Apollo Tyres: Capex not yet priced in

We had looked at Apollo Tyres nearly a year back (Apollo Tyres: Available at attractive valuations) and our view was framed based the thesis of lower commodity prices namely lower rubber and crude prices. Our thesis has played out and the price is has moved around 50% higher from the time we started looking at Apollo Tyres. However, the 16% drop in the Q4-17, PAT made us re-look at our position. Apollo Tyres has moved from being available at attractive valuations to now being available at reasonable valuations. 


Ignoring the quarter on quarter impact of the lower rubber and crude prices has already played out as the stock moved from around Rs 150 to around Rs 240. Falling rubber prices alone will not give the stock any further legs to go up or even sustain at current levels.

The PE expansion story in the stock is over for now.  The PE expanded from around 7 to the current PE of close to 11. Now the earnings have to grow for the stock to move up. FY17 EPS contracted compared to the FY16 EPS and the price moved up close to 50% from its 52 week low.

From now on the only catalyst left in the stock is the unfolding of the capex story which will deliver EPS growth. Now we are looking the next trigger of volume growth coming in from European operations along with the TBR capacity being doubled from 6K to 12K in Chennai.

We are unsure if the capex will deliver results as per the schedule suggested by the management. We are not sure if we remember that the management had indicated that the Hungarian operations will start by Jan-17. In reality the inauguration of the Hungarian plan took place in Apr-17. These small slippages in inauguration may result in further slippages in the capacity ramp up being planned for in Hungary.

We also have not heard about the milestones for TBR capacity being doubled in Chennai.

While capex is the only trigger available for the stock we are not seeing or hearing great execution on it.

So do we buy the stock?

Definitely not a price around Rs 240.

You may want to continue holding on to the stock if you had entered it at a lower price with some margin of safety to handle the short term volatility in the stock prices given the not so great Q4-17 results.  We would not be surprised if the stock moves closer to Rs 200 or even if it slips slightly below the Rs 200 mark.

Where is the margin of safety?

We feel the stock is priced reasonably based on the current PE metric so do not see any margin of safety for those wanting to enter into Apollo Tyres.

For those holding on to Apollo Tyres, the margin of safety will kick in only if the planned capex in Hungary and Chennai kicks in and delivers volume and profit growth. The capex expansion will play itself out over FY18 and FY19. It will need some patience to go thru the ride. Maybe a benign commodity price could provide us with a safety cushion till the capex kicks in.

We still don’t see any progress on protection by the government from Chinese imports and have not included it in our view of the business. We have also not considered the impact of two wheeler tyres. The two wheelers segment still has a lot of growing up to do for it to be significant in our view about the stock.

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