Apollo Tyres At Four-Year High As Analysts Bet On Better Pricing Power, Cheaper Oil

Shares of Apollo Tyres Ltd. gained the most in at least a year as analysts bet on the company's better pricing powers, benign commodity price outlook and cheap valuations.

The optimism comes after the Gurugram-based tyremaker posted a net profit of Rs 190.6 crore in the quarter ended June 30, an increase of 49% over the year ago. That compares with the Bloomberg consensus analysts' estimate of Rs 131 crore.

Key Highlights (Consolidated, YoY)

• Revenue up 30% at Rs 5,942 crore

• Ebitda up 22% at Rs 689.80 crore

• Ebitda margin at 11.6% vs 12.3%

Brokerages said the company's capital efficiency focus and price hikes helped deliver better-than-estimated profit.

Shares of Apollo Tyres gained as much as 4.7% to Rs 261.9 apiece—the highest in nearly four years, before closing 3.9% higher on Wednesday.

The stock had gained as much as 9% on Tuesday after the earnings beat.

Separately, stocks of tyre, paints and other companies that use oil as a key raw material also gained, tracking a decline in global crude prices to around $94 a barrel.

Of the 31 analysts tracking Apollo Tyres, 22 maintain a 'buy', two suggest a 'hold', while seven recommend a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 1.2%.

Here's what analysts made of Apollo Tyres' Q1 FY23 results:

• Maintains 'buy' with a target price of Rs 310, implying a potential upside of 24%.

• India business outperformed on all fronts driven by volume growth and price hikes despite higher-than-estimated cost inflation, while the EU business was in line.

• India business is likely to remain subdued in Q2 due to seasonality, whereas EU demand to remain strong. While raw material basket will peak in Q2, price hikes will support QoQ margin improvement.

• Among its tyre peers, Apollo offers the best blend of earnings growth and cheap valuations.

• Maintains 'reduce' with a fair value of Rs 250, implying a potential downside of 12%.

• Apollo Tyres reported consolidated Ebitda 8% above our estimates due to stronger-than-expected revenue print of standalone operations.

• EU operations performance came in below expectations due to inflationary pressures. Expect margins to improve in the second half of the fiscal given recent decline in commodity prices.

• An inferior return ratio profile over the capex cycle remains a key issue for the business.

• Maintains 'buy' with a target price of Rs 290, implying a potential upside of 16%.

• Healthy performance, capital efficiency focus retained.

• Retains 'buy' amid strong intent on sweating of assets, controlled capex spends and return ratios focus for the business.

• CV cyclical upswing, high radialisation levels, uptick in PV space, network expansion and healthy PV recovery in Europe to be major top line drivers.

• Benign commodity price outlook amid recent cool off in crude prices along with operational efficiencies to result in 13.5% Ebitda margins by FY24.

• Apart from Apollo, in auto OEM coverage, ICICI likes M&M.

• Maintains 'buy' with a target price of Rs 315, implying a potential upside of 26%.

• Better pricing power drives performance; raw material benefit an additional lever.

• Domestic demand remained strong in OE/export segments and witnessed recovery in replacement market. Management expects double-digit demand growth in FY23 led by steady domestic demand, exports and strong demand tailwind in EU PCR market due to import restrictions from Russia.

• Margin performance has been resilient owing to the company’s ability to take gradual price hikes. With the softening commodity prices going ahead, we expect margin recovery to sustainable levels during second half.

• Capex peaked during FY16-22 and the company has guided for reduced capex intensity from FY23. Focus on productivity improvement (by 10-15%) augurs well for the company.

• Weakness in domestic auto sales and easing of tyre import restriction are key risks.