Apollo Tyres shares at Rs 500 or Rs 325; Should you buy, sell or hold the stock?

Apollo Tyres has been a multibagger stock on Dalal Street as the shares of the tyre maker have surged more than 130 per cent in the last one year. However, the stock, of late, has lost its steam, witnessing a correction of around 5 per cent from a 52-week high, primarily on the back of rich valuations and profit booking.

The tyre manufacturer recently hosted a bunch of brokerage firms in its investor meet, where the company management shared the guidance for revenue, EBITDA margins and capacity expansion. The company is looking to increase its capacity at Andhra Pradesh plants.

However, brokerage firms remain divided on the stock, citing various reasons. Some believe that the company is focused on improving profitability over market share gain, while others believe that current margins are difficult to sustain and rich valuations are capping the gains. They see up to 23 per cent upside to 20 per cent fall in the counter.

The company's India revenue growth is likely to taper to mid-to-high single digits in FY24 due to moderation in OEM and replacement segments, and lower exports; Europe revenue could be flat in FY24; RM cost is expected to be flat-to-higher quarter-on-quarter (QoQ) for Q1FY24; FY24E capex is planned at Rs 1,100 crore; the Andhra plant has greater automation, which shall facilitate cost control, improvement in quality and better productivity vis-à-vis Apollo’s other plants, said Nuvama Institutional Research.

"Apollo has gained market share over the past three years due to favorable government policies, new products and network expansion, and we expect its share to largely sustain. In light of the company’s moderate revenue growth prospects and limited upside potential, we retain ‘hold’ with a revised target price of Rs 400 based on a slight uptick in our FY24E and 25E EPS," it added.

According to Motilal Oswal Financial Services, Apollo's management has discussed its FY26 vision of a revenue of $5 billion, along with an EBITDA of more than 15 per cent; an ROCE of 12-15 per cent; and a net debt-to-EBITDA of more than 2 times. While Apollo Tyres indicated that capacities will be added in FY26, the next leg of capex is likely to be prudent and will not be bunched up, said Motilal Oswal Financial Services.

"We have marginally cut our earnings estimates by 1 per cent as Apollo Tyres is likely to budget for the next phase of capex starting from FY25. However, unlike in the past, the current phase of capex is going to be brownfield (lower intensity) and would not be bunched up. We estimate Apollo Tyres to turn net debt free by FY25," it added with a 'buy' rating and target price of Rs 500.

Shares of Apollo Tyres dropped about 3 per cent on Monday to Rs 406, compared to its previous close at Rs 416.10 on Friday. The company's market capitalization slipped below Rs 26,000 crore. The stock tested its 52-week high at Rs 427.20 on June 22, 2023.

Shares of Apollo Tyres have surged more than 130 per cent from its 52-week low at Rs 180, while the stock has delivered 5 times return from its Covid-19 lows. Interestingly, the stock has gained about 25 per cent in the current year so far.

The company has to clock in EBITDA per kg of Rs 47.6 over the medium term to justify current prices, which we believe is unsustainable. In addition, inferior return ratios over the capex cycle remain an area of concern for the industry, noted Kotak Institutional Equities, retaining 'sell' rating with a fair value of Rs 325.

"We have increased our FY2024-26E consolidated EPS estimates by 3-4 per cent on higher revenue growth assumptions, driven by the recovery in M&HCV replacement segment demand. We believe that the current profitability is not sustainable in the medium term, and margin recovery is completely priced in at the current levels," it added.


(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Business Today)

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