturing a tyre. These raw materials are derivatives of crude oil and a fall in the prices of crude will reduce the input costs, it stated. Moreover, it pointed out that the company saw its EBITDA Margin expand to 18.3 percent in Q3FY24 from 14.2 percent in Q3FY23.
Reducing Debt and Attractive Valuations: Markets Mojo also highlighted that the company is constantly looking to reduce debt going forward and the company is doing this with internally generated cash flows. In 9MFY24, the company has generated a free cash flow of ₹1,600 crore as compared to ₹600 crore in FY23. The Net Debt of the company has come down from ₹4,300 crore in March 2023 to ₹3,000 crore in December 2023. This reduction in debt will improve the bottom line in the coming quarters as the company is focusing on profitability and improving profit ratios, said the brokerage.
The company is trading at attractive valuations with a PE of 18x and a market cap to sales of 1.3x which is quite undervalued in the context of the margins posted by the company. Even the EV/EBITDA of the company which stands at 8.22 is quite undervalued, added the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.
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