Stock in Action - Apollo Tyres

Why Apollo Tyres Share is in Buzz?

Apollo Tyres Limited (NSE:APOLLOTYRE) has garnered significant attention in stock market for multiple reasons. Despite its relatively low price-to-earnings (P/E) ratio of 16.3x compared to Indian market average, company has shown robust earnings growth. Over past year, Apollo Tyres posted impressive earnings increase of 132% & cumulative three-year growth of 1,136%. However, future growth forecasts by analysts suggest more modest annual increase of 11% over next three years, compared to 20% growth forecast for broader market.

Furthermore, stock has provided substantial returns to its investors, delivering 16% return this year & 22% return over past twelve months. Long-term investors have seen their investments grow by 181% over five years & astounding 7900% since 1999. Recent corporate activities, such as Warburg Pincus’s subsidiary White Iris Investment selling 3.5% stake for ₹ 1,040 crore, have also kept stock in limelight. Despite recent decline in net profit for March 2024 quarter, company's strategy for profitable growth & strong market performance, especially in Europe, have contributed to its prominence in stock market.

Fundamental Analysis of Apollo Tyres Stock 

1. Apollo Tyres Overview
Apollo Tyres Limited, founded in 1972, is leading tire manufacturer globally, ranking as 7th largest. company is headquartered in Gurgaon, India, & operates in more than 100 countries across world. Apollo Tyres caters to various segments including passenger cars, commercial vehicles, & off-highway tires.

2. Apollo Tyres Earnings & Growth

- Recent Performance
Apollo Tyres has demonstrated significant earnings growth with 132% increase over past year & cumulative 1,136% increase over past three years. This robust performance is attributed to company’s strategic initiatives & market expansion.

- Future Growth Prospects
Analysts forecast more modest growth of 11% per annum over next three years, which is below market average of 20%. This expectation has contributed to lower P/E ratio, indicating market skepticism about sustained high growth.

3. Apollo Tyres Revenue & Profit

- Q4 FY2024 Performance
Apollo Tyres reported consolidated net profit of ₹ 354 crore, 14% decline compared to same period last year. Revenue from operations stood at ₹ 6,258 crore, slightly higher than previous year’s ₹ 6,247 crore. Higher expenses contributed to decline in net profit.

4. Market Position & Shareholder Value

- Shareholder Returns
Apollo Share has consistently provided substantial returns to investors. Over past year, it has delivered 22% return, & over five years, impressive 181%. long-term return since 1999 has been astounding 7900%.

- Mutual Funds & Institutional Interest
Mutual funds held 19.23% stake in Apollo Tyres at end of June, up from 16.77% in previous quarter. This increase in institutional investment reflects confidence in company's long-term prospects.

5. Strategic Initiatives & Market Expansion

- Warburg Pincus Stake Sale
Warburg Pincus’s subsidiary White Iris Investment recently sold 3.5% stake for ₹ 1,040 crore. Despite sale being at discount to market price, it indicates substantial investor interest in stock.

- European Market Performance
Apollo Tyres has shown strong performance in Europe, gaining market share across various product categories. company's focus on profitable growth & market expansion has been key driver of its success.

6. Historical Context & Notable Investors

- Harshad Mehta’s Involvement
late stock market investor Harshad Mehta once held significant stake in Apollo Tyres, adding to its historical intrigue. Despite legal battles over his holdings, company's share price has surged dramatically from ₹ 21 in 1992 to over ₹ 500 today.

7. Challenges & Risks

- Profit Decline
Recent decline in net profit highlights challenges such as higher expenses that could impact future profitability.

- Growth Expectations
lower growth forecast compared to market average suggests that investors may need to temper expectations for future performance.

8. Path to Scaling Business

- Expanding Distribution Networks

Enhancing embedded distribution strategies & infrastructure sharing can help reach more customers.

- Technological Advancements
Investing in integrated technology for operational efficiency & product innovation.

- Hybrid Capital Model
Leveraging hybrid capital approach to enhance lending capabilities & product offerings.

- Strategic Partnerships
Increasing collaborations with regional HFCs, NBFCs, & digital platforms.

- Regulatory Compliance & Risk Management
Maintaining strong corporate governance & risk management practices to build investor confidence.

Brokers Overview

1. Nomura
Nomura finds Apollo Tyres' current valuations reasonable, supported by its free cash flow yield of 8% to 9% projected for FY2025 and FY2026. The brokerage highlights the company's focus on a favorable product mix and price hikes as key factors that will bolster margins in the future.

2. Morgan Stanley
Morgan Stanley remains cautious, expressing concerns that Apollo Tyres' margins may have peaked. It also notes potential revenue growth deceleration due to the company’s price hikes aimed at mitigating emerging cost pressures.

3.JM Financial
JM Financial holds a positive outlook, emphasizing the company's favorable product mix and stringent cost controls as crucial elements that will aid margin improvement. The brokerage commends Apollo Tyres’ consistent focus on growth, deleveraging, and enhancing Return on Capital Employed.

4. Analyst Consensus
Out of 27 analysts covering Apollo Tyres, 17 have a "buy" rating, while five each have "hold" and "sell" ratings. This mixed sentiment reflects varying expectations regarding the company's future performance.

5. Earnings Call Insights 
Apollo Tyres has expressed optimism about improved performance in its European business compared to the previous year, indicating potential for better market dynamics and operational efficiency in this key region.

Conclusion 

Apollo Tyres continues to be a prominent player in the global tire industry, attracting substantial interest from investors and analysts alike. While the company has demonstrated strong historical performance and strategic market positioning, future growth expectations remain modest. The company's proactive measures in pricing and cost management, along with its focus on market expansion, will be crucial in sustaining its market position and delivering value to shareholders. Apollo Tyres is prominent player in global tire industry with strong market presence & robust historical performance. While current growth expectations are modest, company's strategic initiatives & market expansion efforts could provide opportunities for future growth & value creation for shareholders.