Digitalization, Premiumization, And Sustainability Efforts Propel Growth Amid European Recovery

Key Takeaways

• Recovery in European markets and premiumization efforts could boost revenues and margins through improved product mix and higher-value product focus.
  
• Digital supply chain optimization and sustainability initiatives are poised to enhance operational efficiency, brand value, and long-term profitability.
  
• Rising raw material costs, declining OEM performance, and increased debt pose risks to margins, revenue, and competitive positioning if trends continue.

Catalysts

Manufactures and sells automotive tires, tubes, and flaps in the Asia Pacific, the Middle East, Africa, Europe, and internationally.

• Apollo Tyres anticipates a recovery in European markets, driven by improved demand, especially in the Ultra-High-Performance segment, which is expected to enhance revenue and margins due to a better product mix.
  
• The company is taking proactive pricing actions in response to raw material cost pressures, aimed at improving net margins by offsetting higher input costs.
  
• Apollo Tyres is leveraging digitalization in its supply chain, which is expected to optimize inventory and improve demand-supply planning, potentially leading to better operational efficiencies and enhanced earnings.
  
• The company is focusing on premiumization, particularly in the passenger vehicle segment, with model wins from major German manufacturers, which could drive higher revenues and improve net margins through a focus on higher-value products.
  
• Sustainability efforts and recognition may enhance brand value and customer preference, potentially supporting revenue growth and improving profitability over the long term.

Apollo Tyres Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Apollo Tyres's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 7.6% in 3 years time.
• Analysts expect earnings to reach ₹23.8 billion (and earnings per share of ₹37.27) by about January 2028, up from ₹14.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹26.9 billion in earnings, and the most bearish expecting ₹19.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, up from 18.6x today. This future PE is lower than the current PE for the IN Auto Components industry at 27.5x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.0%, as per the Simply Wall St company report.

Apollo Tyres Future Earnings Per Share Growth

Risks

• Steep increase in raw material costs has pressured operating margins, which could negatively impact net margins if the trend continues or worsens.
  
• Decline in the OEM segment, especially in the truck and passenger car segments in India, could hamper revenue growth if the trend does not reverse.
  
• Increased net debt levels, primarily due to short-term borrowings used to finance inventories, could lead to lower earnings if interest expenses rise or inventory issues persist.
  
• Continued reliance on price increases to offset raw material cost pressure poses a risk to maintaining competitive pricing, which could affect revenue and market share if competitors do not follow suit.
  
• Flattening growth in the European market and the challenges in the export markets may limit revenue growth, despite signs of market recovery, if these trends persist.

Valuation

• The analysts have a consensus price target of ₹535.68 for Apollo Tyres based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹635.0, and the most bearish reporting a price target of just ₹375.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹313.2 billion, earnings will come to ₹23.8 billion, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 14.0%.
• Given the current share price of ₹423.95, the analyst's price target of ₹535.68 is 20.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.