Apollo Tyres to maintain momentum in coming quarters on margin uptick

Volume growth expected to be led by the truck and bus replacement market

After outperforming the Indian tyre sector in the September quarter with a volume growth of 26 per cent, Apollo Tyres is expected to maintain its momentum in the coming quarters given higher share of truck radial business, strong replacement demand and higher utilisation levels. 

Softer raw material prices, both for natural rubber as well crude oil derivatives such as synthetic rubber, nylon tyre cord and carbon black, will help on the margin front for both the sector as well as Apollo Tyres.  The two (natural rubber and crude oil derivatives) together account for 80 per cent of raw materials consumed.

On the demand front, analysts expect a robust second half and overall growth of about 19 per cent for FY19. 

This is expected to be driven by the replacement segment which accounts for about two-thirds of revenues. 

Given the strong truck sales over the last few quarters, analysts expect the demand for replacement segment to be strong. 

Joseph George and Suraj Chheda of IIFL Institutional Equities believe that the recent weakness in sales to tyre makers is not much of a concern given two-thirds of demand comes from after-market or replacement sales. 

Tyre industry volumes have not declined even once, despite the sharp declines in sales of truck makers, they added. 

Trucks and buses account for over 60 per cent of Apollo Tyres’ standalone sales. 

Among the triggers for the stock is the expectation that margins will improve from the current levels on account of easing of raw material costs. 

Margins that have been trending down over the last few quarters are expected to look up. 

Further price hikes by the company (8 per cent year-to-date in FY19) should also help. 

While capacity utilisation in India is good, scaling of production at the Hungarian plant by end of FY19 should add to its profitability.

Further valuations of the company at 10 times FY20 earnings estimates is also attractive. 

This is at a 23-28 per cent discount as compared to peers such as MRF and CEAT.