Recommendation: Buy
Current price: Rs 23 (at the time of publishing this tip)
Price target: Rs 45
Key points:
- Apollo Tyres has reported a massive plunge in its profitability in the Q2-FY2009 results. The top line has grown by 16.2% to Rs 980.8 crore, which was led by a sales realisation growth of 17.5%, however volumes declined by 1.3% yoy to 66,202 tonnes. The operating profit margin slumped to 5.1% as against 12.8% last year on the back of higher raw material prices, especially that of natural rubber (which constitutes ~40% of the total raw material cost).
- Consequently, the operating profit marked a de-growth of 54% yoy. This along with a lower other income and higher interest and depreciation charges led the net profit to decline by 84.8%. The net revenues rose by 16.3% to Rs 1,262.2 crore, while the net profit fell by a precipitous 74% to Rs 15.1 crore in Q2-FY2009 from Rs 57.6 crore in Q2-FY2008.
- The sales volume of the original equipment segment have declined, especially that of the commercial vehicle segment, due to a significant slowdown, whereas the replacement sales has also witnessed a slide due to recent price hikes taken by the company. The raw material prices have started declining from October onwards, the benefits of which would be visible in the coming quarters. Decline in the crude oil prices have also caused the prices of crude-related raw materials to soften.
- At the current market price, the stock discounts its FY2010E earnings by 5.1x and quotes at an enterprise value/EBIDTA of 3.3x.
- I recommend a Buy call on this stock with a price target of Rs 45, again long-term.
