Multiple growth drivers for the Indian tyre industry – Apollo Tyres

Update on the Indian Equity Market:

The benchmark index NIFTY 50 declined for the 3^rd straight session on Tuesday and closed at 17,325 (-0.3%). Investors’ will focus on the Fed policy decision due Wednesday which could induce volatility, amid concerns over elevated inflation and a delay in the economic recovery due to omicron strain.

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Excerpts of an interview with Mr. Onkar Kanwar, Chairman, Apollo Tyres (APOLLOTYRE) published in Business Standard on 14^th December 2021:

• There are multiple growth triggers for the Indian tyre industry, apart from the ones arising due to import curbs on China. The National Infrastructure (NIP) for FY19-25 for which the government has allocated ₹ 111 tn is expected to have a multiplier effect. He believes there is enough research that indicates the multiplier effect due to the creation of road infrastructure in a country. The significant increase in the movement of goods and people via road is beneficial for the tyre industry.
• There has been a revival in the truck side original equipment manufacturers (OEMs), which will result in repeat demand in the replacement segment as well. The growth in the replacement segment is a mixed bag, some months witness growth in bias-ply tyres demand while some others witness growth in radials.
• The Company is hoping that the push on infrastructure development and increased consumer spending will further drive demand in the CV segment.
• The only challenge facing the company now is the relentless inflation which has been and is expected to be a pain point in the near future as well. The price hikes taken lag the raw material inflation, which adversely impacts the margins.
• The company has decided to specialise in the Enschede plant in the Netherlands to be cost-competitive in the European manufacturing operations. It has shuffled the manufacturing mix such that loss-making units (due to high costs of manufacturing in the Netherlands) were shifted to Hungary and India. With the successful execution of Dutch plant specialisation, there has been a significant improvement in the European operations’ performance.
• The share of high margins passenger car sales mix has increased to over 30 percent and is expected to rise to 40% in the next 2-3 years.
• The current focus is on ramping the facility in Andhra Pradesh. This unit along with Chennai and Hungary units services the demands of all geographies. Hence, the company is not looking at any acquisitions.

 Asset Multiplier Comments

• The CV industry was one of the most ravaged by the pandemic. With a turnaround expected in the CV cycle in India, and pent-up demand in passenger vehicles, the entire tyre industry is likely to be a beneficiary.
• The Indian business of APOLLOTYRE is expected to benefit from operating leverage and an increasing share of the Andhra plant. The European operations are likely set for a turnaround led by strategic initiatives at the front end (product side) and restructuring in the Netherlands.

Consensus Estimate: (Source: market screener website)

• The closing price of APOLLOTYRE was ₹ 217/- as of 14-December-2021.  It traded at 18x/ 13x/ 11x the EPS estimates of ₹ 12/ 17/ 20/- for FY22E/FY23E/FY24E respectively.
• The consensus target price of ₹ 258 implies a P/E Multiple of 13x on FY24 EPS estimate of ₹ 20/-.

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