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The 70-day lockout at Apollo Tyres' Cochin plant was lifted in the last week of August'10. The lockout was
capacity. This, along with recent correction in prices of natural rubber, the key raw material, augurs well
for the domestic business. However, we do not expect volume growth in FY11 in the domestic business
due to lockout at the Cochin facility. Although the company has undertaken price increases, margins are
expected to take a 440bps knock at 11.3%. VBBV reported a net profit margin of 6.5% in Q1FY11. We
expect subsidiaries to contribute Rs1.9bn in profit in FY11.
What will move the stock?
1) Re-rating of the sector on the back of radialisation in the truck-bus radial (TBR) segment; 2) Ramp-up
at the Chennai facility and commencement of production for TBR tyres; 3) Correction in natural rubber
prices due to production growth or reduction in import duty on natural rubber as demanded by the tyre
industry; and 4) Continued strong performance of VBBV, which specializes in winter tyres.
Where are we stacked versus consensus?
Our FY11 and FY12 consolidated earnings estimates are Rs8.7 and Rs11.0 respectively. With the end of
the lockout at the Cochin facility, we have increased our target earnings multiple to 10x (from 7.5x). We
reiterate our 'BUY' recommendation on the stock with a revised price target of Rs110. Our consolidated
earnings estimate for FY11 is 2.0% higher than consensus estimate of Rs8.5.
What will challenge our target price?
1) Further increase in natural rubber prices, a key raw material; and 2) Payment of penalty due to
involvement in a price fixing cartel alleged by Competition Commission of South Africa.
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