APOLLO TYRES (Buy, Target Rs.115) LKP Advisory

APOLLO TYRES (Buy, Target Rs.115)

·         Apollo Tyres is India’s second largest tyre producer with subsidiaries in Europe & South Africa. Improving South African operations and stable demand in Europe would in our view drive volumes for Apollo Tyres and easing rubber prices coupled with a pick-up in the domestic replacement market would help sustaining  EBIDTA margins of 10%

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·         We like the business model of Apollo Tyres having an ROCE of 30% and despite the present subdued demand from domestic OEM’s in the Truck & Bus Radial segment, we believe that the capex cycle has peaked and with the ramp up of its Chennai facility slated for December 2012, the company would be in a position to bring down its gearing from present levels of 0.75x to 0.35x next fiscal by virtue of its robust free cash generation.

·         Apollo Tyres by virtue of its timely capacity expansion and brand image is ideally positioned to leverage the potential in export markets. Buy Apollo Tyres trading at 6.5x one-year forward earnings with a price target of Rs115

 

TECHNICAL VIEW

·      Technically, the stock is in a very strong uptrend (rising trendline, see graph ), right from its 2009 lows. The momentum is still very strong, and with a breakout close to 100, the stock looks set to conquer new time high levels.

·      With long term support (as seen from the rising trendline) at 80 levels from current price data, the long term trend looks intact. Stock is comfortably above its long term averages (200 DMA), which is also a positive sign for long term investors.

·      The weekly charts indicate a strong bullish Flag formation and a breakout of a 2 month consolidation, and with pick-up in volumes, the stock appears to be extremely bullish on charts.

Please find attached file.

Thanks and Regards

LKP Advisory