Buy Call For Apollo Tyres with target price of Rs 97: PINC Research

Lockouts at its Cochin facility and Dunlop (South Africa) operations took a toll on Apollo Tyres' Q2FY11 results. Exacerbating this, high natural rubber prices impacted margins. Rubber supplies have been disrupted due to unseasonal weather in India and South East Asia, spiraling prices to an all-time high of Rs200/kg. Domestic players have made 3-4 rounds of price increases and another round is expected soon. Demand momentum is expected to continue in domestic markets. While domestic business is on a difficult turf, overseas subsidiaries are expected to contribute Rs1.9bn in profits 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 Rs7.8 and Rs9.7 respectively. Our consolidated earnings estimate for FY11 is 1.5% lower than consensus estimate of Rs7.9. We reiterate our 'BUY' recommendation on the stock with a price target of Rs97.

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.